Robson v Mitchell (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Patten |
| Judgment Date | 08 July 2004 |
| Neutral Citation | [2004] EWHC 1596 (Ch) |
| Docket Number | Case No: CH/2004/APP/063 |
| Court | Chancery Division |
| Date | 08 July 2004 |
[2004] EWHC 1596 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Patten
Case No: CH/2004/APP/063
John Smart (instructed by Gregory Rowcliffe Milners) for the Appellant
Rupert Baldry (instructed by Solicitor of Inland Revenue) for the Respondent
Approved Judgment
Hearing date: 25 th June 2004
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice Patten
Introduction
This is an appeal by the taxpayer (Mr David Robson) by way of case stated from a decision of the General Commissioners for the Division of Scarborough dated 1 st May 2002. The General Commissioners dismissed the taxpayer's appeal against an estimated assessment to capital gains tax by determining that a loan granted by Barclays Bank Plc to Robson Developments (Scarborough) Limited ("the Company") was not a qualifying loan within the meaning of s.253(1) TCGA 1992. They did, however, accept that Mr Robson had satisfied the conditions set out in s.253(4) and therefore, had the loan been a "qualifying loan" as defined, the taxpayer would have been entitled to claim relief in the sum of £151,000 against the chargeable gain of £148,950, thereby reducing the assessment to nil. The Inspector of Taxes, by way of Respondent's Notice, seeks to challenge the determination of the Commissioners that the conditions set out in s.253(4) had been satisfied and (if necessary) asks this Court to uphold the decision of the General Commissioners on the alternative grounds that the loan was not, at the relevant date, irrecoverable and that in any event the payment of £151,000 made by Mr Robson was not made to Barclays under a guarantee.
In relation to the year of assessment 1994–1995 s.253 TCGA 1992 provided as follows:
"(1) In this section "a qualifying loan" means a loan in the case of which—
(a) the money lent is used by the borrower wholly for the purposes of a trade carried on by him, not being a trade which consists of or includes the lending of money, and
(b) the borrower is resident in the United Kingdom, and
(c) the borrower's debt is not a debt on a security as defined in section 132;
and for the purposes of paragraph (a) above money used by the borrower for setting up a trade which is subsequently carried on by him shall be treated as used for the purposes of that trade.
……….
(4) If, on a claim by a person who has guaranteed the repayment of a loan which is, or but for subsection (1) (c) above would be, a qualifying loan, the inspector is satisfied that—
(a) any outstanding amount of, or of interest in respect of, the principal of the loan has become irrecoverable from the borrower, and
(b) the claimant has made a payment under the guarantee (whether to the lender or a co-guarantor) in respect of that amount, and
(c) the claimant has not assigned any right to recover that amount which has accrued to him (whether by operation of law or otherwise) in consequence of his having made the payment, and
(d) the lender and the borrower were not each other's spouses, or companies in the same group, when the loan was made or at any subsequent time and the claimant and the borrower were not each other's spouses, and the claimant and the lender were not companies in the same group, when the guarantee was given or at any subsequent time,
this Act shall have effect as if an allowable loss had accrued to the claimant when the payment was made; and the loss shall be equal to the payment made by him in respect of the amount mentioned in paragraph (a) above less any contribution payable to him by any co-guarantor in respect of the payment so made."
The background to this appeal can be summarised quite shortly. Mr Robson is the sole director and shareholder of the Company. Its bankers were at all material times Barclays Bank and as of 29 th March 1993 it had a current account with the bank which was overdrawn in the sum of £252,034.07. On 29 th March 1993 Barclays agreed to grant to the Company a 20-year term loan of £251,000. The express purpose of the loan was to refinance the existing borrowings. The loan was repayable by 240 monthly instalments of principal and interest, each in the sum of £2,415.11. It was a condition of the loan that the bank would be given security in the form of a debenture, an unlimited guarantee from Mr Robson, and second legal charges over two properties owned by Mr Robson, comprising High Yedmandale House (a farm) and 39/40 Queen Street, Scarborough. The loan was drawn down in full on 30 th March 1993, thereby reducing the overdraft on the current account to £1,889.12. At the same time a new loan account was opened, which was debited with the term loan and the subsequent monthly payments of principal and interest, which appear to have been met by transfers by way of standing order from the Company's current account.
In or about May 1994 the farm at High Yedmandale was sold, realising a chargeable gain for CGT purposes of £148,950. Out of the net proceeds of sale the sum of £151,000 was credited to the Company's loan account, thereby reducing the indebtedness on that account to £105,528.95. Mr Robson sought to set off this payment against his liability to CGT on the disposal of the farm. The claim was dealt with by the then Inspector of Taxes for the district, Mr Pollin, who rejected the claim for relief. Mr Robson was represented by his accountant, Mr Steven Lloyd ACA. One of the difficulties about the claim (as conceded by Mr Lloyd in correspondence with the Inspector) was that it was difficult to disentangle Mr Robson's affairs from those of the Company. In his skeleton argument prepared for the hearing before the General Commissioners the Respondent, Mr Mitchell (who is Mr Pollin's successor), noted that Mr Pollin had identified a number of transactions in respect of which he believed that the records were inaccurate and where it was unclear exactly who had done what. Due to the uncertainty it had not been possible for the Revenue to determine that the requirements of s.253 had been met or to settle the claim.
In particular, the Inspector submitted to the General Commissioners that it was not possible to know whether the term loan obtained by the Company from Barclays Bank and guaranteed by Mr Robson had been used wholly for the Company's trade, which was essential if relief was to be claimed under s.253. In the Company's accounts for the year ended 31 st March 1992 the value of work in progress stood at £166,986. This sum was accepted to be the value of the work carried out by the Company to the property owned by Mr Robson at 39/40 Queen Street. All of this work was completed in 1991 and 1992. The Inspector's primary reason for rejecting the claim to relief under s.253 related to the basis upon which this work was done. Mr Mitchell submitted to the General Commissioners that most of the indebtedness on the current account as of 31 st March 1993 related to the work carried out to the Queen Street property in 1991–1992, for which payment had not been made. No invoices were produced in relation to this work and there was no evidence that any profit element would be charged. The Inspector accepted before the General Commissioners that a loan taken to refinance existing borrowings could be a qualifying loan within the meaning of s.253, but only if the loan it replaced had itself been incurred and used wholly for the purposes of the Company's trade. In the present case the Company had financed the work to Mr Robson's property at its own expense, with no apparent agreement for reimbursement at a commercial rate for the work. The original loan had not therefore been used wholly for the purposes of trade and the new term loan was not therefore a qualifying loan.
In relation to s.253(4) the Inspector took the position that it was not possible to know from the records kept whether the sums paid to the Company by Mr Robson out of the proceeds of sale of the farm represented the repayment of the director's loan account or were made in satisfaction of a guarantee liability to the bank. No point was taken, however, in front of the General Commissioners that the condition specified in s.253(4)(a) (loan irrecoverable from principal debtor) had not been satisfied.
Mr Lloyd in his submissions to the General Commissioners rejected any suggestion that the payment of £151,000 made in reduction of the term loan was repayment of an overdrawn director's loan account. It was, he submitted, paid to Barclays Bank directly out of the proceeds of sale from the farm, which was charged to the bank, in reduction of the Company's loan account, as insisted upon by the bank. The term loan was a "qualifying loan" within the meaning of s.253(1) because the Company had been a trading company in the three years up to 31 st March 1993 and the overdraft had been used to support its business.
The facts found by the General Commissioners to be either proved or admitted are set out in paragraph 5 of the Case Stated as follows:
"a. The Appellant disposed of land known as High Yedmandale Farm in Scarborough ("the Farm") in the year 1994/95 and a chargeable gain of £148,590 accrued to him on that disposal.
b. The Appellant was the sole director and shareholder of the Company. On 3 May 1990 a return of allotment of shares in the Company was filed through his accountants showing an allotment of 114,998 (subsequently referred to as 115,000) Ordinary £1 shares for cash consideration. The return did not show that the allotment was wholly or partly other than for cash.
c. The Company was a limited company which began to trade in 1990 mainly in...
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Robson v Mitchell (Inspector of Taxes)
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