Case No: C3/2004/1563
Neutral Citation Number: [2005] EWCA Civ 585
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION (Revenue)
Mr Justice Patten
CH2004APP0063
Royal Courts of Justice
Strand, London, WC2A 2LL

Wednesday, 18 May 2005
Before :

LORD JUSTICE AULD
LORD JUSTICE JONATHAN PARKER
and
LORD JUSTICE NEUBERGER
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Between :

	DAVID ROBSON	Appellant	
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	ERIC MITCHELL (HM INSPECTOR OF TAXES)	Respondent	

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(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
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Mr John Smart (instructed by Messrs Gregory Rowcliffe Milners) for the Appellant
Mr Rupert Baldry (instructed by Solicitor of Inland Revenue) for the Respondent

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Judgment
Lord Justice Neuberger: 
1.	This is an appeal by Mr. David Robson against a decision of Patten J, who, on 8th July 2004, dismissed his appeal from a decision of the General Commissioners for the Division of Scarborough dated 1st May 2002. The Commissioners had dismissed Mr. Robson’s appeal against an estimated assessment of Capital Gains Tax (“CGT”) on the basis that a loan granted by Barclays Bank PLC (“the Bank”) to Robson Developments (Scarborough) Limited (“the company”) was not “a qualifying loan” within the meaning of sub-section (1) of section 253 of the Taxation of Chargeable Gains Act 1992 (“s.253”).
2.	In relation to the relevant year of assessment, namely 1994-1995, s.253 provided, so far as relevant, 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.”
3.	The relevant facts, most of which were not in dispute, were established by the Commissioners to be as follows. 
4.	Mr. Robson was the sole director and shareholder of the company. His, and the company’s, bankers were at all material times the Bank. Shortly after the company was formed in 1990, Mr. Robson purchased the freehold of 39/40 Queen Street Scarborough (“Queen Street”) for £60,000, with the intention of developing it into a retail and office complex. From some time in 1991 until about 31st March 1992, the company carried out work to Queen Street, and also to another property, in Belmont Road, Scarborough (“Belmont Road”). The work carried out at Belmont road was the subject of proper contractual documentation, and the work carried out by the company was properly invoiced. 
5.	The position was entirely different in relation to Queen Street, where no contractual documents were drawn up, and there were no invoices issued by the company in respect of its work. The work carried out at Queen Street was included in the company’s accounts as work in progress, recorded as £123,521 for the year ending 31st March 1991 and £43,465 for the following year, with no work recorded thereafter.
6.	On 29th March 1993, the company’s current account with the Bank was overdrawn in the sum of £252,034.07. On that date, no doubt as a result of prior negotiations, the Bank agreed to grant the company a 20-year loan of £251,000 (“the Loan”). The express purpose of the Loan was to refinance existing borrowings. The Loan was repayable by 240 equal monthly instalments of principal and interest, in the sum of £2,415.11.
7.	The Loan was granted by the Bank on terms that it would be provided with a number of securities. First, there was to be a debenture; secondly there was to be an unlimited guarantee from Mr. Robson; thirdly, there were to be second legal charges on two freehold properties owned by Mr. Robson, namely Queen Street and High Yedmandale Farm Scarborough (“the farm”).
8.	The Loan was drawn down in full the following day, 30th March 1993, as a result of which the company’s current account overdraft was reduced to a mere £1,889.12. At the same time, a new Loan account (“the Loan account”) was opened with the Bank, which was debited with the Loan. The subsequent monthly payments of principal and interest were paid into the Loan account by standing order from the company’s current account with the Bank. 
9.	In May 1994, Mr. Robson sold the farm, realising a chargeable gain for the purposes of the Taxation of Chargeable Gains Act 1992 (“TCGA”) of £148,950. From the proceeds of sale of the farm two sums, one of £86,000 the other of £65,000, were paid by Mr Robson to the Bank, and were credited to the Loan account, thereby reducing the company’s indebtedness on that account to  £102,528.95. 
10.	Mr Robson sought to set off this payment against his liability for CGT on the disposal of the farm. The Inspector of Taxes for the District at the time, Mr. Pollin, rejected that claim on a number of grounds, one of which was the confusion in the documentary records which meant that it was very difficult to disentangle Mr. Robson’s affairs from those of the company. A particular difficulty identified by the Inspector to the General Commissioners was that it was not possible to know whether the Loan had been used wholly for the company’s trade, as he argued was essential if relief was to be granted under s.253. In the company’s accounts for the year ending 31st March 1993, work in progress stood at £166,986 which was accepted as the value of the work carried out during 1991 and 1992 by the company to Queen Street, which was, as mentioned above, owned by Mr. Robson and not by the company
11.	The lack of proper records, contractual documents, invoices, or written documents to support Mr. Robson’s evidence on certain matters was commented on by the General Commissioners. Indeed, as they recorded, Mr. Robson’s accountant Mr. Lloyd, “conceded it was difficult to separate the affairs of the company and [Mr. Robson’s] personal affairs.” As a result, Mr Lloyd had to try to reconstruct the records.
12.	The Commissioners also referred to the fact that Mr. Robson had made claims for differing types of relief, and observed that:
“in endeavouring to secure [Mr. Robson’s] various reliefs, including rollover relief, negligible value relief and latterly under s235(4) of the Act, explanations of transactions appear at times to have varied to suit the particular relief sought”.
13.	The Commissioners also referred to a letter written on 11th August 1997 by Mr. Pollin to Mr. Lloyd. The letter began by observing that “there is no dispute that [Mr.] Robson guaranteed the loan in question and subsequently made a payment in question towards its satisfaction”. However, it then went on to say:
“the loan was effectively financing the work in progress appearing in the company’s accounts, and subsequent payments of interest thereon, and as such the loan was financing [Mr.] Robson’s personal activities and was not therefore a loan for the purposes of the company’s trade.”
14.	The letter then continued:
“The Queen Street property and the allied costs were effectively removed from the company’s accounts and all transactions relevant thereto transferred to [Mr.] Robson’s loan account as evidenced by your letter of 3rd January 1996 in connection with the company investigation.”
15.	In their conclusions, the Commissioners referred again to the absence of any “contractual documents indicating the nature of the supposed enterprise between the company and Mr. Robson” in relation to Queen Street, and to the “various conflicting explanations as to the company’s activities”. These problems, they said, “failed to assist us in formulating a clear view of the facts urged upon us by the tax payer upon whom the onus of proof rests.” The Commissioners’ conclusion was then expressed in these terms:
“We feel that the loan in question was not used wholly for the purposes of the trade carried out by the recipient of the loan due to the absence of any formal contracts. The loan was effectively financing the work in progress appearing in the company’s accounts and subsequent payments of interest and as such was financing Mr. Robson’s personal activities and was not therefore a loan solely for the purposes of the company’s trade”.
16.	In their case stated to the High Court, the Commissioners made it clear that they were not thereby seeking to go behind Mr. Pollin’s concessions that Mr. Robson had guaranteed the Loan, and that the payments totalling £161,000 were made by him in partial satisfaction of repayment of that loan to the Bank.
17.	In a reserved judgment, Patten J dismissed Mr. Robson’s appeal. The essence of the Judge’s reasoning was in paragraphs 19 and 20 of his judgment, which included the following observations:
“The only purpose of the loan, on the facts found by the General Commissioners, was the replacement of the existing overdraft. As already indicated, this was how the money (and all of it) was applied. Therefore the only issue is whether one needs to look beyond those facts in order to be satisfied that the statutory test has been complied with or whether the consolidation of existing borrowing is a business or trade purpose in itself, regardless of how that indebtedness came to arise.
…
On the evidence presented to the General Commissioners as to Mr. Robson’s failure in the past to differentiate between his business activities and those of the company, the General Commissioners were clearly entitled to conclude (as they did) that the taxpayer had not demonstrated, on the evidence, that the company had used its overdraft to further its own trade, as opposed to conferring a gratuitous benefit on its controlling shareholder.”
18.	In effect, the Judge analysed the Commissioners’ reasoning as proceeding along the following lines. First, in order to succeed in his appeal to the Commissioners (and his appeal to Patten J) Mr. Robson would have to satisfy two requirements, namely;
i)	that the Loan was “used by [the Company] wholly for the purposes of a trade carried on by [it]” within s.253(1)(a), and
ii)	that the various stipulations set out in s.253(4) were also satisfied in relation to the Loan.
19.	Secondly, the Commissioners were not prepared to go behind or question the Inspector’s concession that the second requirement was satisfied, and accordingly the only issue concerned the first requirement. Thirdly, as the Loan advanced to the company by the Bank in March 1993 was used to pay off (virtually in full) the company’s current account overdraft with the Bank, one therefore had to look to see whether the monies in the current account could be characterised as a “qualifying loan”, an issue where the onus was on Mr. Robson. Fourthly, in light of the deficiencies and inconsistencies in his evidence, Mr. Robson had not satisfied the Commissioners that those monies had been used by the company “wholly for the purposes of a trade carried on by [it]” rather than for the purpose of conferring a gratuitous benefit on Mr. Robson. 
20.	Patten J held that the first three steps in this line of reasoning were correct in principle, and that the last step represented a conclusion of fact that the Commissioners were entitled to reach, and with which he could not interfere.
21.	The first contention of Mr. John Smart, who appears on behalf of Mr. Robson on this appeal, is that Patten J and the Commissioners both erred in law by looking at the purpose for which the money in the company’s current account had been used, rather than looking at the purpose for which the Loan had been used. In other words, his argument is that what Mr. Robson guaranteed was the Loan advanced in March 1993, and that the purpose of that loan was to pay off virtually the whole of the company’s overdraft on its current account, and that accordingly “the money lent”, that is the Loan, was indeed used by the company “wholly for the purposes of a trade carried on by [it]”, namely for the purpose of paying off its overdraft and enabling it to continue to trade.
22.	Simple and attractive though that argument is, I do not accept it. In my view, where a company has been lent money for the purpose of certain activities, and it then reschedules its borrowing, one can only determine whether the new borrowing represents “a qualifying loan” by assessing the purpose for which the original borrowing was incurred. In other words, to quote from the skeleton argument of Mr. Rupert Baldry who appears for the Inspector of Taxes, “if the money lent is used to repay an existing indebtedness the new loan stands in place of the existing indebtedness”. I also agree with an alternative way in which the point was put on behalf of the Commissioners, namely:
“where money lent is used to repay an existing indebtedness, the purpose served by the use of that money is characterised by the existing indebtedness. This interpretation ensures that where money lent has actually been used for a wholly trading purpose, the taxpayer is not precluded from relief where he simply wishes to refinance that loan. It also ensures that a refinancing exercise does not convert a non qualifying loan into a qualifying loan.”
23.	If it were otherwise, a company which had incurred borrowings for a purpose or purposes which might or would not satisfy the requirements of s.253(1)(a) could bring those borrowings within the ambit of that provision by simply rescheduling its debt. In other words, if the taxpayer’s argument was correct, it would be a classic case of “with one bound he was free”. Of course, the mere fact that a particular construction of a statutory provision leads to such a surprising conclusion does not mean that it is wrong, but it does mean that one requires clear words which do not sensibly admit of any other construction, before such an interpretation could be accepted. Consideration of the facts of this case establish, in my judgment, that this proposed interpretation of s.253(1) is wrong.
24.	The company already had a liability for some £250,000 to the Bank as at March 1993 before it converted almost all its overdraft into the Loan. The Loan can fairly be said to have been used to enable the Company to pay off its overdraft. However, the underlying financial reality is that the Company had incurred a debt of over £250,000 to the Bank well before 30th March 1993, and the only significant thing that changed on that day was the basis upon which the debt would be repaid (and the basis upon which interest would be calculated and paid).
25.	A number of cases were cited both to the Judge and to us to support the construction advanced on behalf of Mr. Robson. In Strong & Co of Romsey Limited –v- Woodifield [1906] AC 448 at 453, Lord Davey said this of the words “for the purposes of the trade”:
“These words are used in other rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, &c. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits.”
26.	Those observations were referred to with approval in a number of subsequent cases including Smith’s Potato Estates Limited –v- Bollam [1948] AC 508 at 526-527 per Lord Simonds, and Morgan –v- Tate & Lyle Limited [1955] AC 21 at 53 per Lord Reid.
27.	In my judgment, if one considers the amount lent by the Bank to the company, it would not be correct to say, at least in the context of s.253(1)(a), that the £251,000 Loan should be treated as “used by” the company for the purpose of paying off its overdraft. The only sum, if any, which can properly be treated as having been freshly incurred by the company in this context would have been any fee or similar sum charged by the Bank for rescheduling its borrowings. That would, at least on the face of it, appear to me to be a liability which would have been freshly incurred by the company for the purpose of enabling it to continue to trade, if indeed the rescheduling of its liabilities to the Bank was for that purpose. However, Mr. Smart’s argument that the incurring of the liability to the Bank for repayment of the £251,000 Loan was to enable the company to continue to trade (assuming that that was indeed the purpose) appears to me to be unrealistic. The company already had a liability to repay the Bank £251,000. Accordingly, liability to repay that sum was not incurred by the company in March 1993, at least for the purposes of s.253(1).
28.	On behalf of Mr. Robson, it is contended that this construction “gives rise to the need for a difficult factual inquiry” both on behalf of the person who is considering guaranteeing the debts of the Company which are being rescheduled, and on the part of an accountant, the Commissioners or the Court, when considering whether a particular rescheduled loan is “a qualifying loan”. I am unimpressed with this argument. So far as the first aspect is concerned, the person proposing to guarantee the rescheduled debts of a company will either know (or certainly ought to know) how the original debts were incurred, or he can be expected to ensure that the normal due diligence exercise is carried out. So far as the difficulties in tracing the history of any rescheduled debt is concerned, it should be no greater than investigating the history of the debts if they not been rescheduled: the degree to which it will be necessary to investigate the past will be no different whether the debts had been rescheduled or not. 
29.	There is a further difficulty for Mr. Robson’s case if he is right in his contention that, for the purposes of s.253(1)(a), one simply looks at the purpose of the Loan in March 1993, rather than going behind it and looking at the purpose for which the overdraft indebtedness, which it substantially cleared, was incurred. I cannot improve on the way in which the Judge expressed the point in paragraph 22 of his judgment, where he said that, on the basis of this argument, it seemed to him that:
“the new loan itself is not "used" to serve the purposes of the trade at all. The loan as such provides no extra money for the borrower company. It may have the effect of reducing the costs to the company of servicing the existing indebtedness, but the "money lent" has not been used for the purposes of a trade carried on by the borrower. All of it has been used to repay the old loan and so create a new debt. However, that approach would rule out as a qualifying loan even a new loan which replaced borrowing that did qualify under s.253(1).”
30.	The second main ground of appeal raised on behalf of Mr. Robson is that, even if the Commissioners were correct in considering how the monies originally advanced by the Bank to the company by way of overdraft were spent, the Commissioners were not entitled to conclude that those monies, or at least some of those monies, were not “used… wholly for the purposes of the trade carried on by” the company. As advanced by Mr. Smart, there were really two components to this argument. The first component involves focusing on the sole adverb in s.253(1)(a), namely “wholly”, and contrasting it with the use of the adverbs “wholly and exclusively”, which are to be found, for instance, in the context of Schedule D Taxation (see section 74(1) of the Income and Corporation Taxes Act 1988). The second component involves attacking the Commissioners’ conclusion of fact as being outside the admittedly generous margin accorded by the courts to any finding of fact, whether primary or secondary, made by the Commissioners in light of the principle enshrined in the speech of Lord Radcliffe in Edwards –v- Bairstow [1956] AC 14 at 34-39, especially at 36.
31.	So far as the first component of this argument is concerned, attention is drawn to the judgment of Romer LJ in Bentleys, Stokes and Lowless –v- Beeson (Inspector of Taxes) [1952] 2 All ER 82 at 84G-H where he said this:
“The relevant words of r 3 (a) of the Rules Applicable to Cases I and II—‘wholly and exclusively laid out or expended for the purposes of the … profession’—appear straightforward enough. It is conceded that the first adverb—“wholly”—is in reference to the quantum of the money expended and has no relevance to the present case. The sole question is whether the expenditure in question was “exclusively” laid out for business purposes, that is: What was the motive or object in the mind of the two individuals responsible for the activities in question? It is well established that the question is one of fact…”.
32.	Mr. Smart’s case is that, as that passage indicates, where one finds the word “wholly” in a provision in a taxing statute such as s.253(1)(a), the natural inference is that it is a reference to the quantum, and not the purpose, of expenditure. In other words, the absence of the words “and exclusively” from s.253(1)(a) is said to have the result that, provided a sum of money can be shown to have been “wholly” used for a qualifying purpose, the fact that that purpose was not the sole motive does not prevent the expenditure in question from qualifying. In other words, the qualifying purpose must be a motive, but need not be the only motive.
33.	The force of that argument is self-evident: the requirement in a taxing statute that money is spent “wholly and exclusively” for a qualifying purpose before it is held to qualify for tax relief is familiar and has been so for a long time. Accordingly, where the word “wholly” is used in a taxing statute without the addition of the words “and exclusively”, one can well see the force of the argument advanced by Mr. Smart. However, s.253 has to be construed primarily according to its terms, and in the context of the statute which it is found, and there are obvious dangers in construing an expression in a section of TCGA by reference to the construction that has been put on a similar, albeit different, provision in another statute, even where that other statute is a taxing statute, and the expression is a familiar one. Furthermore, it is to be noted that the analysis in Bentleys, although plainly approved by the Court of Appeal, went effectively on the basis of the concession.
34.	To my mind, it is not necessary to decide whether this point of construction is correct, in order to dispose of this appeal, and therefore I do not think it appropriate to express a view on it. I am prepared to assume in favour of Mr. Robson that, in principle, he could have succeeded before the Commissioners (albeit possibly only to an extent) if he had established that, on the balance of probabilities, all or only some of the monies represented in the overdraft on the current account in March 1993 had been spent “wholly for the purposes of a trade carried on by [it]”. Nonetheless, it seems to me that Patten J was right to dismiss his appeal on the basis that the Commissioners had been entitled to find that he had failed to establish his case. 
35.	It seems plain that the question of whether any of the money was spent “wholly” on a qualifying purpose was ultimately a matter of fact for the Commissioners. Accordingly, unless it can be shown that they misdirected themselves in law, any appeal would have to be based on the proposition that there was simply no evidence upon which they could have arrived at their conclusion, or that their conclusion was effectively perverse in the light of the evidence before them. 
36.	The problem faced by Mr. Robson’s case, even construing s.253(1)(a) in accordance with his second argument in this appeal, is that the reasoning of the Commissioners appears to me to apply to the whole of the monies expended on Queen Street. As the Judge said in a passage I have quoted in paragraph 20 of his judgment, the Commissioners concluded, in light of the absence of documentation, the unsatisfactory way in which the affairs of Mr. Robson and the company were confused, and the inconsistent ways in which Mr. Robson had put his case on different occasions, that they were not satisfied that any of the money spent by the company in relation to Queen Street was “to further its own trade, as opposed to conferring a gratuitous benefit on [Mr. Robson]”. In other words, they found that all the money concerned was spent for the purpose of benefiting Mr Robson, and none of it was spent for the purposes of the company’s trade.
37.	That was a finding of fact, albeit a factual inference drawn from the primary evidence. It is, as I see it, a finding which is fatal to Mr Smart’s second argument, even if one limits the meaning of the word “wholly” in s.253(1)(a), in the way for which he contends. It is a finding which was open to the Commissioners as a matter of principle, and one for which there was support from the facts, defects in the evidence, inconsistencies, and inferences which they identified in the passages in their reasoning quoted earlier in this judgment. Mr. Smart accepts that he can only succeed in this line of argument if to use his words, “the only true and reasonable conclusion that was open to the Commissioners on the evidence” was that the money in question was spent for a purpose or purposes falling within s.253(1)(a). It seems to me that, for the reasons given by the Commissioners, and summarised by Patten J in paragraph 20 of his judgment, there were ample grounds for justifying the conclusion which the Commissioners reached. 
38.	In light of the way in which the argument developed before us, it is right to add that it would, in principle, have been open to the Commissioners to conclude that only some of the money represented, as it were, by the repayment of the £151,000 had been spent wholly for the purposes of the company. In those circumstances, it would have been necessary for the Commissioners to carry out a more detailed and critical inquiry which could have resulted in a decision that some, but not all, of the tax relief claimed by Mr. Robson should have been accorded to him. 
39.	However, it seems to me that there are two answers to that point, albeit that they may in practice be connected. The first is that, as just mentioned, the Commissioners concluded that they were not satisfied that any of the money represented by the £151,000 repayment was spent for the purposes of a trade carried out by the company. Secondly, as I understand it from the decision of the Commissioners, and indeed from what we were told by counsel, the appeal before the Commissioners preceded on what one might call an “all or nothing” basis, namely on the common assumption that Mr. Robson would either achieve the whole of the tax relief he had been denied by the Inspector of Taxes, or that he would be accorded none of it.
40.	In these circumstances, it follows that I consider that Patten J reached the right conclusion for the right reasons, and I would dismiss the appeal.
Lord Justice Jonathan Parker
41.	I agree.
Lord Justice Auld
42.	I also agree.