England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MEDWAY COUNTY COURT
(His Honour Judge Russell-Vick QC)

		Royal Courts of Justice Strand, London, WC2A 2LL Wednesday 21 November 2001

LORD JUSTICE CHADWICK :

1. This is an appeal from an order made on 25 June 1999 by His Honour Judge Russell-Vick QC, sitting in the Medway County Court, in proceedings brought by the Cheltenham & Gloucester Building Society, as mortgagee of property known as 11 Hawkins Close, Brompton, Kent, against the appellant, Mr Anthony Ashford.
2. The proceedings were commenced as long ago as May 1994. Although the claim in the proceedings is for possession and payment under the mortgage, the issue on this appeal is whether the Society (now Cheltenham & Gloucester plc) is required to make some adjustment to the mortgage account to reflect the fact that mortgage interest relief at source (MIRAS) has not been allowed, as Mr Ashford claims that it should have been, since the inception of the loan. It is necessary, therefore, to have in mind the relevant statutory provisions under which relief against tax is allowed in respect of interest on borrowing.

The statutory provisions

3. The relevant provisions are now found in Part IX of the Income and Corporation Taxes Act 1988. But the provisions in force at the date of the mortgage loan (2 March 1988) were contained in earlier legislation. The provisions of the earlier legislation were repealed on consolidation in 1988; but the substance of the earlier scheme has been re-enacted in the 1988 Act.
4. A convenient starting point is section 75(1) of the Finance Act 1972 (now re-enacted as section 353(1) of the 1988 Act). The section, as amended by the Finance Act 1974, was in these terms, so far as material:

"Where a person pays in any year of assessment – (a) annual interest chargeable to tax under Case III of Schedule D . . . and the interest is stated in Schedule 9 to this Act or in Part III of Schedule 1 to the Finance Act 1974 to be eligible for relief under this section, then, if he makes a claim to the relief and subject to the following provisions of this section, the amount of the interest shall be deducted from or set off against his income for that year of assessment, and income tax shall be discharged or repaid accordingly."

The "following provisions of this section" included subsection (1A), introduced by the Finance Act 1974, which provided that relief under section 75 of the 1972 Act should not be given in respect of interest on a debt incurred by overdrawing an account. An obvious example of interest which would not have been allowed against tax under the 1972 Act, as amended, is interest on an overdrawn bank account. That has continued to be the position – see, now, section 353(3)(a) of the 1988 Act.

5. Paragraph 1 in Part I of Schedule 9 to the 1972 Act ("the 1972 Schedule") (now section 354(1) of the 1988 Act) provided that, subject to the provisions in that Part of that Schedule (which are not material) and to Part II of Schedule 1 to the 1974 Act ("the 1974 Schedule"), interest was eligible for relief under section 75 of the 1972 Act if it was paid by a person for the time being owning an estate or interest in land in the United Kingdom on a loan to defray money applied:

"(a) in purchasing the estate or interest, or one absorbed into, or given up to obtain, the estate or interest, or

. . .

(c) In paying off another loan, if interest on that other loan would have been eligible for relief under section 75 of this Act had the loan not been paid off . . . [or would have been so eligible apart from section 26 of the Finance Act 1982]."

The words which I have placed in parenthesis were added by the Finance Act 1983. Paragraph 4(1) of the 1974 Schedule (now re-enacted as section 355(1) of the 1988 Act) restricted the application of Part I of the 1972 Schedule (so far as material) to cases in which the land was used as the only or main residence of the borrower; and paragraph 5 (now section 357 of the 1988 Act) further restricted the application of the relieving provisions in the 1972 Act to interest on so much of the loan as did not exceed an amount described as "the qualifying maximum for the year of assessment". From the year of assessment 1987/88 – which is the first year material to this appeal – the qualifying maximum has been £30,000.

6. The effect of the provisions to which I have referred, before 1 April 1983, was that relief against tax was allowed in respect of interest on a loan to purchase land (up to the qualifying maximum) in a case where the land was used as the only or main residence of the borrower. The typical case, of course, was mortgage interest paid to a building society on a loan for house purchase. Relief was also allowed where the loan was taken out to pay off an earlier loan which was, itself, eligible for relief. Again, a typical case was interest on a new building society loan made by way of remortgage to repay an existing building society loan of the same amount. But relief had to be claimed in the borrower's tax return; so it would be obtained either in the form of a tax rebate or allowance at the end of the year of assessment, or through an appropriate adjustment to the borrower's PAYE coding.
7. The right of a borrower to deduct tax at the time when he made the interest payment – mortgage interest relief at source – was introduced by section 26 of the Finance Act 1982 (now section 369 of the 1988 Act). The section was in these terms (so far as material):

"(1) If a person who is a qualifying borrower makes a payment of relevant loan interest to which this section applies, he shall be entitled, on making the payment, to deduct and retain out of it a sum equal to income tax at the basic rate for the year of assessment in which the payment becomes due; and, accordingly, section 75 of the Finance Act 1972 (relief for payment of interest) . . . shall not apply to that payment of relevant loan interest.

(2) Where a sum is deducted under subsection (1) above from a payment of relevant loan interest, -

(a) the person to whom the payment is made shall allow the deduction on receipt of the residue;

(b) the borrower shall be acquitted and discharged of so much money as is represented by the deduction as if the sum had actually been paid; and

(c) the sum deducted shall be treated as income tax paid by the person to whom the payment is made.

(3) Part I of Schedule 7 to this Act shall have effect to determine what is relevant loan interest, Part II of that Schedule shall have effect with respect to the application of this section to any such interest and Parts III and IV of that Schedule shall have effect with respect to qualifying borrowers and qualifying lenders respectively."

An individual was a qualifying borrower for the purposes of section 26 of, and Schedule 7 to, the 1982 Act – see paragraph 13 in Part III of Schedule 7 ("the 1982 Schedule"). That has remained the position – see, now, section 376(1) of the 1988 Act.

8. The effect, therefore, where a borrower is able to, and does, take advantage of the right conferred by section 26 of the 1982 Act and its successor, section 369 of the 1988 Act, is that he pays interest net of tax; or, to put the point another way, the amount which he can be required to pay to the lender in respect of interest is the contractual, or gross, amount, less tax at the basic rate on that amount. So, if the monthly amount of interest at the contractual rate is, say, £100 and the basic rate of tax is, say, 30%, the monthly amount which the borrower can be required to pay to the lender is £70; and, on payment of that monthly amount of £70, the borrower is entitled to be credited with £100 against his obligation under the mortgage to pay interest at the contractual rate. Further, if the borrower actually pays £100, when he could only be required to pay £70, he is entitled to be credited with £130; so that the overpayment of £30 is available to be applied in discharge of the principal amount of the loan or any arrears. That, in substance, is what Mr Ashford contends should have been the position in the present case. It is common ground that payments to his mortgage account were not credited on that basis.
9. Paragraph 2(1) in Part I of the 1982 Schedule (now section 370 of the 1988 Act) provided that, subject to the further provisions of that Schedule, "relevant loan interest" was interest which was paid and payable in the United Kingdom to a qualifying lender and to which sub-paragraph (2) or (3) of that paragraph applied. There is no dispute that a building society was, and is, a qualifying lender – see paragraph 14(1)(a) in Part IV of that Schedule and section 376(4)(a) of the 1988 Act. Paragraph 2(2) applied to interest if (a) it was interest falling within paragraph 1 of the 1972 Schedule - which I have already set out – and (b) apart from paragraph 5 in Part II of the 1974 Schedule the whole of the interest either would have been eligible for relief under section 75 of the 1972 Act or would have been taken into account in a computation of profits or gains or losses for the purposes of Case I, Case II or Case VI of Schedule D for any year of assessment. Prima facie, therefore, interest paid by a person for the time being owning land in the United Kingdom on a loan to defray money applied in purchasing that land - or in paying off an earlier loan used for that purpose – is relevant loan interest for the purposes of section 26 of the 1982 Act and its successor, section 369 of the 1988 Act. The basic principle established in relation to relief under section 75 of the 1972 Act was preserved. But so, also, were the restrictions imposed by paragraphs 4(1) and 5 in the 1974 Schedule – in particular, the provision in paragraph 5 of the 1974 Schedule that interest on loans within that paragraph is eligible for relief only to the extent that the amount on which it is payable does not exceed the qualifying maximum for the year of assessment. For the purposes of paragraph 5 of the 1974 Schedule a loan to which Part I of the 1972 Schedule applies by virtue of paragraph 4(1)(a) was described as a "limited loan".

Self-certification

10. Paragraph 7 in Part II of the 1982 Schedule (now section 374 of the 1988 Act) set out the entry conditions to be satisfied before interest relief at source could be allowed. The paragraph was in these terms (so far as material):

"(1) The principal section [section 26 of the 1982 Act] does not apply to any relevant loan interest unless either-

(a) in the case of a loan of a description specified by regulations for the purposes of this sub-paragraph, the borrower . . . has given notice to the lender in the prescribed form certifying –

(i) that he is a qualifying borrower; and

(ii) that the interest is relevant loan interest; and

(iii) such other matters as may be prescribed; or

(b) the Board have given notice to the lender and the borrower that the interest may be paid under deduction of tax; or

(c) . . .; or

(d) . ."

(2) Where notice has been given as mentioned in paragraph (a) or paragraph (b) of sub-paragraph (1) above, the principal section applies to any relevant loan interest to which the notice relates and which becomes due on or after the relevant date, . . ."

The power to make regulations for the purposes of section 26 of, and Schedule 7 to, the 1982 Act was conferred by section 29(3) of that Act. The relevant regulations, in the context of this appeal, are those in The Income Tax (Interest Relief) Regulations 1982 (SI 1982/1236). Regulation 3 is in these terms:

"(1) Loans the interest on which paid by a qualifying borrower is relevant loan interest are loans specified for the purposes of paragraph 7(1)(a) of Schedule 7 [to the 1982 Act] except –

(a) loans in respect of property which is used as the only or main residence of a dependent relative or former or separated spouse of his;

(b) loans in respect of living accommodation which is for him job-related within the meaning of the provisions of paragraph 4A(3) of Schedule 1 to the Finance Act 1974; or

(c) loans to which the provisions of sub-paragraphs (b), (c) or (d) of the said paragraph 7(1) apply.

(2) The lender shall send a copy of the notice sent to it under the said paragraph 7(1)(a) by the qualifying borrower to the Board within 30 days of receiving it.

(3) Where the borrower is unable to provide the lender with the notice to which the said paragraph 7(1)(a) refers he may, if he considers that the interest payable on his loan is or will be relevant loan interest, apply to the Board for a notice under paragraph 7(1)(b) of Schedule 7 and the Board shall notify him of their decision on his application."

11. The effect of regulation 3, read in conjunction with paragraph 7(1)(a) of the 1982 Schedule (and, now, section 374(1)(a) of the 1988 Act), is that, save in the cases described in paragraphs (a), (b) and (c) of regulation 3(1), all loans the interest on which (when paid by a qualifying borrower) is qualifying interest, are specified loans for the purposes of paragraph 7(1)(a) of the 1982 Schedule (or section 374(1)(a) of the 1988 Act); with the consequence that, in the case of all such loans, the borrower must either (i) give a notice to the lender in the prescribed form certifying the matters set out under paragraph 7(1)(a) ("self-certification") or (ii) must apply to the Board for a notice under paragraph 7(1)(b). If the borrower gives a notice to the lender under paragraph 7(1)(a) – or if, on application by the borrower, the Board give notice under paragraph 7(1)(b) – then interest may be paid under deduction of tax. But if no such notice is given, then – save in a case within sub-paragraphs (c) or (d) of paragraph 7(1) – section 26 of the 1982 Act (or section 369 of the 1988 Act) does not apply and the borrower is not entitled to deduct tax from his interest payment; nor is the lender required to give him credit against contractual interest for the amount of tax which he has, or could have, deducted. That does not lead to the result that the borrower can obtain no relief for interest against tax. It leads only to the result that he cannot obtain that relief through MIRAS; it remains open to him to claim the relief through his tax return at the end of the year or through his PAYE coding.

"Limited loans"

12. Paragraph 5 in Part I of the 1982 Schedule (now section 373 of the 1988 Act) was in these terms (so far as material):

"(1) The provisions of this paragraph have effect in relation to a loan where, by virtue of sub-paragraphs (1) and (2) of paragraph 5 . . . of the 1974 Schedule (the limit on eligibility for tax relief), only part of the interest on the loan would (apart from the principal section) be eligible for relief under section 75 of the Finance Act 1972; and in this paragraph any such loan is referred to as a "limited loan".

(2) None of the interest on a limited loan is relevant loan interest unless –

[(a) the loan is made on or after 6th April 1987; or

(b)] the qualifying lender to whom the interest is payable has given notice to the Board in accordance with regulations that he is prepared to have limited loans of a description which includes that limited loan brought within the tax deduction scheme."

The words which I have placed in parenthesis were added by amendment made in the Finance Act 1985. The position, therefore, since the amendment, has been that interest on a limited loan made after 6 April 1987 – or, rather, a proportionate part of that interest - is relevant loan interest (for the purposes of section 26 of the 1982 Act and section 369 of the 1988 Act) whether or not the lender has given notice to the Board that he is prepared to include loans of that description within a MIRAS scheme.

13. Mr Ashford places much weight on the provisions of paragraph 5 of the 1982 Schedule 7 and section 373 of the 1988 Act. But it is necessary to ask: "to what loans are those provisions intended to apply?". The answer is provided by the words in paragraph 5(1) of the 1982 Schedule. The provisions have effect in relation to a loan where "by virtue of sub-paragraphs (1) and (2) of paragraph 5 . . . of the 1974 Schedule . . . only part of the interest on the loan would . . . be eligible for relief under section 75 of the [1972] Act". Paragraph 5(1) of the 1974 Schedule has effect in relation to, and only in relation to, loans to which Part I of the 1972 Schedule applies "by virtue of paragraph 4(1)(a) above"; that is to say, by virtue of paragraph 4(1)(a) of the 1974 Schedule. The reference to paragraph 4A(1) can be ignored in this context. Loans to which Part I of the 1972 Schedule applies by virtue of paragraph 4(1)(a) of the 1974 Schedule are loans "to defray money applied" in purchasing, improving or developing land which, at the time, is used as the only or main residence of the person by whom the interest is paid. Again, the reference in paragraph 4(1) to caravans or houseboats can be ignored in the present context. Paragraph 5(2) of the 1974 Schedule requires there to be brought into account the amount of any earlier loan to which Part I of the 1972 Schedule applies by virtue of paragraph 4(1)(a) of the 1974 Schedule.
14. The effect of paragraphs 5(1) and (2) of the 1974 Schedule was that part only of the interest on loans to which paragraph 5(1) applies ("limited loans") would be eligible for relief under section 75 of the 1972 Act in those cases where the amount of the limited loan (taken with any relevant earlier loan) exceeded the qualifying maximum for the year of assessment. In that context, a "limited loan" means a loan used for the limited purposes described in paragraph 4(1)(a). The epithet refers to the purpose of the loan, not to the amount of the loan. That is clear from the terms of sub-paragraphs (a) and (b) of paragraph 5(1) of the 1974 Schedule. The loans to which paragraph 5 of the 1982 Schedule applied were limited loans (within the meaning of paragraph 5(1) of the 1974 Schedule) in respect of which, by virtue of the restrictions imposed by paragraphs 5(1) and (2) of the 1974 Schedule, part only of the interest on the loan would have been eligible for relief.
15. It is necessary to have in mind that, in paragraph 5(1) of the 1982 Schedule, the phrase "limited loan" was given a meaning which differed from the meaning given to that phrase in paragraph 5(1) of the 1974 Schedule. In paragraph 5(1) of the 1982 Schedule "limited loan" means a loan to which that paragraph applies; that is to say a loan used for the limited purposes described in paragraph 4(1)(a) of the 1974 Schedule and in respect of which, by virtue of the restrictions imposed by paragraphs 5(1) and (2) of the 1974 Schedule, part only of the interest on the loan would have been eligible for relief under section 75 of the 1972 Act. That is a more restricted meaning than the meaning given to the same phrase in paragraph 5(1) of the 1974 Schedule; which did not require the additional characteristic that part only of the interest on the loan would have been eligible for relief. Unless it is kept in mind that the phrase was not used in paragraph 5(1) of the 1982 Schedule in the same sense as it was used in paragraph 5(1) of the 1974 Schedule, there is potential for confusion. The difference in meaning, and the potential for confusion, persists in the 1988 Act - compare sections 357(1) and 373(1) of that Act.
16. Of more importance in the present context, is the conclusion that the phrase "limited loan" is not used in paragraph 5 of the 1982 Schedule to describe any and every loan where only part of the interest on the loan would have been eligible for relief under section 75 of the 1972 Act. The phrase is used only to describe loans used to defray money applied for the limited purposes described in paragraph 4(1)(a) of the 1974 Schedule where the interest eligible for relief is restricted, under paragraphs 5(1) and (2) of that Schedule, by reference to the qualifying maximum of the loan for the year of assessment. The point may be illustrated by an example. If the qualifying maximum for the relevant year of assessment is £30,000, a mortgage loan in the amount of £35,000 for the purchase of dwelling-house as the borrower's main residence, will be a limited loan for the purposes of paragraph 5 of the 1982 Schedule. A mortgage loan in the amount of £45,000, of which £35,000 is used to purchase the dwelling house and £10,000 is used, say, to pay school fees, will not be a limited loan for the purposes of that paragraph. Nor will a re-mortgage loan in the amount of £45,000, of which £35,000 is used to repay the earlier loan for the purchase of the dwelling house and the balance is used for some other purpose, be a limited loan for the purposes of paragraph 5 of the 1982 Schedule or section 373(1) of the 1988 Act.
17. Interest on a loan which was not a limited loan for the purposes of paragraph 5 of the 1982 Schedule might or might not be relevant loan interest for the purposes of section 26 of the 1982 Act. Whether or not interest on such a loan was relevant loan interest turned on paragraphs 2, 3 and 4 of that schedule. But, before paragraph 5(2) was amended by the Finance Act 1985, none of the interest on a loan which was a limited loan for the purposes of paragraph 5 of the 1982 Schedule – that is to say, not even so much of that interest as would be eligible for relief notwithstanding the restriction imposed by paragraph 5(1) and (2) of the 1974 Schedule – could be relevant loan interest unless the lender had given notice to the Board electing to bring limited loans of that type within the MIRAS scheme. The option to exclude some or all limited loans from the MIRAS scheme was removed, by the amendment, in respect of loans made on or after 6 April 1987. But the effect of the amendment was only to bring within the scheme limited loans which (but for the amendment) would have been outside it. The amendment had no effect on loans which were not limited loans for the purposes of paragraph 5 of the 1982 Schedule. The question whether or not interest on loans which were not limited loans was relevant loan interest for the purposes of section 26 of the 1982 Act continued to turn on paragraphs 2, 3 and 4 of the 1982 Schedule.
18. The point may be illustrated by the example already given. Suppose a qualifying maximum for the relevant year of assessment of £30,000, and a mortgage loan in the amount of £35,000 for the purchase of dwelling-house as the borrower's main residence. The whole of the interest on that loan would (apart from the restriction imposed by paragraph 5 of the 1974 Schedule) be eligible for relief under section 75 of the 1972 Act; so the interest would be relevant loan interest under the provisions of paragraph 2(2) of the 1982 Schedule. But the loan is a limited loan for the purposes of paragraph 5 of that schedule; so that, before the 1985 amendment, none of the interest on that loan would have been relevant loan interest unless the lender had given notice to the Board electing to bring limited loans of that type within the MIRAS scheme. That would not have led to the result that the borrower was deprived of relief in respect of that interest; but the borrower would have had to claim relief under section 75 of the 1972 Act. He would not have been entitled to deduct tax when making his interest payment. The effect of the 1985 amendment was that, if the loan were made on or after 6 April 1987, the interest on the loan – or, more accurately, six sevenths of that interest, being the proportion eligible for relief under paragraph 5(1)(a) of the 1974 Schedule – would be relevant loan interest on payment of which the borrower could deduct tax (see paragraph 5(4) of the 1982 Schedule, now section 373(5) of the 1988 Act).
19. Interest on a supposed mortgage loan in the amount of £45,000 - of which £35,000 is used to purchase a dwelling house and £10,000 is used, say, to pay school fees - on the other hand, would not be relevant loan interest because it would not satisfy the condition in paragraph 2(2)(b) of the 1982 Schedule (now section 370(2)(b) of the 1988 Act). It would not be interest the whole of which would (apart from the restriction in paragraph 5 of the 1974 Schedule) be eligible for relief under section 75 of the 1972 Act. That is because it was not interest on a loan used (exclusively) to defray money applied for one of the purposes under paragraph 1 of the 1972 Schedule (now section 354(1) of the 1988 Act). The position would not have been affected by the 1985 amendment. If the £45,000 were to be lent after 6 April 1987, the lender might be persuaded to split the loan; so that there was one loan of £35,000 for the purchase of the dwellinghouse - six sevenths of the interest on which would be relevant loan interest - and a distinct loan of £10,000, the interest on which would not be relevant loan interest. In that way tax relief at source could be obtained on the appropriate proportion of part of the interest paid by the borrower. The analysis would be the same in the case of a re-mortgage loan in the amount of £45,000, of which £35,000 is used to repay the earlier loan for the purchase of the dwelling house and the balance is used for non-qualifying purposes.

The facts underlying this appeal

20. I turn now to the facts underlying this appeal. The property, 11 Hawkins Close, Brompton, was purchased by Mr Ashford in 1985 for the sum of £45,950. The purchase price was funded in part by a mortgage advance of £35,000 from the Bradford & Bingley Building Society and in part by borrowing under an overdraft facility provided by National Westminster Bank Plc. Subsequently the bank borrowing was converted into a fixed loan of £10,000 secured by a second charge. On 2 March 1988 the existing secured borrowing was repaid out of the proceeds of a new mortgage advance of £45,000 from the Portsmouth Building Society. On 12 March 1991 the undertaking of the Portsmouth Building Society was transferred to the Cheltenham & Gloucester Building Society. On 10 October 1991 the Cheltenham & Gloucester Building Society made a further advance of £7,500. In 1997 the undertaking of the Cheltenham & Gloucester Building Society was transferred to Cheltenham & Gloucester Plc. Save where it is necessary to distinguish between the claimant in these proceedings and its two predecessor societies, I shall refer to them without distinction as "the Society".
21. We are not concerned, on this appeal, with the question whether relief at source was available, or was obtained, on the £35,000 advance from Bradford & Bingley Society. For my part, I am content to assume, for the purposes of the appeal, that that loan was a limited loan for the purposes of paragraph 5(1) of the 1982 Schedule and that (subject to the lender's election by a notice under paragraph 5(2) of that Schedule) a proportionate part of the interest on that loan was relevant loan interest for the purposes of section 26 of the 1982 Act. On that basis, and (at least) prima facie, MIRAS relief would have been allowed by the Bradford & Bingley Society provided that Mr Ashford had given notice to the society in the prescribed form under paragraph 7(1)(a) of the 1982 Schedule. I am content to assume, also, that interest on the Bradford & Bingley loan would have been eligible for relief under section 75 of the 1972 Act apart from section 26 of the 1982 Act; that is to say, that it was a loan within paragraph 1(c) of the 1972 Schedule.
22. Whether or not relief at source was available, or was obtained, on the advance from the Bradford & Bingley Society, it is, I think clear, that relief at source would not have been available on the fixed loan of £10,000 from National Westminster Bank Plc. I think it reasonably clear, also, that interest on that loan would not have been eligible for relief under section 75 of the 1972 Act. Mr Ashford has explained the factual position in an affidavit sworn on 27 November 1998:

"2. I confirm that the purpose of the Bank loan of £10,000.00 obtained by me in and around 1985 was to make up the difference between the £35,000.00 mortgage advance to me by Bradford & Bingley Building Society and the purchase price of 11 Hawkins Close, Brompton, Chatham, Kent being £45,950.

3. The £10,950.00 difference between the purchase price and the loan with Bradford & Bingley was obtained by way of drawing funds against my personal overdraft limit with National Westminster Bank. My intention at this time was to clear the overdraft as soon as possible and therefore this would be a short term loan. Unfortunately, I was unable to repay the overdraft as quick as I would have liked and therefore I was paying extortionate bank charges which was worsening my financial position in view of the interest rates at that time.

4. The Manager of National Westminster Bank Plc contacted me to discuss how this additional borrowing could be controlled. It was suggested that a charge be placed on my property to secure the Bank's position, which I agreed to as I had no other proposals for clearance of the overdraft."

It is clear from those paragraphs that the £10,000 fixed loan made by National Westminster Bank Plc was used to repay existing borrowing on overdraft. The debt incurred by borrowing on overdraft could not, itself, be a debt the interest on which was eligible for relief under section 75 of the 1972 Act – see section 75(1A), which was introduced by amendment in 1974. So, again (at least) prima facie, the fixed loan of £10,000 used to repay that debt was not, itself, a loan the interest on which was eligible for relief under that section; and so was not a loan within paragraph 1(c) of the 1972 Schedule.

23. We were referred to the "Miras Lenders Booklet" (MIRAS 30) issued by the Inland Revenue. The booklet bears no date; but the internal evidence provided by its contents suggests that it was issued between the enactment of the Finance Act 1985 and the date (6 April 1987) when the amendment made by that Act to paragraph 5(2) of the 1982 Schedule took effect – see, in particular, paragraphs 43 and 44 of the booklet. Paragraph 117 of the booklet is in these terms:

"Interest on overdrafts is not eligible for relief. Where an overdraft is used solely for a qualifying purpose and is replaced by a loan within 12 months, relief will be given for the loan interest only, provided all other relief conditions are met. Such a loan may qualify for inclusion in the MIRAS arrangements, but should come in by form MIRAS 3 and not by self-certification." [emphasis added]

Form MIRAS 3 was to be used by the borrower to make a request to the tax office, under paragraph 7(3) of the 1982 Regulations, that the Board give a notice under paragraph 7(1)(b) of the 1982 Schedule – see paragraphs 66 and 118 of the booklet.

24. For my part, I am not persuaded that the concession (if that is what it is) made by the Inland Revenue in paragraph 117 of the booklet could have had any relevance in the present case. The words which I have emphasised make it clear that it is only where the overdraft has been used solely to fund, say, the purchase of the house which is relied upon as a qualifying purpose that the revenue are prepared to accept that the fixed loan by which the overdraft is replaced is "a loan to defray money applied" for that purchase – see paragraph 1(a) of the 1972 Schedule. An overdraft on current account – where the account is used for general expenditure as well as for "bridging" the house purchase – does not, as it seems to me, satisfy that test. In my view it is very unlikely that interest on the fixed loan of £10,000 from National Westminster Bank Plc would have been eligible for relief under section 75 of the 1982 Act.
25. We have been shown what is, I think, a memorandum from the Administration Manager of the Portsmouth Society following a seminar on new MIRAS forms issued at or about the same time as the Miras Lenders Booklet. The memorandum is dated 23 November 1987 and is addressed to "All Head Office Mortgage Staff and All Branches". It contains the following paragraph:

"The Society has decided that, with immediate effect, all re-mortgage applications will be considered on the non-Miras basis. ? Miras form 3 will be issued to the borrower and it will be for the borrower to apply direct to his/her Local Inland Revenue Office should they feel all or part of the loan qualifies for tax relief."

The thinking behind that decision is disclosed in a passage from the paper given at the seminar, at page 10 of the extracts attached to the memorandum:

"Remortgages are another suspect area, as far as Miras is concerned. I understand from the Central Unit that 99% of the queries raised by them with all lenders relate to re-mortgages. The Revenue take the view that very few people will remortgage without borrowing additional money. If additional money is required for a qualifying purpose viz home improvements, it would be logical to assume that a further advance from the existing lender would be a much cheaper alternative. It follows, therefore, that the additional funds will be required for a non-qualifying purpose."

26. It is clear that the Portsmouth Society was concerned, at least by late 1987, that loans made on a remortgage were likely to fall outside paragraph 1 of the 1972 Schedule; because it was likely (although not, of course, inevitable) that the new loan would not be used, in whole, to pay off an existing qualifying loan within subparagraph (c) of that paragraph. If the new loan did fall outside paragraph 1 of the 1972 Schedule, the interest on that loan would not be relevant loan interest for the purposes of section 26 of the 1982 Act – see paragraph 2(2)(a) of the 1982 Schedule – and so could not be brought within the MIRAS scheme. In those circumstances the Society was unwilling to accept self-certification under paragraph 7(1)(a) of the 1982 Schedule in remortgage cases. That did not lead to the result that the borrower was necessarily denied the benefits of relief at source. He could use the MIRAS Form 3 to request his tax office to issue a notice under paragraph 7(1)(b) of that Schedule. That, as I have said, was (in any event) the appropriate course where the loan was to be used to repay existing borrowing on overdraft – see paragraph 117 of the Miras Lenders Booklet.
27. The Portsmouth Society applied (or anticipated) the policy to which I have just referred when dealing with the remortgage application made by Mr Ashford. In what is, I think, a standard form Offer of Advance, dated 3 July 1987, the Society included the following special condition:

"This loan has not been included under the Miras scheme. If they believe all or part of the loan qualifies for income tax relief, the applicants should complete Miras form 3 and send it to their local tax office."

An accompanying letter contained the sentence:

"If form MIRAS 3 is enclosed (instead of MIRAS 70) this should be completed and sent to your normal Tax Office – NOT to the Society."

In the course of these proceedings the District Judge made the following findings of fact in relation to those documents:

"The Defendant did receive the relevant MIRAS form from the Portsmouth Building Society with the offer letter in July 1987. He cannot say if he filled it in and sent it off to his tax office; he thinks that he would have done so, but he cannot actually recall doing so. I find that he did not, in fact, do so. It is far more likely than not that that is the case, for he never heard from the Inland Revenue with any form of acknowledgement, so far as I am aware no communication was sent by the Revenue to the Building Society, and the Defendant himself never chased the matter up with the Revenue or the Building Society. . . .

Instead, I think the Defendant simply did not read the relevant documents properly and take in the fact that he had to apply to the Inland Revenue to get the MIRAS relief, and that until he did so he would be paying, and thereafter did pay, the interest gross. . . . "

28. In my view it is impossible to hold that the Portsmouth Society was wrong to take the view that this was a case in which it should not accept self-certification; but should require the applicant to obtain approval from the revenue and the issue of a notice under paragraph 7(1)(b) of the 1982 Schedule. The Society knew, from the mortgage application form which Mr Ashford had completed, that £35,000 of the new advance was to be used to repay an existing building society loan (which was likely to be a qualifying loan) and that some or all of the balance was to be used to repay a bank loan secured by a second charge. Although there is nothing to suggest that the Society knew that the bank loan was probably not a qualifying loan under paragraph 1(c) of the 1972 Schedule; there was no reason for the Society to think that it was a qualifying loan. In those circumstances there was an obvious risk that the new loan was not to be used wholly to defray money applied for a qualifying purpose under paragraph 1 of the 1972 Schedule; and an obvious risk that interest on the new loan would not be relevant loan interest within paragraph 2 of the 1982 Schedule – see, in particular, subparagraph (2)(b) of that paragraph. It seems to me that this was a case in which the Society was entitled to take the view that, if Mr Ashford wanted his loan to be brought within the MIRAS scheme, he should not self-certify, but seek revenue approval using a form MIRAS 3.
29. It is unnecessary to decide what would have happened if Mr Ashford had done what the Portsmouth Society had invited him to do; that is to say, if he had applied to his local tax office on a form MIRAS 3. But it is, I think, very unlikely that, if Mr Ashford had disclosed to his tax office that one of the loans which the new loan was to replace – the £10,000 fixed loan from National Westminster Bank Plc – had itself replaced overdraft borrowing on a current account used for general expenditure, the revenue would have notified the lender, under paragraph 7(1)(b) of the 1982 Schedule, that the new loan could be included within the MIRAS scheme. The more likely result, as it seems to me, is that he would have been given the advice which subsequently appeared on the form MIRAS 76 (1992):

"If there are non-qualifying elements in the loan(s) you are replacing, you should ask if your lender is willing to set up two new loans. One will be for the qualifying element(s), which can come into MIRAS – this is the loan you should tell us about on the front of this form. Your lender should be able to help you work out the amount. The other loan, containing the non-qualifying elements, does not qualify for tax relief and we do not need to know about it on this form."

30. Mr Ashford did not apply to his local tax office, as the Portsmouth Society had invited him to do. What did happen is described by the district judge at pages 19 and 20 of his written judgment:

"He [Mr Ashford] assumed that he was paying net – no doubt as he had done with his previous Bradford and Bingley mortgage – and he, I accept, filled in his income tax returns each year saying in the relevant place that his mortgage interest was paid net of relief under MIRAS.

. . . It was not until April 1996 that the Defendant was advised by Mr Davis [a financial consultant] as to the true position, and as a result he asked for the certificates [of interest paid] from the Plaintiff for each year from inception; those were supplied immediately, and the Defendant put in hand the request for the Inland Revenue to accept the account into MIRAS, and at the same time sought back tax relief."

These proceedings

31. In the meantime, Mr Ashford had fallen into arrears; that is to say he had not kept up the payments of interest at the contractual, or gross, rate which the Society was expecting to receive. These proceedings were commenced in May 1994. The relief sought was possession and payment of the total amount outstanding under the mortgage. In amended particulars of claim dated 19 July 1994 it was asserted that that amount was £56,022.47. Mr Ashford did not serve a defence. On 21 July 1994, on the application of the lender, an order for the delivery of possession within 28 days was made by the district judge; but execution of that order was suspended for so long as Mr Ashford paid the instalments due under the mortgage as they fell due, and paid off the arrears (then said to be £1,839.97) at the rate of £20 per month. Judgment was entered for the lender in the sum of £56,660.33; but execution on that judgment was stayed, also, for so long as the order for possession remained suspended. Mr Ashford consulted solicitors. There was extensive correspondence. It emerged that there was a dispute as to the true state of the account. Eventually, on 8 December 1997, District Judge Caddick directed that there should be a hearing to determine the amount of the arrears and the total sum outstanding. That issue came before him in February and April 1998. On 20 May 1998 the district judge delivered a substantial written judgment.
32. The district judge found there to be no dispute in relation to the separate account ("the loan account") maintained by the lender in respect of the further advance of £7,500 made in October 1991. As at 31 December 1997 the amount outstanding on that account was £7,417.39, taking into account an amount of £70.18 in credit on current instalments. It is unnecessary to refer further to the loan account.
33. In relation to the account ("the main account") maintained by the lender in respect of the remortgage advance of £45,000 made in March 1988, the district judge found that there were three issues between the parties: (i) whether the lender was entitled to recover £958.84, being an amount which had been repaid to Mr Ashford in August 1993; (ii) whether the lender was entitled to add an amount of £1,066.88 to the account in respect of costs and administration fees (including legal costs incurred in seeking to enforce the security); and (iii) whether the lender was obliged to make some adjustment to the account to reflect the fact that mortgage interest relief at source ("the MIRAS issue") had not been allowed from the inception of the loan.
34. On the first of those issues the district judge held in favour of Mr Ashford. Put shortly, he found that the repayment had been made as a result of a mistake of fact on the part of the lender; but that Mr Ashcroft had been led to believe that the money was due to him as a refund of past overpayments and that, in reliance on that belief, he had changed his position by spending the money on ordinary living expenses. In those circumstances the judge held that the lender was estopped from seeking to recover the repayment which it had made. That decision has not been challenged.
35. The district judge then addressed the MIRAS issue. It was logical for him to do so before reaching a decision whether the lender was entitled to debit costs and expenses because, if Mr Ashcroft was correct in his contention that the account ought to have been conducted on a MIRAS basis from inception, there would have been no arrears and no proceedings to enforce the security. The district judge explained the position in two paragraphs at pages 17 and 18 of his judgment:

"I turn now to the question of the mortgage account not being conducted on the MIRAS basis until the Inland Revenue so directed in early 1997, with effect from April 1996. It is the Defendant's contention that the Plaintiff should have conducted the account on the MIRAS basis from inception; that by not doing so the Plaintiff was in breach of contract and breach of statutory duty, and is liable to make good to the Defendant the losses which flow, by adjusting the account balances accordingly or reimbursing the net eventual losses to the Defendant. It is the Plaintiff's case that the Plaintiff was not so obliged, and is therefore not in breach and not liable to make any adjustments/payments under this heading.

Undoubtedly, the figures involved are substantial. If the account had been so conducted, and on the basis of the one month notice period 1991/1997, as the Plaintiff now concedes, and ignoring costs already debited to the account, the balance as at the 31st December 1997 on the main account would have been, according to the Plaintiff, £37,095.41 and, according to the Defendant, £35,849.80. The difference arises essentially from the £958.00 item already referred to above, so the Defendant's figure is to be preferred. In other words, assuming that the Defendant had paid what he did in fact pay, the Defendant would be well in credit as against the target balance of £45,000, and would not at any time have been in arrears and, as the Plaintiff concedes in that event, there would never have been any possession proceedings."

36. After referring to the fact that the MIRAS provisions were to be found in sections 369-379 of the 1988 Act and in the 1982 Regulations, the District Judge continued, at pages 21 to 23 of his judgment:

" A loan is either qualifying or non-qualifying within the meaning of the Act. If it is qualifying, the lender has a duty to see to the Inland Revenue formalities at the outset, and must lodge the relevant forms, duly signed, with the Revenue: see Regulation 3(2). If it is not, then no such duty arises, and if the borrower says that his loan qualifies it is for him, the borrower, to fill in the relevant forms and send them himself to the Inland Revenue: see Regulation 3(3). It is this second course which the Portsmouth Building Society followed in 1987: they sent the Defendant the relevant form, MIRAS 3, and invited him to complete it and send it to the Revenue by way of application to be included into MIRAS. In effect, that is what the Defendant eventually did on advice in April 1996.

When the Portsmouth Building Society made its offer it had a choice. £45,000.00 was clearly a non-qualifying loan, because it included an additional £10,000.00 for non-qualifying purposes beyond the original £35,000.00. It was a mixed loan. The Portsmouth Building Society could have made the offer on the basis of simply one loan for £45,000.00, as they did, thus leaving the Defendant to make his application to the Revenue. Alternatively, they could have offered on the basis of a split loan: in effect, an offer of two loans, one for £35,000.00 qualifying, and the other for £10,000.00 non-qualifying. If they had done that, the first loan would then have had to be included into MIRAS and the Portsmouth Building Society would have had the obligation to deal with the necessary forms etc., as described above, from inception. Which course to follow was purely a matter of practical choice on the part of the lender. If the Cheltenham and Gloucester had been making such a loan in 1987/1988 they would, according to Mr Bateman, in fact have followed the split loan course; again, Mr Davis, speaking of his days with Barclays at the same time, would also have followed the split loan option. The Portsmouth Building Society, however, chose to do it the other way. Although with hindsight it is unfortunate from the Defendant's point of view, there was nothing wrong in the Society doing so: they are in breach of no contractual obligation, nor of any statutory obligation."

37. Accordingly, the district judge rejected Mr Ashford's contention that the lender was obliged to make some adjustment to the account to reflect the fact that mortgage interest relief at source had not been allowed from the inception of the loan. But he went on to disallow the amount of costs and fees debited to the mortgage account - save as to two small items (together £25) – on the grounds that they had been unreasonably incurred. He reached that conclusion because he thought that the Society had failed to deal adequately with the queries that were being raised by its borrower in 1993 and early 1994; and that, if it had dealt with the matter properly, the proceedings could have been avoided. He reflected that view in that part of his order which disallowed the Society any part of its costs of the proceedings. The Society does not challenge the district judge's decision on costs.
38. Mr Ashford appealed from the order made by the district judge. His notice of application limited the appeal to the decision on the MIRAS issue; and to the order for costs. As appears from the passages of his judgment which I have set out, the district judge had determined the MIRAS issue on the basis that the additional £10,000 lent by National Westminster Bank Plc was for non-qualifying purposes. Mr Ashford obtained permission to put in the further evidence as to the purpose of that loan which is contained in his affidavit of 27 November 1998, to which I have referred. So, when the appeal came before His Honour Judge Russell-Vick QC in June 1999, there was that further evidence; and, I think, further documentary material relating to the operation of the MIRAS provisions. Further, the judge heard evidence, under cross-examination, from the witnesses called as experts by the parties. The judge dismissed the appeal on the MIRAS issue. The substance of his decision is to be found in the following passages of his judgment:

"The expert evidence which I have heard and in particular from Mr Bateman, and indeed assisted by Mr Davis who is also very familiar with it, is that there was an option open to the Portsmouth Building Society when they set up the loan of £45,000 to split it in such a way that the defendant would get the benefit of mortgage interest relief at source as opposed to dealing with it as a whole loan, because as I say the maximum figure to obtain the relief was £30,000, £45,000 was 15,000 over, but had it been split into a home loan, so to speak, of £35,000 and £10,000 set off on a separate account, he would have qualified for interest relief at source on that £30,000. Now that I hope sets out the bare bones of what it is that the defendant is contending for, that is that there was an obligation on the building society to set up the relief in that way. Further, they should have notified him what in fact they were doing, and enabling him therefore to get the benefit of that relief.

The evidence of Mr Bateman is, had he looked at the application at that time, had it come directly to him as being the person responsible for MIRAS with the current claims, he would have split the matter into two, but he said it would have been necessary for him to have sent the defendant, that is the borrower, the form MIRAS III, because this was not a case where it could have been set up as a self-certification of MIRAS on form either 70 or subsequently 75; there is a much more up to date one which is now, I think, form 76 which is applicable. So what he would have done, that is what Mr Bateman would have done, and Mr Davis agreed with this in his evidence, that form MIRAS III should have been sent to the borrower.

District Judge Caddick dealt with that as a matter of fact. He found that in fact the defendant had been sent that form, and it was a finding of fact which he was entitled to make on the evidence that came before him and I remind myself that he heard the evidence over a day and a half and had to make those findings of fact, and he said effectively what happened was that if it was sent, as he found it was, the defendant did not in fact react to it, in other words he did not complete the form and did not get the benefit and that it was his fault.

The defendant's case has been throughout that it was an obligation on the building society effectively to get him within the MIRAS scheme. As Mr Bateman says that could only be done by the defendant himself completing a form, it was not a case where the building society could do it for him and so the obligation was put upon him . . .

It seems to me that the finding of fact of the District Judge is unimpeachable, he had the benefit of the evidence. Insofar as the evidence before me is concerned, Mr Bateman has really confirmed what he has already said in evidence, that further documentation has not, in my judgment, assisted the issue on the MIRAS issue and accordingly I dismiss the appeal in relation to the MIRAS issue on the basis that the District Judge did not err in law or in fact."

The judge dismissed the appeal as to the MIRAS issue. He dismissed, also, Mr Ashford's appeal against the order for costs made by the District Judge. He made no order as to the costs of the appeal before him.

This appeal

39. On 12 October 2000 Lord Justice Laws granted Mr Ashford permission to appeal to this Court; but limited that permission to an appeal on the MIRAS issue. For the reasons set out by the Master of the Rolls in an interlocutory judgment given at the oral hearing of the appeal, this Court did not think it right to permit other issues to be argued.
40. Mr Ashford has made his submissions to this Court in person. He contends that the judges below were wrong to hold that the Society was under no obligation to include his mortgage within the MIRAS scheme from inception. He has relied, in particular, on a letter dated 3 December 1999 and sent to him by the Inland Revenue (Kensington 1 TSO). The letter purports to confirm that form MIRAS 76 was in existence in 1988; and continues:

"There has been no change in statute since 1987 which removed the Lenders option to enter all loans in excess of the tax relief limit, used entirely for a qualifying purpose, within the MIRAS system. From April 1987 qualifying lenders were to bring into MIRAS any such loans." [emphasis added]

41. Form MIRAS 76 was a self-certification form intended for use where the loan was to replace an existing loan. It was introduced in 1983 – see Appendix F to an Inland Revenue Central Unit circular dated 6 February 1983. It is referred to in a subsequent circular dated 20 June 1983. A circular dated 6 February 1984 refers to the form having been redesigned, with a new version to be "brought into universal use by April 1984". But, in a Central Unit circular dated 12 July 1985, lenders were informed that: "A new MIRAS certificate – MIRAS 70 – will be available shortly. This form will take the place of all existing declaration forms with the exception of form MIRAS 75 and should be brought into use as soon as possible." Confirmation that form MIRAS 76 went out of use (until re-introduced in 1992) can be found in the omission of any reference to MIRAS 76 in the list of "Miras Forms in Use" which appears in the Miras Lenders Booklet, issued in or about 1986/87. It appears from that list (and from paragraph 63 of the booklet) that the self-certification form then in use was form MIRAS 70. A new form, MIRAS 76 (1992) was introduced by a Central Unit circular dated 20 December 1991; and has been in use thereafter.
42. On the material which we have seen, therefore, there is room for doubt whether a form MIRAS 76 was in use between, say, 1986 and 1991; in particular, whether that form was in use in 1988. But the point is not of importance. All the material which we have seen makes it clear that the form MIRAS 76 which was in use (until suspended in 1985 or replaced in 1992) was only to be used where the whole of the new loan was to be applied (i) to replace existing loans on the same property which themselves qualified for tax relief or (ii) partly to replace such existing loans and partly for altering or improving the property. The change, in 1992, was to restrict use of the new form MIRAS 76 to the first of those cases.
43. In my view, Mr Ashford obtains no assistance from the letter of 3 December 1999 upon which he relies. It is impossible to escape the conclusion that the loan made by the Portsmouth Society in 1988 could not have been brought within the MIRAS scheme without either (i) self-certification under paragraph 7(1)(a) of the 1982 Schedule (or section 374(1)(a) of the 1988 Act) or (ii) a notice under paragraph 7(1)(b) of the 1982 Schedule (or section 374(1)(b) of the 1988 Act) following Inland Revenue approval. It is impossible, also, to escape the conclusion that self-certification (whether by the use of form MIRAS 70 or (if available at the time) form MIRAS 76) was not open to Mr Ashford unless and until the loan was split into two parts – so that one of those parts (£35,000) could be used exclusively to repay the existing qualifying loan from the Bradford & Bingley Building Society. Unless and until the loan was split, the only course open to Mr Ashford was to apply to his tax office on a form MIRAS 3. That, as the district judge has found, is what the Society had invited him to do. As I have said earlier in this judgment, it is by no means clear, at least to me, that an application to the tax office would have led to the inclusion of the new loan in the Portsmouth Society's MIRAS scheme. What would have happened, I think, is that Mr Ashford would have been advised to ask the Society to split the loan.
44. It is impossible to say whether, if Mr Ashford had asked the Portsmouth Society to split the loan – so as to create a distinct loan of £35,000 which could have been brought within the MIRAS scheme – the Portsmouth Society would have been willing to do so. But that is not the question for decision on this appeal. The question on this appeal is whether, in the events which did happen, the Society ought to have treated the £45,000 loan which was made in 1988 – or any part of that loan - as within the MIRAS scheme. In my view, the answer to that question is not open to doubt. In the events which did happen, there was no obligation on the Society to treat the interest paid by Mr Ashford in respect of the £45,000 loan made in March 1988 as interest paid under deduction of tax. Indeed, the Society could not properly do so without a notice from the Inland Revenue under paragraph 7(1)(b) of the 1982 Schedule or section 374(1)(b) of the 1988 Act.
45. I would dismiss this appeal.

LORD JUSTICE WALLER:

46. I agree.

THE MASTER OF THE ROLLS:

47. I also agree.
Order:
48. Appeal dismissed
49. No order for costs. Respondents to add costs to appeal to mortgage account.
50. Leave to appeal to House of Lords refused.
51. Appellant undertakes to file petition to House of Lords within 28 days.
52. Respondent undertakes not to initiate possession proceedings pending result of petition to House of Lords
(Order does not form part of the approved judgment)