Crosby (Trustees) v HM Inspector of Taxes [2004] UKSC SPC00416 (08 June 2004)

SPC00416

CAPITAL GAINS TAX — qualifying loans — loans becoming irrecoverable — loans formally waived — claim for loss relief — TCGA 1992 s 253 — whether loan must be in existence at time claim made — no — appeal allowed

THE SPECIAL COMMISSIONERS

DANIEL CONRAD CROSBY
BRIDGET JOAN HEGGS
JOHN ROBERT SEED
(Trustees of the E A Crosby No 2 Settlement of 30 December 1954)
 	Appellants
	
- and -

PHILIP BROADHURST
(HM Inspector of Taxes)
Respondent

			Special Commissioners : 		Colin Bishopp
			David Demack

Sitting in Manchester on 19 May 2004.
Hugh McKay of counsel, instructed by Addleshaw Goddard, for the taxpayers
John Cormack, HM Inspector of Taxes, for the respondent

© CROWN COPYRIGHT 2004

DECISION

1	We take the brief description of the background of this appeal which follows from the parties’ agreed statement of facts; we heard no evidence.
2	The taxpayers are the current trustees of a settlement made in 1954 by Eric Arthur Crosby (“the settlor”). In 1981 the settlor and Mr H Housley formed a company, H Housley & Sons Limited (“HHS”), of which they each owned half the shares. In 1982 HHS acquired a cutlery manufacturing and distribution business. The business was profitable but occasional injections of funds were required and on 15 October 1985 the then trustees lent the company £100,000, from the trust funds. In the same year Mr Housley retired and his shares were acquired by various members of the settlor’s family; by 1987 the settlor’s shares, too, had been transferred to family members and he retained none himself. HHS continued to require funds and on 27 October 1988 the then trustees lent it a further £150,000 from trust funds. The company made other borrowings elsewhere. The settlor died in 1990.
3	HHS did not prosper and by 1991 it had total liabilities of over £2 million, including the aggregate £250,000 owed to the settlement. Some of the liabilities were guaranteed by members of the settlor’s family. HHS was in a parlous financial position, and the Revenue accept that the loans were then irrecoverable. The shareholders were able to secure a sale of the company to its then managing director and an outsider, neither of whom was a member of the settlor’s family. The sale was completed on 5 March 1992. One condition of the sale was that the trustees should execute a deed of waiver and release of the loans, and this was done. However, HHS continued to decline and it entered into receivership in 1993; the guarantees we have mentioned remained effective and were called upon.
4	In April 1992 the trustees submitted the settlement’s 1992/93 tax return. It included a claim for a capital loss of £250,000, the aggregate of the 1985 and 1988 loans. The inspector refused the claim. The trustees lodged an appeal against the refusal in 1995; it was subsequently transferred to our jurisdiction by the General Commissioners.
5	The relevant law is contained in section 253 of the Taxation of Chargeable Gains Act 1992. So far as material, that section, entitled “Relief for loans to traders”, read (at the time the claim was made: it has since been amended) 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 security as defined in section 132; …
(3)	If, on a claim by a person who has made a qualifying loan, the inspector is satisfied that—
(a)	any outstanding amount of the principal of the loan has become irrecoverable, and
(b)	the claimant has not assigned his right to recover that amount …
this Act shall have effect as if an allowable loss equal to that amount accrued to the claimant when the claim was made …
(5)	Where an allowable loss has been treated under subsection (3) … above as accruing to any person and the whole or any part of the outstanding amount mentioned in subsection (3)(a) … is at any time recovered by him, this Act shall have effect as if there had accrued to him at that time a chargeable gain equal to so much of the allowable loss as corresponds to the amount received …
(12)	References in this section to an amount having become irrecoverable do not include references to cases where the amount has become irrecoverable in consequence of the terms of the loan, of any arrangements of which the loan forms part, or of any act or omission by the lender …”.
6	The inspector accepted that the two loans were “qualifying loans” within the meaning of subsection (1), that they had become irrecoverable before the waiver was executed, and that the waiver did not come within subsection (12). His refusal to allow the claim was founded upon internal Revenue guidance, in turn based upon the view that, at the time a claim for relief under subsection (3) is made, the loan must remain in existence. That was not the case here; the loan had been extinguished by the waiver, which came before the claim. The sole issue between the parties is whether that interpretation of subsection (3) is correct and it has been formulated, in an  agreed direction, in these terms:
“Do the provisions of section 253(3) Taxation of Chargeable Gains Act 1992 (as applicable at the relevant date) require the loan by the appellants to H Housley & Sons Limited to be in existence at the time of the claim for loss relief by the appellants (being the date the tax return for the period to 5 April 1992 was submitted) for the claim to succeed?”
7	Hugh McKay, counsel for the taxpayers, based his arguments primarily upon what he contended was the purpose of the legislation. It related only to a limited class of loans—those made to traders—and it could be deduced, he said, that it was intended to encourage such loans by allowing the lender relief if the borrower became unable to repay the loan. There is no indication in section 253(3) that the loan must still be in existence at the time the claim is made; that is an interpretation placed on the subsection by the Revenue which, in the absence of clear words, is unwarranted. It was clear in this case that at the time the claim was made the loans had become irrecoverable and the waiver did not affect that position. It did not cause the irrecoverability, nor would the loans have become recoverable again had there been no waiver. If the legislature had intended that a loan should be both irrecoverable and in existence at the time the claim is made it could easily have said so. If paragraph (a) had read “any outstanding amount of the principal of the loan is irrecoverable” the inspector might be correct but the words “has become irrecoverable” could not be interpreted to import the further condition that the loan should still be in existence; it merely meant that the loan had become irrecoverable at a time before the claim was made. The Revenue’s further argument that there could be no “outstanding” amount if the loan no longer existed added nothing since the word indicated no more than that the relief was limited to the amount which was irrecoverable, and did not extend to any amount which had been, or was likely to be, repaid.
8	The respondent was represented by John Cormack, himself an inspector of taxes. His argument was that there was no need to resort to a purposive construction of subsection (3), as Mr McKay had suggested, since the statutory words were clear. The use of the words “has become irrecoverable” necessarily implied a continuing state of affairs. Thus the debt must exist (and be irrecoverable) at the date on which the claim is made. He gave as an analogy the sentence “My cat has become ill”: one would not use that form of words if the cat had since recovered or died, but only if the cat were alive and still unwell. Mr Cormack referred us to Varty (Inspector of Taxes) v Lynes [1976] STC 508 and Williams (Inspector of Taxes) v Bullivant [1983] STC 107, in both of which the court was required to construe similar words. In Williams v Bullivant the taxpayer had made a claim made under section 23(4) of the Finance Act 1965 that certain shares had a negligible value. At [1983] STC 107 at 111 Vinelott J said:
“Section 23(4) reads as follows: 
  ‘If, on a claim by the owner of an asset, the inspector is satisfied that the value of an asset has become negligible, he may allow the claim and thereupon this Part of this Act shall have effect as if the claimant had sold, and immediately re-acquired, the asset for a consideration of an amount equal to the value specified in the claim.’ 
 The subsection operates in this way, that if it is agreed on a claim by the owner of an asset that it is of negligible value, a notional sale and reacquisition is deemed thereupon to have taken place. It is that notional sale and reacquisition which gives rise to a notional loss. 
   On a literal construction the word ‘thereupon’ most naturally relates back to the words ‘he may allow’. That literal construction may give rise to arbitrary consequences if, for instance, as a result of delay on the part of the inspector, a claim made in one tax year is allowed in a subsequent tax year. In practice, as is apparent from the statement that I have read, the Revenue have always construed sub-s (4) as if the word ‘thereupon’ related back to the words ‘on a claim by the owner of an asset’. That, I think, is a permissible construction, and I can see great force in the argument that if it is a permissible construction it should be preferred to a construction which fixed the possibly arbitrary date when the claim is allowed.”
9	If one took the same approach here, Mr Cormack argued, it must follow that there has to be a subsisting irrecoverable debt at the time the claim is made and if, as here, the debt has ceased to exist, any claim must fail. Furthermore, there can be no amount “outstanding” on a loan which has ceased to exist. The claim could have been made immediately before the waiver and if that had been done it would have been allowed. It was not anomalous that, because the waiver preceded the claim, the relief was not available since it was within the taxpayer’s power to dictate the sequence of events. The taxpayers’ construction of the subsection would require relief to be granted when the loan had become irrecoverable and, before the claim was made, had become recoverable again; the contention that it was sufficient that a loan had at some time been irrecoverable could not be right—the only conclusion was that it must be irrecoverable (and subsisting) at the date of the claim.
10	At first sight there is some attraction in Mr Cormack’s argument, which he advanced with considerable skill. However, we have come to the conclusion that it is wrong.
11	We return to Mr Cormack’s cat. It is right that one would not say “my cat has become ill”, without more, of a cat which is now well; but one might say “my cat has become ill and has recovered several times” of a cat which is now well. The latter sentence implies no continuing state of affairs. The semantic subtlety on which Mr Cormack’s argument depends must, therefore, be treated with some caution. We are also not persuaded that what Vinelott J said in Williams v Bullivant supports Mr Cormack’s argument. In our view the passage we have set out favours a pragmatic over a pedantic approach.
12	We prefer Mr McKay’s purposive approach which, we think, is consistent with the wording of the section itself—indeed, its title, “Relief for loans to traders” identifies what that purpose is. It seems to us clear that Parliament’s intention was to afford relief to those who, having made a loan to a trader, will not see the money, or a part of it, again. The relief is available, as Mr McKay pointed out, only in respect of a limited class of loans; and there are provisions catering for changes in the debtor’s fortunes after a claim has been admitted (subsection (5)) and countering abuse (subsection (12)). We agree with Mr McKay that if Parliament had intended that a loan must be both subsisting and irrecoverable it would have been simple to say so, either by rephrasing subsection (3) or by adding further words to that effect to subsection (12). Instead, it seems to us, subsection (12) should be taken as an exhaustive list of the circumstances which disqualify a lender from the relief to which he would otherwise have been entitled. We see nothing in the statutory words to support the view that the accident of waiving a loan, and not for reasons which come within subsection (12), before rather than after a claim is made disqualifies the lender from the relief.
13	Accordingly we allow the appeal.

COLIN BISHOPP	DAVID DEMACK
SPECIAL COMMISSIONERS