Tribunal dismisses HMRC's appeal and confirms transactions did not give rise to a taxable remittance

In HMRC v Sehgal [2024] UKUT 00074 (TCC), the Upper Tribunal (UT) dismissed HMRC's appeal and confirmed that transactions entered into by the taxpayers for the sale of shares did not give rise to a taxable remittance under section 809L, Income Tax Act 2007 (ITA 2007).

Background

Raj Sehgal and Sanjeev Mehan (the Taxpayers) were UK resident non-UK domiciled individuals. In February 2010, they entered into an arm’s length share purchase agreement (SPA) to sell their shares in Visage Group Ltd (VGL) to Centennial (Luxembourg) Sarl (Centennial). Centennial was a Luxembourg resident subsidiary of the Li & Fung Group (L&F).

At the time of the sale, Internacionale Retail Ltd (IR), another company indirectly beneficially owned by the Taxpayers, owed Visage Ltd (VL) (a subsidiary of VGL) approximately £6 million. IR was a subsidiary of SKS1 Ltd (SKS), a Jersey resident company.

Under the SPA, the Taxpayers indemnified Centennial against losses arising out of any failure by IR to pay, or any waiver or forgiveness of, amounts owed by it. Shortly after the sale was completed, it became clear that the debt due from IR to Visage could not be recovered, triggering the indemnity.

L&F was concerned about the effect on its financial reporting of a straightforward payment of the indemnity amount and therefore requested that the Taxpayers’ obligations be discharged in a way that L&F hoped would not create any charge to profits. Accordingly, a supplemental agreement was entered into amending the SPA. In the event, SKS bought clothing from Miles Fashion Ltd (Miles), a German resident subsidiary of Li & Fung (Trading) Ltd, for €6,783,000. The clothing was only worth approximately £200,000 and was ultimately gifted to a charity. The money SKS used was contributed by the Taxpayers and was monies received by them in accordance with the original SPA (by redeeming loan notes). A side letter was entered into between Centennial and the Taxpayers whereby it was agreed that the payment by SKS to Miles reduced the amounts owed by IR by the sterling equivalent of €6,783,000. Following receipt of the payment the Taxpayers were released from all claims pursuant to the SPA and IR’s obligation to make payment to Visage was reduced by an equivalent amount. Following the transactions, Visage issued a credit note to IR for £6 million in respect of the debt.

HMRC was of the view that the transactions gave rise to taxable remittances to the UK and in July 2020 issued to each of the Taxpayers a closure notice containing liabilities under section 809L, ITA 2007, in the sum of £606,480.

The Taxpayers appealed. The key issue before the FTT was whether Conditions A and B, in section 809L, were satisfied. The FTT determined that Condition A was satisfied because, while there was no property, Centennial’s agreement to waive the debt due from IR and the Taxpayers’ obligations under the indemnity amounted to the provision of a service in the UK. However, the FTT found that Condition B was not met because, since there were various ways in which the gain could be adjusted after first crystalising, it would not be appropriate to treat a payment under the indemnity as anything other than a reduction of the gain, rather than a payment derived from the gain. Accordingly, the FTT allowed the appeals. 

HMRC appealed to the UT.

UT decision

The appeals were dismissed.

With regard to the service issue, the UT disagreed with the FTT, finding that the benefits conferred on the Taxpayers and IR as a result of the transactions did not amount to anything that would fall within the normal understanding of the word “service”. The UT noted that if Parliament had intended that the conferring of any kind of benefit with a monetary value to the recipient should potentially give rise to a remittance, then it could easily have provided for that with appropriate wording, but it chose not to do so.

Further, even if it had found that a service was being provided, the UT determined that, as it was common ground that any such service was provided by Centennial, if that service were being provided in any geographical location it would be Luxembourg rather than the UK.

The determination of the service issue disposed of HMRC's appeal. However, the UT went on to consider HMRC's remaining grounds. In dismissing those grounds, the UT held that the "relevant debt" provisions in section 809L(3) and (7), ITA 2007, had no application to the Taxpayers' facts, contrary to HMRC's contention. That was because the IR debt could not in any way be said to relate to the payment the Taxpayers subsequently agreed to make in order to secure their release under the indemnity and the right to require VGL to prevent VL from enforcing its debt.

The UT also rejected the FTT's finding that the manner in which the Taxpayers made payment did not affect the analysis of the chargeable gain for Condition B. Instead, the UT accepted HMRC's argument that the transactions created rights and obligations that were distinct from the rights and liabilities under the original sale of shares and disposal of loan notes because the whole purpose of the structure adopted was to avoid there being a claim under the indemnity, and that was its actual effect. As such, the UT did not consider it appropriate to regard that (as the FTT did) as simply a change of 'form' on the basis that the ultimate source of the payment made by the Taxpayers remained the profit generated through the redemption of loan notes. The UT therefore considered that if Condition A had been satisfied, then Condition B would have been satisfied by virtue of section 809L(3)(b), ITA 2007.

Finally, the UT rejected HMRC's argument that: (a) Condition A was satisfied because the money was used in the UK because of the effect its use had on the liabilities of the Taxpayers and IR in the UK; and (b) Condition B was satisfied by virtue of section 809L(3)(a), ITA 2007, because the money so used was in part the offshore chargeable gains of the Taxpayers. In that regard, the UT noted that HMRC's submission that the money was used in the UK even though it never came into the jurisdiction "would require quite an extension to the normal concept of “use” of money in any particular place" and that, even if it were wrong on that point, it could not see how section 809L(3)(a) could ever apply in relation to chargeable gains.

Comment

The provisions concerning the remittance basis are notoriously complex and have generated a substantial body of case law in recent years. The UT's decision provides helpful clarification on, inter alia, the meaning of "service" for the purposes of the conditions in section 809L, ITA 2007, and guidance on determining the place of provision of the service. While the government has indicated an intention to abolish the remittance basis, and it remains to be seen whether HMRC will seek to appeal the decision, the UT's confirmation that the remittance rules are not anti-avoidance rules will be helpful to taxpayers challenging assessments issued by HMRC under the remittance rules.

The decision can be viewed here.