IN THE UPPER TRIBUNAL                                           Appeal No. CIS/2884/2012
(ADMINISTRATIVE APPEALS CHAMBER)

BEFORE JUDGE WEST

DECISION 

The decision of the appeal tribunal sitting at Taunton dated 18 May 2012 under file reference SC206/12/00323 does not involve an error on a point of law. The appeal against that decision is dismissed.

            This decision is made under section 11 of the Tribunals, Courts and Enforcement Act 2007.

REASONS 

1.    This is an appeal, with the permission of District Tribunal Judge McLachlan, against the decision of the appeal tribunal sitting at Taunton on 18 May 2012.

2.	I shall refer to the appellant hereafter as “the claimant”. The respondent is the Secretary of State for Work and Pensions. I shall refer to him hereafter as “the Secretary of State”. I shall refer to the tribunal which sat on 18 May 2012 as “the appeal tribunal”.

The Facts
3.     The claimant, who was born on 13 January 1965, applied for income support on 3 October 2011 on the grounds of incapacity. He now appeals through his representative, originally Mr Stuart Toll of Shelter Somerset, but since the closure of the Taunton office of Shelter on 28 March 2013 Ms Clare Mason of Shelter North East in Newcastle, against the decision dated 2 December 2011 that the outstanding first legal charge over his home was not an eligible loan for housing costs purposes.

4.     As at the date of his application for income support, the claimant’s incapacity benefit of £99.85 exceeded his weekly income support entitlement of £96.35 and therefore he was advised on 21 October 2011 that he had no entitlement to income support. His papers were, however, passed to the section dealing with housing costs to ascertain if he could be given help with those costs.  

5.     The claimant purchased his house in Taunton, apparently with the benefit of an inheritance (see page 13), on 29 September 2011 for £90,000. The freehold of the property is owned by Taunton Deane Borough Council and it would appear that the property was originally enfranchised under the right to buy legislation. It was held under the residue of a lease originally granted for a term of 125 years from 20 November 1989. He could not in fact pay the whole of the purchase price at the date of completion and it was agreed between him and his vendor that the sum of £10,000 did not need to be paid on completion, but would be left outstanding as a loan and secured by a first legal charge over the property. The claimant was registered as proprietor of the property on 18 October 2011 and the first legal charge in favour of the vendor was registered on the same date as entries numbers 1 and 2 on the charges register of the property (the office copy entries appear at pages 45-46). There is also a restriction on the title in favour of the vendor. The legal charge, in form CH1, appears at pages 40-41 of the bundle. For present purposes the material provision is that in box 9 which provides that 

“The Borrower covenants with the Lender to pay to the Lender the sum of £10,000.00 by equal monthly instalments of £100.00 commencing on the 1st day of each month following the date of this Deed but without interest until the debt is discharged”.

6.     The claimant’s appeal, which was made on 23 December 2011, came before the appeal tribunal on 18 May 2012. The decision had been reconsidered, but not revised, on 23 February 2012. The claimant attended in person and gave oral evidence. The appeal was dismissed. The record of the proceedings appears at page 28. The notice of decision appears at page 29 and doubles up as the appeal tribunal’s statement of reasons. The decision notice states that

“The Tribunal accepts that the appellant is repaying by monthly sums of £100.00 a loan made to him by his sellers when he purchased his present residence. These are capital repayments and the appellant is not required to pay any interest. Having considered the submissions of the parties and Schedule 3 of the Income Support (General) Regulations 1987 the Tribunal is satisfied that whilst “housing costs” include interest payments they do not include capital repayments. The cost of purchasing a property is not a housing cost for the purpose of income support it is the cost of payment for the purchase loan (i.e. the interest) which is the housing cost”.
 
7.    The claimant then sought permission to appeal from the tribunal judge on 31 May 2012, which was granted by District Tribunal Judge McLachlan on 19 July 2012 (at page 47). The claimant had also applied to the Upper Tribunal for permission to appeal on 9 August 2012 (at pages 49 to 54). In giving permission the District Tribunal Judge stated that the grounds of appeal relied upon were arguable:

“In addition to that, although the vendor’s interests were secured by a registered legal charge, the nature of the transaction being undertaken may have been that the vendor was leaving outstanding part of the purchase price which was to be paid over the specified period. That was not an aspect of the matter considered by (or indeed argued before) the tribunal”. 

8.    Given that permission to appeal had already been granted, Judge Jacobs made directions for the Secretary of State to provide a response to the appeal within one month after the date on which the notice of permission to appeal was sent to the parties. The claimant was to be given an opportunity to provide a response thereto within one month thereafter (page 58).

9.      On 19 February 2013 the Secretary of State made his submissions (which appear at pages 59 to 61).

10.    The claimant replied to those submissions on 19 March 2013 (at pages 71 to 75).

11.   In view of the fact that both the claimant and the Secretary of State have indicated that they do not require an oral hearing and that the point at issue is one of statutory construction, I consider that I can now proceed to resolve the matter.

The Income Support (General Regulations) 1987
12.   So far as material regulation 17 of the Income Support (General) Regulations 1987 provides as follows: 

“(1) Subject to [regulations 18 to 22A] (applicable amounts in other cases and reductions in applicable amounts [...]), a claimant's weekly applicable amount shall be the aggregate of such of the following amounts as may apply in his case: 

…

(e) any amounts determined in accordance with Schedule 3 (housing costs) which may be applicable to him in respect of mortgage interest payments or such other housing costs as are prescribed in that Schedule”

and Schedule 3 provides that

“1.—(1) Subject to the following provisions of this Schedule, the housing costs applicable to a claimant are those costs –

(a) which he or, where he is a member of a family, he or any member of that family is, in accordance with paragraph 2, liable to meet in respect of the dwelling occupied as the home which he or any other member of his family is treated as occupying, and

(b) which qualify under paragraphs 15 to 17.

2.—(1) A person is liable to meet housing costs where –

(a)	the liability falls upon him …

…

15.—(1) A loan qualifies under this paragraph where the loan was taken out to defray monies applied for any of the following purposes–

(a) acquiring an interest in the dwelling occupied as the home; 

or

(b) paying off another loan to the extent that the other loan would have qualified under head (a) above had the loan not been paid off”.

13.    It is common ground that the claimant is liable to meet the costs in respect of his home in accordance with paragraph 1 and that he had taken out a loan with the intention of acquiring an interest in the dwelling occupied as his home within paragraph 15(a).

14.    Paragraph 10 goes on to set out the calculation for the amount of housing costs to be met in respect of the loan by applying a formula: 

“The weekly amount of existing housing costs or, as the case may be, new housing costs to be met under this Schedule in respect of a loan which qualifies under paragraph 15 or 16 shall be calculated by applying the formula–

                                            A x B
                                               52

where–

A= the amount of the loan which qualifies under paragraph 15 or 16;

B = the standard rate for the time being applicable in respect of that loan”

and paragraph 12 defines the rate of interest payable in respect of a qualifying loan:

“(1) The standard rate is the rate of interest applicable per annum to a loan which qualifies under this Schedule”.

The rate of interest under the Schedule is, and was at all material times, 3.63%.

15.   The Secretary of State’s short point is that the loan is an eligible housing cost within paragraphs 1 and 15, but that in accordance with paragraphs 10 and 12 only interest can be allowed on eligible loans; any eligible loan which does not attract interest cannot therefore attract any amount by way of housing costs (pages 4-5). The claimant’s equally short point is that the appeal tribunal has misinterpreted the housing cost provisions by linking the entitlement to housing cost payments to actual interest liabilities for a qualifying loan, whereas the legislation does not link the payment of housing costs to any actual interest charged for a loan and only requires a liability to pay housing costs and the generation of those costs from a qualifying loan.  

CIS/636/1992  
16.    The Secretary of State prays in aid the decision of Mr Commissioner Johnson in CIS/636/1992, which was upheld by the Court of Appeal in Brain v. Chief Adjudication Officer (unreported, 2 December 1993), but it seems to me that that decision is different from the matter now before me in that 

(i) the version of the Income Support Regulations then current was materially different from that which now applies 

(ii) the conclusion which Mr Commissioner Johnson reached in relation to mortgage payments neither demanded nor payable until the happening of certain events was undoubtedly right, but that is entirely different from the situation in the case before me where there is an immediate contractual liability to make monthly repayments under the terms of the deed of charge.   

17.	The facts in that somewhat unusual case were not in dispute. The claimant was a widow in her 70s who obtained an advance by way of mortgage from the Cheltenham & Gloucester Building Society to assist her to buy her home. The mortgage was under what is known as the "C & G 60+ scheme", which did not require any payment of either interest or capital to be made as long as the principal amount outstanding, including any accrued interest (which was compounded in accordance with the Society's terms), did not exceed 75 per cent of the value of the property, as assessed by the Society in every third year of the term. If and when the sum outstanding exceeded 75 per cent of the valuation the interest rate then applicable became payable. The claimant applied for income support, which was originally awarded to her, but the award was reviewed and reduced when the adjudication officer investigated her claim and ascertained that she did not make any monthly repayments, but that she had usually taken advantage of the provision that no monthly repayments need be made. The Bristol appeal tribunal had allowed her appeal, but that decision was set aside by the Commissioner, who held that, for so long as the claimant was not liable to make payments of interest under her mortgage, her income support was not to include housing costs in respect of interest due under the mortgage.

18.    The Commissioner held that:

“7. … Section 124 of the Social Security Contributions and Benefits Act 1992 (formerly 20(3) and (4) and section 21(1) of the Social Security Act 1986) provides that a person shall be entitled to income support if, among other matters, he has no income or his income does not exceed the "applicable amount". The applicable amount is defined by section 135 of the 1992 Act as -

“… such amount or the aggregate of such amounts as may be prescribed …"

and is further particularised by regulation 17 of the Income Support (General) Regulations 1987 (SI 1987 No. 1967). For the purposes of the present case I need only set out regulation 17(1)[(e)], which provides for -

"[(e)] any amounts determined in accordance with Schedule 3 (housing costs) which may be applicable ... in respect of mortgage interest payments ...”.

Schedule 3 deals very fully with "Eligible Housing Costs" and again I need only mention, firstly, paragraph 1(e) which provides that the applicable amounts in respect of prescribed housing coats include -

“(a) mortgage interest payments,"

secondly, paragraph 2, which sets out the basic condition of entitlement to housing costs, namely that -

" .. the housing costs referred to in paragraph 1 shall be met where the claimant ... is treated as responsible for the expenditure to which that cost relates ... "

and thirdly, paragraph 7, which deals with the amount of interest to be met in particular cases and, in paragraph 7(3), defines "eligible interest" as the -

“ … amount of interest on a loan ... taken out to defray
money applied for the purpose of -

(a) acquiring an interest in the dwelling occupied
     as a home ... ".

8. It is clear that a person's applicable amount of income assessed on the basis of what is necessary for him to cover his basic living expenses, and in that sense it is equivalent to his requirements or needs, although neither word is used in the relevant legislation. Such living expenses naturally include housing costs, and in my judgment the key to the instant case lies in that very word, 'costs' - not, I would emphasise, liability - but actual costs which, as I see it, must mean what is actually properly demanded and payable. I am reinforced in that view by the wording of regulation 17[(1)(e)] and paragraph 1(a) of schedule 3, which speak of "mortgage interest payments" (my emphasis), and by paragraph 2 of Schedule 3, which is concerned with the person "responsible for the expenditure" (again my emphasis).

9. In the instant case I am left in no doubt that the tribunal, perhaps understandably in the circumstances, misdirected themselves as to the law. The applicable amount of housing costs under income support is related to such amounts as the claimant is required to pay, not merely to such amounts of interest as may accrue but, at his election, will be neither demanded of nor payable by him until the happening of a certain event. To my mind that situation differs radically from the loan by way of overdraft postulated in the tribunal's reasons unless, of course, there were specific arrangements for the overdrawn account to be credit[ed] with payments from another source, when it would plainly be analogous to a normal repayment mortgage. However, in the case of an overdraft, merely subject to a maximum borrowing limit, interest would usually be debited on a quarterly basis and, while that would constitute an additional liability which would have to be discharged in due course, it could not be said that, in the ordinary sense of the words, the borrower was paying that interest. In the present cage Mrs B chose, presumably advisedly and for her own good reasons, to have a Cheltenham & Gloucester Building Society 60+ Loan, under which she will be required to make no payments for the immediately foreseeable future. In those circumstances the interest charged on the loan, while it is "eligible interest" for the purposes of regulation 7, cannot properly be met as an eligible housing cost within Schedule 3.”

CJSA/2365/2009
19.  That decision was followed, rightly in my judgment, by Judge Lane in CJSA/2365/2009 where she said that

“10. The next issue is whether the Regulations permit payment of housing costs during a mortgage holiday. I consider that the reasoning in CIS/636/1992 is correct and the principle set out in it is applicable to this case.

11. As in Income Support, Jobseeker's Allowance (Income Based) provides for a claimant's basic living expenses, including an amount to meet defined housing costs. Commissioner Johnson considered that the word 'cost' was key to understanding the provision made. In paragraph 9, the Commissioner said:

'...The amount of housing costs to which a claimant is entitled is related to such amounts as the claimant is required to pay, not merely to such amounts of interest as may accrue but, at his election, will be neither demanded of nor payable by him until the happening of a certain event.'

I agree that an amount that is neither demanded nor payable cannot properly be characterised a 'cost' as envisaged by means tested benefits.”

20.    However, whilst I accept the correctness of both decisions, in my judgment they are not determinative of the issue in the case before me for the two reasons I have identified in paragraph 16. The second point of distinction is the one shortly made in paragraph 16(ii); this is not a case where repayment has, at the election of the mortgagor, neither been demanded nor payable until the happening of specified events, but a case where there is an immediate binding obligation to repay on a monthly basis until the debt has been paid off. The first point of distinction, however, requires a degree of elaboration.

The Difference in the Regulations
21.   Under the version of the Income Support (General) Regulations 1987 then current when CIS/636/1992 was decided it was provided in regulation 17(1) that

“Subject to regulations 18 to 22 and 70 (applicable amounts in other cases and reductions in applicable amounts and urgent cases), a claimant’s weekly applicable amount shall be the aggregate of such of the following amounts as may apply in his case:

…

(e) any amounts determined in accordance with Schedule 3 (housing costs) which may be applicable to him in respect of mortgage interest payments or such other housing costs as are prescribed in that Schedule”. 

The italicised words were not expressly recited by Mr Commissioner Johnson in his decision (although they did not need to be for the purposes of his decision), but they do appear in the original version of what was then regulation 17(1)(e). 

22.   In the current version of regulation 17, as explained in paragraph 12 above, that provision appears as

“Subject to regulations 18 to 22A (applicable amounts in other cases and reductions in applicable amounts …), a claimant’s weekly applicable amount shall be the aggregate of such of the following amounts as may apply in his case:

…

(e) any amounts determined in accordance with Schedule 3 (housing costs) which may be applicable to him in respect of mortgage interest payments or such other housing costs as are prescribed in that Schedule”. 

23.   However, in the original version there was a material difference in that under Schedule 3 paragraph 1 it was provided that the eligible housing costs were defined in this way:

“Subject to the following provisions of this Schedule, the amounts which may be applicable to a person in respect of mortgage interest payments or other prescribed housing costs under regulation 17(1)(e) or 18(1)(f) are – 

(a) mortgage interest payments

…”.

Furthermore, in the original version of the regulations, Schedule 3 paragraph 7(3) provided that

“ … in this paragraph “eligible interest” means the amount of interest on a loan, whether or not secured by way of a mortgage … taken out to defray money applied for the purpose of 

(a) acquiring an interest in the dwelling occupied as the home

                   …”

There was, therefore, no doubt under the original version of the regulations that only mortgage interest payments qualified as eligible housing costs for income support purposes. 

24.   Now, by contrast, the eligible housing costs are defined by Schedule 3 paragraph 1 on this basis: 

“1.—(1) Subject to the following provisions of this Schedule, the housing costs applicable to a claimant are those costs–

(a) which he or, where he is a member of a family, he or any member of that family is, in accordance with paragraph 2, liable to meet in respect of the dwelling occupied as the home which he or any other member of his family is treated as occupying, and

(b) which qualify under paragraphs 15 to 17.

…

(2) In this Schedule—

“housing costs” means those costs to which sub-paragraph (1) refers …”.

Paragraph 15 then defines the qualifying loan in these terms:

“15.—(1) A loan qualifies under this paragraph where the loan was taken out to defray monies applied for any of the following purposes–

(a) acquiring an interest in the dwelling occupied as the home; 

or

(b) paying off another loan to the extent that the other loan would have qualified under head (a) above had the loan not been paid off”.

25.    There is therefore no direct equivalent of the definition of housing costs in the old Schedule 3 paragraph 1; now the definition of housing costs in Schedule 3 paragraph 1(2) merely refers back to sub-paragraph (1). In addition, there is no direct equivalent of the old Schedule 3 paragraph 7(3): the new paragraph 10 sets out the method of calculating the level of benefit payable for loans without reference to any actual interest charged on those loans.

The Respective Contentions 
26.     On the one hand, it might be said that those two material differences have the effect that, whereas hitherto, only mortgage interest payments could qualify as eligible housing costs, now payments in respect of mortgage capital also qualify since the explicit restriction to interest payments no longer applies and the question is now whether the loan qualifies, not whether the interest is eligible. 

27.   On the other hand, it remains that case that, under the current version of the regulations as under the old, the applicable amounts are those which may be applicable to the applicant in respect of mortgage interest payments or such other housing costs as are prescribed in Schedule 3. On that footing it would be odd that payments in respect of mortgage capital were to be categorised as “other housing costs”, whereas one would expect them, if they were eligible costs, to be grouped generically as mortgage payments (whether of capital or interest).  If payments in respect of mortgage capital were meant to be included in that definition, the more natural way of doing so would be for the legislation to say that applicable amounts were 

“in respect of mortgage payments (whether of capital or interest) or such other housing costs as are prescribed in that Schedule”,

thus making it clear that the first limb of the definition had two sub-limbs but with a generic link based on the fact that they were all mortgage payments. That conclusion, that capital payments are in fact excluded, is consistent with the basic rationale of income support, viz. to defray a person's basic living costs, as they arise from week to week, which would not ordinarily include an obligation only in respect of capital repayment. Although there is no direct equivalent of the old Schedule 3 paragraph 7(3), the new paragraph 10 presupposes that there is some rate of interest charged on the amount of the loans, even though it standardises the rate so as to simplify the task of calculating the level of benefit payable for the loan without having to engage in complicated computations on a case by case basis.

28.   However, the claimant makes the telling point that under the version of the regulations now current it is inevitable that, in the case of a claimant with an interest rate below 3.63%, the effect will be that capital will be paid off the mortgage. Thus if the claimant were to remortgage his property with an interest rate below the current standard interest rate of 3.63%, that would effectively produce the same result as that for which he contends in the present case.  Housing costs payments would effectively be paying off the capital on the loan where they exceeded the actual interest liabilities because the rate of interest is now a standard one which applies across the board regardless of the actual interest rate payable by an individual claimant. There is, on that argument, no material difference in principle between that position (were the rate, say, 0.1%), where the interest rate is lower than the standard interest rate, and the present case (0%) where there is no liability for interest. That consequence demonstrates, according to the claimant, that under the current version of the regulations there is no limitation which requires that there be a liability for interest repayments under the mortgage.

The Decision
29.    In my judgment the Secretary of State is correct in his submissions. Schedule 3 is not a stand-alone provision, but must be construed in the light of regulation 17. What regulation 17(1) provides is that a claimant’s weekly applicable amount shall be the aggregate of such of the following amounts as may apply in his case, of which the relevant one is:

“(e) any amounts determined in accordance with Schedule 3 (housing costs) which may be applicable to him in respect of mortgage interest payments or such other housing costs as are prescribed in that Schedule”. 

Given the explicit reference to mortgage interest payments, the natural construction of the provision is that it impliedly excludes mortgage capital payments. It is not a natural construction of the provision to include mortgage capital repayments as “other housing costs”. If it had been meant to include them as eligible costs, the regulation could have been amended so that it provided that applicable amounts were 

“in respect of mortgage payments (whether of capital or interest) or such other housing costs as are prescribed in that Schedule”.

Crucially it was not amended in that form. Rather what was amended was Schedule 3, but Schedule 3 depends for its interpretation on the prior regulation 17 which impliedly excludes mortgage capital payments. If one read Schedule 3 alone, without recourse to regulation 17, one could see why the claimant argues as he does, but when one reads the explicit wording of regulation 17 and the reference to mortgage interest payments his argument loses much of its force.  

30.   There is to my mind a fundamental difference of principle between an interest-bearing loan and a non-interest bearing loan, even though in strictly financial terms there may be little practical difference between a loan with a very low rate of interest and a loan which bears no interest. It is certainly true that, in the light of the amendments to Schedule 3, the effect of the introduction of a standard rate of interest will have the effect that, in the case of interest-bearing loan with a rate of interest below the standard rate, the effect will be to pay off capital, but that is an inevitable by-product of the introduction of a standard rate of interest to avoid individual computations in each and every case. That by-product does not, however, alter the construction of regulation 17(1)(e) nor does it have the effect of making mortgage capital repayments eligible housing costs.

31.    Housing costs are therefore applicable if they fulfil the requirements of Schedule 3 paragraph 1 of the Income Support (General) Regulations 1987 in that there is a liability in respect of the dwelling occupied as the home and paragraph 15 in that the loan is a qualifying one if it were taken out to defray the monies applied for the purpose of acquiring an interest in the dwelling occupied as the house, but by virtue of regulation 17 there is a prior limitation that only mortgage interest payments on such a loan fall within the scope of housing costs. Capital payments on such a loan therefore do not fall within the scope of housing costs for income support purposes because they do not fall within the scope of regulation 17 on its true interpretation. 

32.   This is not a case where repayments have not been either demanded or payable at the election of the mortgagor, as was CIS/636/1992, nor is it a case of a mortgage holiday, as was CJSA/2365/2009.  In this case the claimant has an immediate monthly liability for housing costs on a qualifying loan and is making those contractually due repayments. However, that loan is an interest-free loan and as such the repayments of capital due under it do not fall within the scope of housing costs as defined in regulation 17. 

33.   Although the District Tribunal Judge in giving permission to appeal raised the question of whether the arrangement the nature of the transaction might have been that the vendor was leaving outstanding part of the purchase price which was to be paid over the specified period and questioned whether that might make a difference, I am satisfied that the nature of the arrangement does not make a difference to the result. The effect of the transaction was to give the vendor security over the property in return for what was regarded by the parties as an interest-free loan of £10,000 within the terms of Schedule 3 paragraph 15(1)(a) of the Income Support General Regulations 1987, but that was not an eligible housing cost within the terms of regulation 17(1)(e), on which Schedule 3 depends.

Conclusion
34.   For these reasons I conclude that the decision of the appeal tribunal sitting at Taunton dated 18 May 2012 under file reference SC206/12/00323 did not involve an error on a point of law. The appeal against that decision is therefore dismissed.

Signed 			                        Mark West
                                                                        Judge of the Upper Tribunal

Dated                                                              5 June 2013