Neutral Citation Number: [2004] EWHC 1596 (Ch)

Case No: CH/2004/APP/063

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 8 July 2004 

Before :

THE HONOURABLE MR JUSTICE PATTEN

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Between :

	DAVID ROBSON
	Appellant	
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	ERIC MITCHELL
(HM Inspector of Taxes)	Respondent	

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John Smart (instructed by Gregory Rowcliffe Milners) for the Appellant
Rupert Baldry (instructed by Solicitor of Inland Revenue) for the Respondent

Hearing date: 25th June 2004
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Judgment
Mr Justice Patten : 
Introduction
1.	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 1st 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.
2.	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.”
3.	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 29th March 1993 it had a current account with the bank which was overdrawn in the sum of £252,034.07.  On 29th 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 30th 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.
4.	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.
5.	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 31st 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 31st 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.  
6.	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.
7.	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 31st March 1993 and the overdraft had been used to support its business.
8.	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 property development.
d. Invoices were produced to show that the Company carried out relatively minor building and repair work and also the supply of shop equipment between 1991 	and 1992.  Further invoices produced showed that the Company issued invoices 	under the additional name of Macstyle providing on a very small scale printing supplies between July 1992 and October 1992.
e. Some time after the formation of the Company the Appellant purchased 39-40 Queen Street, Scarborough for £60,000 with the intention of developing the same into a commercial complex providing shops and offices.  The Appellant’s explanation for the purchase into his own name rather than into the Company’s name was that the building society which funded the purchase would lend only to 	an individual.
f. The only substantial property development work carried out by the Company took place in 1991 and 1992 and related to a development at Belmont Road, Scarborough, which was a joint venture and work for the Appellant comprising 	the development of 39-40 Queen Street.  No further substantial property development appears to have been carried out after 31 March 1992.
g. The work carried out by the Company at the Belmont Road development was properly invoiced and appropriate contractual documents drawn up between the parties.
h. At no stage were any invoices issued or other contractual documents drawn up between the Company and the Appellant for any of the work carried out by the 	Company at 39-40 Queen Street.  
i. The work carried out by the Company at 39-40 Queen Street was subsequently included in the Company’s accounts as work in progress comprising work valued at £123,521 carried out in the year ending 31 March 1991 and £43,465 in the year ending 31 March 1992 with no other work done on that property thereafter.   In any event, the value of the work done on the property was stated to be approximately £166,000.
j. The Appellant’s accountants conceded it was difficult to separate the affairs of the Company and the Appellant’s personal affairs.
k. By virtue of “the Loan Agreement” the Bank lent to the Company the sum of £251,000 for the stated purpose of re-financing existing borrowing and contained conditions that the loan was subject to a debenture, an unlimited guarantee by the Appellant, a second legal mortgage of freehold deeds of the Farm, and a second legal mortgage of freehold deeds of 39-40 Queen Street.  The Company continued to trade after the loan was made.  The Company’s accounts for the 	period to 31 March 1992 show that it had an overdraft in the sum of £261,887.  The Company accounts for 31 March 1993 show an overdraft of £576 but with a bank loan totalling £242,500 falling due after 1 year.	
l. That on the sale of High Yedmandale Farm in or about 1994 two payments, one of £86,000 and the other of £65,000 were received by Barclays Bank plc in reduction of the loan of £251,000 made in March 1993.
m. On 11 August 1997 Mr J Pollin HM Inspector of Taxes indicated by letter to the Appellant’s accountants that there was no dispute that the Appellant guaranteed the loan in question and subsequently made a payment towards its 	satisfaction but did not consider that the loan in question was a qualifying loan 	under Section 253(4) of the Act.
n. The lack of proper records, contractual documents and invoices together with the lack of evidence of a clear understanding between the Company’s activities and the Appellant’s business activities has meant that his accountants at best have endeavoured to reconstruct his activities and those of the Company at times apparently contending with conflicting instructions.
o. A number of business activities were carried out by the Appellant on the 	premises at 39-40 Queen Street including the printing business of Macstyle which, according to his accountants, were always viewed by the Appellant as 	being his own personal business despite the fact that some of them appeared in the Company accounts.
p. No documents were put before the Commissioners indicating the exercise by the Bank of its rights of guarantee under the Loan Agreement against the Appellant, nor were any documents produced to indicate whether a legal charge 	in respect of the Farm had been executed in favour of the Bank, the provisions of which would be relevant on its sale.
q. From 1992 the Company’s indebtedness arose principally from the work carried out by the Company on 39-40 Queen Street for which no invoices were ever submitted and therefore at the time of the Loan Agreement the Company’s 	borrowing was principally funding the cost and interest on the work for the Appellant’s benefit at 39-40 Queen Street.
r. In support of the negligible value claim the Appellant made under section 24(2) of the Act on 24 October 1995 in respect of the 115,000 Ordinary £1 shares of the Company, the Appellant through his accountants contended that the Farm 	had been transferred to the Company by way of payment for 115,000 shares albeit that the Farm appears to have been purchased after the share allocation.
s. The Farm was never conveyed to the Company and the legal title remained with the Appellant throughout.		
t. The Farm appears in the accounts of Mr D Robson trading in his own name 	and in the Company accounts contemporaneously.
u. In support of the negligible value claim, the Appellant contended through his 	accountants that on the sale of the Farm a payment was made to the Company of £146,000 of which £115,000 directly replaced the farm land in the accounts thus providing consideration for the 115,000 shares.
v. The Revenue subsequently rejected the Appellant’s contentions and his negligible value claim was refused.
w. In endeavouring to secure the Appellant various reliefs including rollover relief, negligible value relief and latterly, under Section 253(4) of the Act, explanations of transactions appear at times to have varied to suit the particular relief sought.
x. Mr J R Pollin on HMIT’s admission was more significantly involved in the case on behalf of HMIT than any other person.”
9.	In the letter of 11th August 1997 referred to in sub-paragraph m., Mr Pollin had written to Mr Lloyd in these terms:
“I have had a look at your claim under Section 253(4) and my view of the situation is as follows.  There is no dispute that Robson guaranteed the loan in question and subsequently made a payment towards its satisfaction.  However for relief under Section 253(4) to be available the loan in question must be a qualifying loan within Section 253(1).  That paragraph requires the loan in question to have been used wholly for the purposes of the trade carried out by the recipient of the loan, in this case the company.  The reality is however that 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 Robson’s personal activities and was not therefore a loan for the purposes of the company’s trade.  As you will recall the Queen Street property and the allied costs were effectively removed from the company’s accounts and all transactions relevant thereto transferred to Robson’s loan account, as evidenced by your letter of 3 January 1996 in connection with the company investigation.”
10.	At the end of the hearing the General Commissioners gave short reasons for determining the appeal in favour of the Inspector.  In a written decision sent to the parties they said this:
“We have looked at the circumstances so far as they can be ascertained during a long period of time in which the development took place and subsequent time scale.
There are no contractual documents indicating the nature of the supposed enterprise between the Company and Mr Robson.  Various conflicting explanations as to the Company’s activities and the ownership of capital 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.
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.”
The written decision does not deal with whether the sum of £151,000 had been paid in satisfaction of a guarantee liability, but in the Case Stated, at paragraph 8.1, the General Commissioners confirm that they had not dismissed the appeal for that reason.  Paragraph 8.1 states that:
“Although the exact circumstances of in which the sum of £151.000 was paid 	to the Bank in May 1994 remains unclear, we were of the view that in fairness to the Appellant there was insufficient evidence to go behind our understanding of the conclusion of Mr J R Pollin in his letter of 11 August 1997.”
“Qualifying Loan”
11.	The first question, therefore, is whether the term loan of 30th March 1993 was a “qualifying loan” within the meaning of s.253(1).  The General Commissioners determined this issue against the taxpayer by considering whether he had discharged the burden of proving that the arrangements under which the work was done to the Queen Street property between 1991 and 1992 constituted trade on the part of the Company.  They adopted the approach concurred in by both the Inspector and Mr Lloyd that, in order to decide whether the March 1993 term loan was a qualifying loan, it was necessary to consider whether the indebtedness which it replaced had itself been incurred wholly for the purposes of the Company’s trade.  They were not satisfied, on the evidence put before them, that there was not an element of subsidy involved in the arrangements, and they found as a fact that at no stage were any invoices issued or any contractual documents drawn up which governed the terms on which the services and materials were provided.  Before me Mr Smart on behalf the taxpayer took a new approach to this issue.  He submitted that it was irrelevant to consider whether the existing overdraft had been incurred wholly or only partly for the purposes of the Company’s trade.  What the General Commissioners should have considered was whether the new loan granted in March 1993 was itself used wholly for the purposes of trade.  On the General Commissioners’ findings of fact the new loan replaced the current account overdraft and thereafter the Company continued to trade, as its accounts for the year ended 31st March 1994 indicate.  The new loan therefore allowed the Company to remain in business and as such was a “qualifying loan”.
12.	This argument is reflected in questions 2 to 4 of the case which the General Commissioners have been asked to state.  This Court is asked to determine:
“ (2) 	Whether we erred insofar as we failed to find that the object of the loan was to consolidate existing borrowing by the Company in order to assist the Company to continue to trade.
(3)	Whether we erred in:
(a) Holding to be relevant to the question of whether a qualifying loan was made within S253(1)(A) of the Taxation of Chargeable Gains Act 1992):
(1) the question of whether work was done in the past by the company for the taxpayer’s benefit and/or
(2) the absence of any formal written contract between the taxpayer and the Company relating to any work done by the Company for the taxpayer’s benefit: 	and
(b) failing to consider the effect, as a matter of law, of such absence.
(4) 	Whether we were right to ask ourselves if the loan “effectively” or “as such” financed the taxpayer’s personal activities.”
On the taxpayer’s new argument, the findings referred to in question 3 and 4 were immaterial.  The factual issue raised in question 2 was the important one, but this has not been answered.
13.	The General Commissioners did of course find that the term loan had been used to replace the existing overdraft.  Question 2, however, places the emphasis on what was the object of the new loan.  Mr Smart submitted that it was obvious that it was intended to consolidate the Company’s existing borrowing on better terms and to spread repayment over a period of 20 years.  This would have and must have been intended to have a beneficial effect on the Company’s cashflow.  The General Commissioners, he says, did not attempt to construe s.253(1)(a) and failed to give proper effect to the words “wholly for the purposes of a trade carried on by him”.  There is no decided authority on the meaning of these words, but Mr Smart submits that some guidance can be obtained from the cases on s.74(1)(a) ICTA 1988, which prohibits deductions in the computation of chargeable profits for purposes of income tax under Schedule D Cases I and II, unless the money was “wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation”.
14.	In this context the words “for the purposes of the trade” mean “for the purposes of enabling a person to carry on and earn profits in the trade”.  This phrase is taken from the speech of Lord Morton of Henryton in Morgan v. Tate & Lyle Ltd [1955] AC 21 at page 39 and is derived from Lord Davey’s speech in Strong & Co of Romsey Ltd v. Woodifield [1906] AC 448 at page 453, where he said this:
“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, etc.  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.”
15.	In Bentleys, Stokes & Lowless v. Beeson (HMIT) [1952] 33 TC 491 the Court of Appeal had to consider whether the partners in a firm of solicitors could deduct from profits the expenses involved in entertaining clients to lunch.  They were held to be deductible, notwithstanding the element of hospitality involved.  At pages 503-4 Romer LJ analysed the wording of what is now s.74(1)(a) in these terms:
“  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: and again, therefore, the problem seems simple enough. The difficulty, however, arises, as we think, from the nature of the activity in question. Entertaining involves inevitably the characteristic of hospitality: giving to charity or subscribing to a staff pension fund involves inevitably the object of benefaction: an undertaking to guarantee to a limited amount a national exhibition involves inevitably supporting that exhibition and the purposes for which it has been organised. But the question in all such cases is: Was the entertaining, the charitable subscription, the guarantee, undertaken solely for the purposes of business, that is, solely with the object of promoting the business or its profit-earning capacity? It is, as we have said, a question of fact. And it is quite clear that the purpose must be the sole purpose. The paragraph says so in clear terms. If the activity be undertaken with the object both of promoting business and also with some other purpose, for example, with the object of indulging an independent wish of entertaining a friend or stranger or of supporting a charitable or benevolent object, then the paragraph is not satisfied though in the mind of the actor the business motive may predominate. For the statute so prescribes. Per contra, if, in truth, the sole object is business promotion, the expenditure is not disqualified because the nature of the activity necessarily involves some other result, or the attainment or furtherance of some other objective, since the latter result or objective is necessarily inherent in the act.”
16.	These observations on the state of mind of the taxpayer in relation to the expenditure incurred have now to be read in the light of later authorities.  In particular, in Mallalieu v. Drummond [1983] 57 TC 330 the House of Lords rejected the notion that the object of the taxpayer was inevitably linked to what he or she consciously had in mind at the moment of expenditure.  Other purposes apparent from the nature of the expenditure itself could be included.  The effect of these later authorities is summarised by Millett LJ in Vodafone Cellular Ltd v. Shaw (HMIT) [1997] STC 734.  At page 742 he said this:
“ The leading modern cases on the application of the exclusively test are Mallalieu v Drummond (Inspector of Taxes) [1983] STC 665, [1983] 2 AC 861 and MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co [1989] STC 898, [1990] 2 AC 239. From these cases the following propositions may be derived. (1) The words for the purposes of the trade mean to serve the purposes of the trade. They do not mean for the purposes of the taxpayer but for the purposes of the trade, which is a different concept. A fortiori they do not mean for the benefit of the taxpayer. (2) To ascertain whether the payment was made for the purposes of the taxpayer’s trade it is necessary to discover his object in making the payment. Save in obvious cases which speak for themselves, this involves an inquiry into the taxpayer’s subjective intentions at the time of the payment. (3) The object of the taxpayer in making the payment must be distinguished from the effect of the payment. A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment. (4) Although the taxpayer’s subjective intentions are determinative, these are not limited to the conscious motives which were in his mind at the time of the payment. Some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made.
   To these propositions I would add one more. The question does not involve an inquiry of the taxpayer whether he consciously intended to obtain a trade or personal advantage by the payment. The primary inquiry is to ascertain what was the particular object of the taxpayer in making the payment. Once that is ascertained, its characterisation as a trade or private purpose is in my opinion a matter for the commissioners, not for the taxpayer.”
17.	In the present case, as already indicated, the General Commissioners made no findings about the Company’s intentions or object in obtaining the 1993 term loan, other than that it was intended to replace the existing overdraft.  It is also clear that the loan was wholly expended in eliminating most of the Company’s existing indebtedness.  There was no suggestion, and certainly no finding, that Mr Robson obtained any financial benefit from the loan itself.  It is common ground that a loan made to refinance the borrowing of a trading company can be a qualifying loan for the purposes of s.253, and in the ordinary case the issues raised before the General Commissioners will not arise.  The Company will simply have altered the funding arrangements for its business and the new loan (like the one it replaces) will provide it with working capital to deploy in the course of its trade.  It will not be necessary to show that the new loan was essential to the Company’s continued existence.  All that will be necessary is to show that, with the benefit of the loan, the Company continued to trade.  The issue, however, which divides the parties on this appeal is whether that approach also applies even if the purposes for which the Company’s existing borrowings had been used were not limited to those of the Company’s trade.
18.	Mr Baldry submitted that I got little or no help from the decisions on what had to be established in order to deduct expenditure against profits under ICTA 1988 s.74(1)(a).  The wording of s.253 is not the same (there is no reference to “exclusively”) and the emphasis of the statutory provisions is also different.  Section 74(1)(a) is concerned to identify expenditure which is deductible in computing profits because it was used in order to make the profits in question.  The cases establish that expenditure which achieves this objective is not to be discounted merely because it also secures some incidental private benefit, provided that the expenditure was incurred with the object of serving the purposes of the trade and of course did do that.  In the case of s.253 Mr Baldry submitted that the inquiry directed by the words of the section was whether the loan itself was a qualifying loan.  To be such, it was not the purpose of the loan which mattered, but rather the use made of it.  What the taxpayer must demonstrate is that the loan, once granted, was in fact used by the borrower wholly for the purposes of a trade carried on by him.  It is not enough merely to prove that the loan had a business purpose, even though the loan was used more widely.  In the case of a loan used to refinance existing borrowings, the need to prove use of the monies wholly for the use of the borrower’s trade necessitated an inquiry into the nature of the existing indebtedness which the new loan was taken to replace.  If this expenditure was not wholly for the purposes of the borrower’s trade, then the refinancing of the indebtedness was in no better a position. 
19.	I accept that the inquiry directed by s.253(1) is to the use made of the loan and not to the object which the borrower had in obtaining it.  But just as in the case of business expenditure under s.74(1)(a), in most instances the two will not diverge.  The use made of the money will conform to the purposes of the expenditure.  This case is no exception.  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.
20.	It is clear from the findings of fact made by the General Commissioners that they were not satisfied that the work carried out to the Queen Street property had been the subject of a proper commercial agreement as to payment and that it involved at the very least an element of subsidy, even assuming that Mr Robson did intend at some time to reimburse the Company for the expenditure it had incurred through its overdraft in doing the work.  Mr Smart submitted that these findings were themselves flawed, because the General Commissioners did not take into account the right of the Company (even in the absence of a contract) to claim payment on the basis of a quantum meruit.  The reality of the situation, however, is that the commerciality of the terms upon which the Company executed the work cannot be assessed simply in terms of what legal rights it (or a liquidator) would have to recover what was due.  There is also the question of whether Mr Robson, as the only director and controlling shareholder, ever intended to respect those rights and to treat the Company as a separate entity to which payment was due and should be made.  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.  If, therefore, the General Commissioners were entitled to take into account the arrangements under which the work was originally done, as a necessary part of their determination of whether the new loan was a qualifying loan, their conclusion is unassailable as a matter of law.  There was ample material on which they could properly have reached the factual conclusion which they did.  The relevance, however, of that determination to their ultimate decision is a question of law which is reviewable by this Court on conventional Edwards v. Bairstow principles.
21.	The definition of a “qualifying loan” in s.253(1) is used to apply to two types of claimant for relief.  Under s.253(3) the relief is made available to the lender itself unless the debt is a debt on security as defined by TCGA 1992 s.132.  Section 253(4) extends the relief to the guarantors of such loans in all cases, subject only to proof of payment under the guarantee.  It is a condition of both s.253(3) and (4) that the principal of the loan should have become irrecoverable from the borrower.  Subject to these conditions, relief is therefore given against CGT in respect of loans to traders, unless it is deductible against income or profits for the purpose of calculating the taxpayer’s liability to income or corporation tax:  see s.253(10).  For the reasons already given, the application of what might be termed the purposive test derived from ICTA 1988 s.74(1)(a) does not really assist to resolve the real issue in this case.  The question is whether the refinancing of the overdraft was in itself a use, and the only relevant use, of the loan for the purposes of a trade.  
22.	It seems to me that one can derive this much assistance from the cases under s.74(1)(a).  The condition contained in s.253(1)(a) is satisfied upon proof that the loan was applied (to use Millett LJ’s test) to serve the purposes of the trade.  If one assumes (as on the General Commissioners’ findings one must) that the Company’s existing indebtedness would not be a qualifying loan because of the use to which the money had been put, it would be odd if any new loan which merely replaced that borrowing could, without more, be treated as satisfying the qualifying purpose.  One can test the proposition in this way.  If the existing loan had been used (for example) to provide personal benefits to the directors of a company unconnected with that company’s trade, the loan would clearly not be a qualifying loan and any guarantee liability of the directors would for the same reason not qualify for relief under s.253(4).  If the directors then procured the replacement of that borrowing with a new loan also guaranteed by them, the sole purpose and effect of which was to eliminate the old loan and replace it with a new loan of a similar amount on slightly better terms as to interest, I find it difficult to accept that the new loan (which adds nothing to the company in terms of income or working capital, but merely reduces the interest payable on the debt) should qualify as a loan used wholly for the purposes of the company’s trade.  As a matter of analysis, there seem to me to be two alternative reasons for this.  The first is 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).  The alternative approach (which the Revenue accepts) is to treat a replacement loan as a qualifying loan if the existing loan has been expended wholly on the borrower’s trade.  Where the new loan is used to refund and therefore stands in the place of the existing borrowing, one can ignore the change in funding for the purposes of s.253 and simply ask whether the residual indebtedness represents money which was expended for the qualifying purpose.  But I do not accept that s.253(1)(a) applies to convert non-qualifying loans into qualifying loans merely by a refinancing exercise which leaves the existing indebtedness in place, but repayable on improved terms.  The lender or guarantor must, in my judgment, demonstrate that the indebtedness was itself used wholly to serve the borrower’s trade.  On the facts found by the General Commissioners, that test is not satisfied in the present case.
Section 253(4)
23.	My decision that the 1993 loan was not a qualifying loan suffices to determine this appeal, and the issues raised by the Respondent’s Notice do not arise.  However, in case this matter should go any further, it may be useful if I briefly summarise my conclusions on the issues raised in respect of s.253(4).  
24.	The General Commissioners declined to go behind Mr Pollin’s letter of 11 August 1997, even though Mr Mitchell in his skeleton argument had made it clear that the Revenue was at least challenging the taxpayer’s assertion that he had paid the £151,000 in satisfaction of his liability under the guarantee.  No point was taken by Mr Mitchell about the recoverability of the loan (which was not dealt with in Mr Pollin’s letter) but it seems to have been accepted that this condition was fulfilled.  I do not consider that it is open to the Inspector to raise that issue now.  However, in relation to the condition specified in s.253(4)(b), there clearly was a live issue before the General Commissioners, which they appear to have resolved simply by relying on Mr Pollin’s letter and his knowledge of the position gained from investigating the affairs of the taxpayer prior to the appeal.
25.	The rules of evidence before the General Commissioners are extremely relaxed.  Under regulation 15(5) and (6) of the General Commissioners (Jurisdiction and Procedure) Regulations 1994:
“(5)  Evidence before the Tribunal may be given orally or, if the Tribunal so directs, by affidavit or a statement made or recorded in a document, but at any stage of the hearing the Tribunal may, on the application of any party or of its own motion, require the personal attendance as a witness of—
(a)  the maker of an affidavit, or
(b)  the maker of such a statement, or
(c)  in the case of an oral statement recorded in a document, the person by whom the statement was so recorded.
 (6)  The Tribunal may receive evidence of any fact which appears to the Tribunal to be relevant to the subject matter of the proceedings notwithstanding that such evidence would be inadmissible in proceedings before a court of law in that part of the United Kingdom by reference to the law of which the proceedings before the Tribunal are to be determined, but, save in cases where claims for privilege are allowed (including, in proceedings in Scotland, claims for protection from disclosure by virtue of any rule of law relating to the confidentiality of communications), it shall not refuse to admit any evidence which would be admissible in such proceedings.”
26.	I really know very little about what took place at the hearing beyond what is recorded in the Case Stated.  From that it is clear that the £151,000 was produced from the sale of Mr Robson’s farm, which was charged to Barclays Bank as security for the 1993 loan.  The Revenue accepts that security of this kind, which is given to support the obligations of a third party borrower, amounts to the guaranteeing of those liabilities and that, if realised, constitutes the making of a payment under a guarantee within the meaning of s.253(4)(b).  Therefore the only issue in the present case is whether the money was paid by way of guarantee or in satisfaction of an independent liability to the Company on an overdrawn director’s account, which would have negatived the obligation of the Company as borrower to repay the sums provided in satisfaction of its own liabilities to the bank by the taxpayer as mortgagor.  
27.	I take the view that the General Commissioners were entitled to weigh such evidence as they received against the fact that Mr Pollin had (from his own investigations) accepted that this was a payment under the guarantee, and to conclude that the s.253(4)(b) condition had been satisfied.  This is not a case where, on Edwards v. Bairstow principles, their decision can be set aside as one which no tribunal, properly directed on the law, could have reached on the admissible material before it.  The challenge to their decision on this point, as recorded in paragraph 8.1 of the Case Stated, therefore fails.  It is unnecessary for me to deal with the other procedural points taken by Mr Smart about the appropriateness or otherwise of raising these points by way of a Respondent’s Notice rather than some form of cross-appeal.
Conclusions
28.	For these reasons the taxpayer’s appeal will be dismissed.  In the absence of agreement I will hear Counsel on the question of costs.