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[1996] UKSSCSC CIS_6010_1995 (23 September 1996)

R(IS) 22/98

Mr. J. Mesher CIS/6010/1995

23.9.96

Housing costs - interest payments on overdraft facility arranged to provide for costs of home repairs - whether interest on loan for repairs and improvements to the dwelling occupied as the home

The claimant had taken up an offer of a grant from the local authority for repairs on her house. However, the local authority would only make an initial payment after some work was completed, and would make the final payment after the work had been completed to their satisfaction. The claimant arranged an overdraft facility with which to pay builders before the release of funds by the local authority. Interest payments were made on the overdraft. The adjudication officer decided that an overdraft facility was not a loan. On appeal, a tribunal decided that the authority had met the costs of repairs, and that therefore the overdraft facility was not a loan for repairs. The claimant appealed to the Commissioner.

Held, allowing the appeal, that:

the use of an overdraft facility granted specifically to finance building works clearly did fall within "taking out a loan", for the purpose of paragraph 8 of Schedule 3, and therefore interest on eligible costs were payable. In the circumstances the loan or loans were for the purpose of carrying out the repairs. The Commissioner did not express a view on whether that would be the case if the claimant merely made use of an overdraft facility available, though not specifically granted, to finance building works. The Commissioner also expressed the view that the same principle would apply to paragraph 7 (interest on a loan to acquire an interest in the dwelling occupied as home).

[Note: A new Schedule 3 came into force on October 2, 1995. Qualifying loans taken out for the purpose of acquiring an interest in the home, and carrying out repairs and improvements, are covered respectively in paragraphs 15, and 16, of the new Schedule.]

DECISION OF THE SOCIAL SECURITY COMMISSIONER

The claimant's appeal is allowed. The decision of the Brighton social security appeal tribunal dated 12 December 1994 is erroneous is point of law, for the reasons given below, and I set it aside. The appeal is referred to a differently constituted social security appeal tribunal for determination in accordance with the directions given in paragraphs 18 to 21 below (Social Security Administration Act 1992, section 23(7)(b)).

The facts as presented by the adjudication officer to the appeal tribunal were as follows (in box 5 of form AT2):

"5.1 [The claimant] is a single woman aged 39 who lives with her son [L], aged five, in a property owned by herself and on which she has a mortgage with the Abbey National Building Society. The mortgage of £23,654 was taken out on 26 June 1984 for the purpose of acquiring an interest in the home. MIRAS is applicable on the whole of the mortgage. Housing costs have been included in the claimant's income support assessment since the start of the claim, based on the whole of the original mortgage.

2 [The claimant] has been in receipt of income support since 1988 prior to which she was receiving supplementary benefit.

3 On 2 February 1994 a letter was received in the local office from [the claimant] which stated that in March or April 1992 she made use of an overdraft facility in order to carry out repairs to her house. She did not specify what repairs were carried out nor the amount overdrawn. She did however state that the overdraft bank charges and interest on the overdraft amount to £3,054.37 in total. She requested that the interest and bank charges over the preceding two years be paid by way of income support.

4 The adjudication officer considered the request but decided that an overdraft facility is not a loan for income support purposes and could not be considered for eligible interest."

The claimant's letter of 2 February 1994 had explained that she had taken up the offer of a grant from the local authority for repairs on the house. Because the local authority only made interim payments after some work was done, and she had to pay builders for their work before the interim payments came in, she set up a facility with her bank. The borrowing commenced in March 1992 and the last payment from the local authority was made in February 1993. Enclosed were letters from her bank showing the interest debited in the four quarters of 1992 and a letter dated 22 May 1992 from the local authority detailing the release of the second instalment of the improvement grant.

The claimant appealed against the adjudication officer's decision, saying that she would not have applied for the facility with her bank if she had not been advised by a housing advice agency and an officer of the Benefits Agency that the interest payments would be recoverable.

The appeal tribunal disallowed the appeal. Its reasoning is set out in the following passage in its reasons for decision:

"The appellant obtained a grant from Brighton Borough Council to pay for repairs to her home. It was the usual arrangement whereby the council paid the grant in three instalments, after satisfying themselves that the work had been carried out satisfactorily.

In the normal way there would have been no problem. However, in this case the appellant entered into a somewhat complicated arrangement with a number of small builders, and because they were not prepared to wait for payment by the council in the usual way, the appellant went to her bank and obtained an overdraft facility to deal with these builders in the meanwhile.

She did not require a loan to effect the repairs, because the entire cost of the repairs was paid by Brighton Borough Council: therefore her overdraft facility did not constitute a loan for repairs and improvements as envisaged in the Income Support (General) Regulations, regulation 17 and Schedule 3, 1(b). Therefore, any indebtedness of the appellant to the bank in respect of the overdraft facility does not attract housing costs under that regulation.

Paragraph 8 of Schedule 3 makes reference to the fact that the amount is to be calculated as if the loan were a loan to which paragraph 7 applied. Under the provisions of paragraph 7 the adjudication officer is under a duty to calculate the amount of housing costs, following a certain formula.

In this particular case, the calculation would have been impossible. Mr. Chapman [the claimant's representative] referred the tribunal to Schedule 3, paragraph 7(4C), but that provides that where evidence supplied by the lender shows that the eligible interest charged is different from that calculated in the sub-paragraph (4), the weekly amount of eligible interest shall be calculated by reference to the interest charged. However, the tribunal rejected that argument. 7(4C) is only invoked retrospectively, and the initial amount of interest could not have been calculated under paragraph 7(4).

Even if there were eligibility for housing costs, the Adjudication Regulations, reg 69(1)(a) would prevent the appellant from receiving such costs for any period prior to 3 February 1993 because she applied for the review on
2 February 1994. She was overdrawn between March 1992 and February 1993.

Mr. Chapman submitted that that difficulty in paragraph 69 is overcome because the Department of Social Security told the appellant to wait until the work had been completed before applying for these particular housing costs.

The tribunal reject that argument, on the grounds that regulation 72 of the Adjudication Regulations does not have any application in this case.

Mr. Chapman submitted that the appellant received a written reply from the DSS which probably refused her application for review. However, the tribunal was not presented with any material which was capable of sustaining that argument."

The claimant was granted leave to appeal by a Commissioner. The written submission dated 11 December 1995 on behalf of the adjudication officer supported the appeal. It was submitted that an overdraft was a form of loan, within the dictionary definition of "money borrowed at interest", and that Commissioner's decision R(IS) 11/94 supported that proposition. A nominated officer directed an oral hearing, as further examination of the legal issues was required.

The claimant attended the oral hearing, where she was represented by Mr. Steven Chapman of Brighton Welfare Rights Service. The adjudication officer was represented by Mr. Leo Scoon of the office of the Solicitor to the Department of Social Security. I am grateful to both for their clear submissions.

Mr. Chapman's central submission was that the appeal tribunal erred in law in not adopting the dictionary definition of the taking out of a loan. When the claimant took advantage of the overdraft facility a loan was created, and there was evidence that the facility was granted specifically for the purpose of carrying out the works. He submitted that the appeal tribunal adopted a wrong basis in concentrating on whether the claimant needed to take out the loan in order to get the works done. The proper question under paragraph 8 of Schedule 3 to the Income Support (General) Regulations 1987 as in force at the relevant dates (the Income Support Regulations) was whether the loan was taken out for the purpose of carrying out qualifying repairs or improvements. Mr. Chapman was unable to understand what the practical difficulty was in calculating interest. He also agreed when it was pointed out that until 2 February 1993 the categories of housing cost listed in paragraph 1 of Schedule 3 included (h) "payments analogous to those mentioned in this paragraph". He submitted that the appeal tribunal should have considered that provision. Mr. Chapman finally submitted that there had been a specific contention to the appeal tribunal that the question of revising housing costs to take account of the interest on the overdraft had been raised in 1992, which had not been clearly recorded or dealt with in the AT3. He now had a copy of a letter of August 1992 from the Department of Social Security (which was not before the appeal tribunal) showing that the question of interest had been under discussion prior to that date.

Mr. Scoon submitted that there is a difference in ordinary language and in financial practice between a loan and the use of an overdraft facility. He said that the reference in paragraphs 7 and 8 of Schedule 3 to a loan being taken out did not cover the use of an overdraft. There were essential differences in that a loan was usually made for a specific period, while an overdraft usually had an indefinite period, and that an overdraft facility could be used piecemeal, while a loan was usually of a clearly defined amount. Mr. Scoon submitted, contrary to the written submission of 11 December 1995, that the decision in R(IS) 11/94 supported his view, for reasons which I shall examine below. However, he conceded that it was arguable that an overdraft was analogous to a loan and that the appeal tribunal should have considered paragraph 1(h). Finally, Mr. Scoon submitted that there was a fundamental problem in that the request for review before the appeal tribunal was made on 2 February 1994 when it appeared that the final instalment of the improvement grant (and thus the repayment of the capital advanced on overdraft) was made in February 1993. The twelve month limit of regulation 69(1)(a) of the Social Security (Adjudication) Regulations 1986 (the Adjudication Regulations) would apply, and regulation 64A (which had replaced regulation 72) could not assist because the ground of review was relevant change of circumstances. But if there was a remission to a new appeal tribunal, the letter produced by Mr. Chapman at the oral hearing could be considered under section 36 of the Social Security Administration Act 1992.

I deal first with R(IS) 11/94. There the question was of the amount of housing costs to be allowed on a claim for income support made in January 1992. The claimant, a self-employed builder, had bought a plot of land in 1989. He then built his own house on the plot. The funds for the building were obtained on overdraft from a bank. The overdraft had reached £82,933.56 by the time that the claimant and his family had moved in and the overdraft ceased to be used for the purchase of building supplies in June 1990. He did not manage to convert the outstanding overdraft into an ordinary mortgage until January 1991, when the overdraft stood at £101,276.19. The mortgage was obtained for £115,000. The Commissioner had to consider how much of the interest on that mortgage was eligible interest within paragraph 7(3) of Schedule 3 to the Income Support Regulations. He held that the interest on £82,933.56 was eligible under paragraph 7(3)(a). That amount had been applied for the purpose of acquiring an interest in the dwelling occupied as the home. The charges and interest demanded by the bank as the cost of making funds available was as much a part of the cost of acquisition as the cost of materials and labour.

Mr. Scoon submitted that the fact that the Commissioner relied on paragraph 7(3)(a) showed that he did not regard the overdraft as a loan. For paragraph 7(3)(b) makes eligible the interest on a loan taken out to defray money applied for the purpose of paying off another loan to the extent that interest on that loan would have been eligible. If the Commissioner had considered that the use of the overdraft facility constituted taking out a loan, he would have relied on paragraph 7(3)(b). I consider that Mr. Scoon's submission attempts to read altogether too much into R(IS) 11/94. The Commissioner's concern there was to reject the submission made at one stage by the adjudication officer that paragraph 7(3) did not apply where costs were incurred before the claimant occupied the dwelling as the home. He was not concerned with the proper analysis of an overdraft. For paragraph 7(3)(b) to have applied, the interest on the loan paid off would have had to be eligible according to paragraph 7(3)(a). Therefore, the Commissioner had no need to do any more than deal with the general point of principle on paragraph 7(3) as a whole. I conclude that the decision R(IS) 11/94 throws no light one way or the other on the question whether the use of an overdraft facility falls within paragraphs 7 and 8 of Schedule 3 to the Income Support Regulations.

I therefore have to approach the question on the basis that there is no direct authority on the interpretation of the provisions in question. I accept, as Mr. Scoon submitted, that there are differences between overdrafts and personal loans by banks. But the question is what is intended to be included within the notion of taking out a loan in paragraphs 7 and 8 of Schedule 3. There are many sorts of loan and many sorts of borrowing arrangement. Looking at the presumed intention of paragraphs 7 and 8, of meeting the interest charges on money borrowed to acquire or maintain the claimant's home, there seems no reason to take a narrow view of what is meant by taking out a loan. There is no doubt that there is a wide ordinary meaning of "loan" along the lines of "money borrowed at interest", which would cover the drawing down of money on overdraft. That is supported by the legal analysis of the position between bank and customer. It is stated in Ellinger and Lomnicka, Modern Banking Law (2nd ed. 1994, at p. 579) that it "is well established that from a legal point of view, an overdraft is a loan granted by the bank to the customer". That proposition is supported by reference to Cuthbert v. Roberts, Lubbock & Co [1909] 2 Ch 173, where it was said that the drawing of a cheque in excess of the amount standing to a customer's credit is really a request for a loan, and that if the cheque is honoured the customer has borrowed money, and to Re Hone, ex parte Trustee v. Kensington Borough Council [1951] Ch 85, where Harman J held that payment by a bank under an arrangement by which a customer has an overdraft is a lending by the bank to the customer. I have no doubt that in paragraphs 7 and 8 of Schedule 3 taking out a loan includes the situation where a bank makes payment on a cheque in excess of the amount standing to the customer's credit in the account under an arrangement for an overdraft. It may be that that conclusion also applies to a situation where the overdraft facility is not arranged in advance with the bank, but I prefer to express no opinion on those circumstances (and see para.14 below).

I agree with Mr. Chapman that there is no severe practical difficulty in calculating the interest which can be allowed on an overdraft such as to require the exclusion of borrowing on overdraft from the scope of paragraphs 7 and 8. There may well be considerable difficulties in working out contemporaneously what interest will be payable in a particular week if, say, the bank calculates interest on the daily debit balances with monthly rests. And the effect of the principle adopted above is that there may strictly be a series of loans taken out when the bank makes separate payments under the overdraft arrangement. But the legislation, and in particular regulation 2 of the Social Security (Payments on account, Overpayments and Recovery) Regulations 1988 on the making of interim payments by the Secretary of State, contemplates that it may not always be practicable to determine a claimant's precise entitlement immediately. There seems to be no particular difficulty in calculating at the end of the appropriate accounting period what interest has in fact been paid on qualifying loans, which can be adopted under paragraph 7(4C) if there is any difficulty in making the calculation under the ordinary formula in paragraph 7(4). The main evidential problem, which detailed information from the bank should resolve, is to identify the element of the balance of the overdraft which is made up of interest which was not paid in earlier periods. Interest on that element will not be eligible (para. 7(6) of Schedule 3). Even if there is some difficulty which I have not appreciated (and I should say that Mr. Scoon made no specific submissions on this point) it seems to me that an arrangement which comes within the narrowest possible meaning of a loan could equally adopt a method of charging interest which gives rise to the same difficulty. Therefore, there is no reason to depart from the view expressed in the previous paragraph.

It is not entirely clear that the appeal tribunal adopted the contrary view. It said that the granting of the overdraft facility was not a loan. That must be correct if one looks solely at the bank's agreement in advance to meet payments for the building works up to a specified limit, but the use of the facility did constitute taking out a loan or loans. At that point the appeal tribunal's reasoning appears to have been that, on the assumption that the claimant had taken out a loan, it was not for the purpose of carrying out the works. It was for the purpose of paying the small builders whom she had chosen to employ rather than some larger contractor who might be prepared to wait for the local authority to pay the instalments of the improvement grant. I think that Mr. Chapman's criticism of that reasoning is justified. I do not see how it is possible to say that the choice made by the claimant had the consequence that the purpose of taking out the loans was not that of carrying out the repairs and improvements. If a person had ample capital to pay for repairs and improvements, yet chose to take out a loan to pay for them, interest on the loan would fall within paragraph 8 because of the purpose of the loan. The situation is fundamentally the same in the present case. Therefore, I conclude that the appeal tribunal erred in law either in adopting too narrow a view of the meaning of taking out a loan or in adopting a wrong approach to identifying the purpose of taking out a loan.

I agree with Mr. Chapman that in the present case there appears to be no doubt, given the evidence of the granting of the overdraft facility specifically to finance the building works, that the payments by the bank under the overdraft facility were for the purpose of carrying out repairs and improvements. It may not be so easy to make such a connection in other circumstances where a person has an overdraft or goes overdrawn on an account, if those circumstances properly fall within "taking out a loan", but I should not speculate on how circumstances other than those before me ought to be analysed.

The appeal tribunal also erred in law in failing to consider paragraphs 1(h) and 9 of Schedule 3 on payments analogous to other payments listed in paragraph 1. If it had been right to conclude that the use of the overdraft fell outside paragraphs 7 and 8, it ought to have raised the question of analogy in relation to that part of the period in issue before the revocation of paragraph 1(h).

Those errors of law might have been immaterial if the payment of any increased benefit following review and revision was limited to the period from 2 February 1993 onwards, through the operation of regulation 69(1)(a) of the Adjudication Regulations. But there were a number of defects in the way in which the appeal tribunal dealt with that issue. The most fundamental is that it did not establish on what date in February 1993 the final instalment of the improvement grant was paid or on what date interest ceased to be payable under the overdraft arrangement on the amount borrowed, rather than on accumulated interest. Thus there was a possibility that some of the period for which increased benefit would have been payable following a successful review and revision fell within the twelve months before the request for review made on 2 February 1994. In addition, I accept that the appeal tribunal did not clearly record or deal with Mr. Chapman's contention that the question of review had been raised in 1992. Although the appeal before the appeal tribunal was against the decision made on the request for review dated 2 February 1994, the appeal tribunal could have dealt with an earlier request for review (if satisfied that one was made) under section 36 of the Social Security Administration Act 1992. Finally, I note that the appeal tribunal referred to regulation 72 of the Adjudication Regulations, which was revoked on 31 August 1991, rather than to regulation 64A.

For those reasons the decision of the appeal tribunal dated 12 December 1994 must be set aside as erroneous in point of law. The appeal must be referred to a differently constituted social security appeal tribunal for determination in accordance with the following directions, as the evidence is not before me on which to make the necessary findings of fact.

Directions to the new appeal tribunal

The new appeal tribunal must apply the approach to the meaning of paragraph 8 of Schedule 3 to the Income Support Regulations put forward in my paragraph 11 above, in determining, on the basis of a fresh consideration of the evidence before it, whether the claimant has shown grounds for review and revision of some adjudication officer's decision on her entitlement to income support. It must also bear in mind the ways in which the appeal tribunal of 12 December 1994 erred in law.

The appeal directly before the new appeal tribunal will be that against the adjudication officer's decision on the claimant's request for review made on 2 February 1994. In relation to that request there will be a problem for the claimant in the twelve month limit on revision on review so as to make increased benefit payable before the date of the request (Adjudication Regulations, regulation 69(1)(a)). In the circumstances, that limit can only be lifted if regulation 64A applies. In order to decide whether it does, it is necessary to identify the ground or grounds of review which have been established as the basis for a revision of entitlement, as paragraph (2) is restricted to review on the ground of ignorance of or mistake as to a material fact and paragraph (3) is restricted to review on the ground of error of law. There are considerable difficulties in seeing how reviews for past periods work where there has been a continuous award of income support. It seems likely to me that, as there had, so far as I know, been no earlier decision by an adjudication officer either for or against allowing a housing cost for interest on the repairs and improvements, the ground of review which could be relied on by the claimant would be a relevant change of circumstances (i.e. the granting and use of the overdraft facility) after the date of the decision making the underlying award of income support. If that is the only ground of review which is made out, regulation 64A cannot apply. If Mr. Chapman wishes to submit on the claimant's behalf that another ground of review is appropriate, he should identify the decision or decisions which he seeks to review and the ground or grounds of review put forward in a written submission to be sent to the Independent Tribunal Service and to the adjudication officer in advance of the rehearing (and without waiting for the date of the rehearing to be fixed). The adjudication officer should include a reply to any such submission in the written submission prepared for the rehearing.

Date: 23 September 1996 (signed) Mr. J. Mesher

Commissioner