Sehgal and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 31 August 2022 |
| Neutral Citation | [2022] UKFTT 312 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 312 (TC)
Judge Rachel Short, Ann Christian (Member)
First-Tier Tribunal (Tax Chamber)
Remittance basis – ITA 2007, s. 809L – Debts waived subject to payment by non-UK third party – Whether property – No – Whether services – Yes – Whether derived from chargeable gain – No – Appeal allowed.
In Sehgal & Anor [2022] TC 08581, the FTT found that a payment made pursuant to an indemnity in a share purchase agreement that was made out of the proceeds of the sale did not derive from the chargeable gains generated from the sale.
Raj Sehgal (RS) and Sanjeev Mehan (SM) (the Appellants), who were both UK-resident but non-domiciled, entered into a written agreement (SPA) in February 2010 to sell their respective shareholdings in Visage Group Ltd (Visage) to Centennial (Luxembourg) S.a.r.l (Centennial) which was a subsidiary of the Li & Fung Group (Li & Fung). Visage was owed c. 6m Euro (the IR debt) by Internacionale Retail Ltd (IR), a member of a group (SKS) in which the Appellants held a major stake and the SPA included a clause indemnifying Centennial against non-payment of the IR debt. In August 2010 it became clear that the IR debt was not recoverable. However, Li & Fung were concerned about the effect on their own financial reporting of a straightforward indemnity payment by the sellers of Visage (that included the Appellants) and therefore a supplemental agreement was made. Under a side letter (the Side Letter) between Centennial and the Appellants, the latter were released from liability under the SPA following a payment equal to the amount of the IR debt made by SKS to a German-resident subsidiary (Miles) of Li & Fung for the sale of clothing to SKS (which was worth only £200k and later donated to charity) and IR was released from its obligation to Visage and given an undertaking that the IR debt would not be pursued. The payment made by SKS was contributed by the Appellants and funded by the redemption of loan notes that they had received under the SPA. HMRC asserted that, by virtue of these transactions, there was a remittance within ITA 2007, s. 809L.
HMRC’s position was that two benefits had been provided in the UK as a result of the Side Letter: the release of the Appellants from their indemnity obligations and the release of IR from its debt. Their arguments proceeded as follows:
- the ‘property analysis’: the contractual rights under the Side Letter were property rights that had been used in the UK (because payments had been made under a contractual obligation governed by UK law) such that Condition A in s. 809L was satisfied (s. 809L(2)(a)) and Condition B was satisfied because the chargeable gains were used outside the UK to satisfy the IR debt which was a relevant debt (s. 809L(3)(a));
- the ‘money analysis’: the funds from the loan notes were money that had been used and enjoyed in the UK (because they were used to settle a trade debt between two UK companies and release the Appellants and IR from their contractual obligations) – also satisfying s. 809L(2)(a) – and the money used derived from the chargeable gain (Condition B: s. 809L(3)(a));
- the ‘service analysis’: a service had been provided by Centennial in releasing or procuring the release of the IR debt and release of the Appellants from liability under the indemnity and both IR and the Appellants had benefited (s. 809L(2)(b)) and the services provided derived indirectly from the chargeable gain because funds from the share sale were transferred to SKS and used to pay Miles (s. 809L(3)(b)(i)).
The FTT’s conclusions were as follows:
The Appellants’ and IR’s rights under the service agreement (to have their liabilities extinguished) were conditional upon payments being made by a third party. Until the payment between SMS and Miles was made, their rights were not therefore ‘property’ because they were conditional. Once the payment was made, the Appellants’ obligations under the indemnity were extinguished and the FTT considered that the extinguishment of a debt could not be treated as giving rise to any property rights. From IR’s perspective, the situation was more complicated because the payment between SKS and Miles similarly resulted in the waiver of a debt but it also obtained an additional right – the undertaking by Centennial that Visage would not enforce the debt – but the FTT concluded that no additional value was obtained by the right because previously IR had been protected from being pursued for the debt by the indemnity. Consequently, they agreed that the rights under the Side Letter were not ‘property’ for the purposes of s. 809L.
The FTT agreed with HMRC that Centennial’s agreement to waive the IR debt and the Appellant’s obligations under the indemnity was a service and that because the services related to the release of a debt, the place where the service was provided was where the debt was located (the UK) so that Condition A was satisfied. However, they did not agree that the services derived from the chargeable gain (Condition B), agreeing with the Appellants that although the source of the payments made under the indemnity was from the redemption of loan notes received under the SPA, the payments did not derive from the gain but were one of the elements that produced the gain (and in fact the payments would have reduce that gain).
The FTT did not go on to consider whether there had been money used in the UK because they had already concluded that the money (from the loan note redemption) did not derive from the chargeable gain.
The appeal was therefore allowed.
In spite of the complexity of the provisions relating to remittances of income or chargeable gains to the UK, it is surprising that to date there has been very little litigation.
Comment by Stephanie Webber, Senior Tax Writer at Croner-i.
Mr Michael Firth of Gray's Inn Tax Chambers appeared for the appellants
Mr Christopher Stone and Mr Bayo Randle of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs appeared for the respondents
[1] With the consent of the parties, the form of the hearing was video. A face-to-face hearing was not held because at the time when the appeal was listed for hearing the COVID 19 pandemic made face-to-face hearings impractical.
[2] The documents to which we were referred were contained in an agreed joint bundle amounting to 1520 pages.
[3] Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such, the hearing was held in public.
[4] This is a joint appeal by Raj Sehgal (“RS”) and Sanjeev Mehan (“SM”) against closure notices issued to them on 22 July 2020 for the 2010–11 tax year. Those closure notices increased the capital gains tax assessed on the Appellants by £606,480 each. In HMRC's view additional capital gains tax is chargeable because s. 809L Income Tax Act 2007 (“ITA 2007”) applies to the settlement of an indemnity agreement made between entities with which the Appellants were connected.
[5] The quantum of the capital gains tax charge is not in dispute for either Appellant.
[6] No penalties are under appeal.
[7] RS and SM appealed to this Tribunal on 26 October 2020.
[8] The appeals of RS and SM are joined in accordance with the Tribunal's directions of 31 July 2021. At the Tribunal we heard only from RS but it was agreed that the issues arising in both cases were identical.
[9] The facts surrounding this appeal are complex, but are not disputed by the parties.
[10] The transactions giving rise to the disputed charge under s. 809L ITA 2007 arose from the sale by the Appellants, two UK resident but non-domiciled individuals, of a company in which they were the major shareholders in 2010.
[11] On 25 February 2010, the Appellants entered into an arm's length agreement (the Share Purchase Agreement (“SPA”)) to sell their 31.5% (SM) and 41.5% (RS) shares of Visage Group Ltd (“VGL”) to Centennial (Luxembourg) Sarl (“Centennial”), a Luxembourg resident subsidiary of the Li & Fung Group. The consideration was a mix of cash and loan notes issued by the purchaser, some of which were to be issued on deferred and earn out terms.
[12] At the time of the sale, Internacionale Retail Ltd (“IR”), another company indirectly beneficially owned by SM (38%) and RS (38%), owed Visage Ltd (a subsidiary of VGL, “Visage”) approximately £6 million. IR was a subsidiary of SKS1 Limited, a Jersey company. (“SKS”)
[13] Clause 8.1(d)(i) of the SPA provided
The Individual Sellers hereby covenant with and undertake to indemnify the Purchaser fully on demand and to keep it indemnified against any and all Losses incurred, suffered or sustained by them or asserted against it or any member of the Group or any member of the Purchaser's Group, or any or all of them arising out of any of the following:
[…] (d) (i) any failure by Internacionale Retail Limited to pay any amounts owed by it to any member of the Group as at the Completion Date by the date that is 30 days after the normal 120-day payment period for such debt (limited to amounts so owed plus costs and expenses in bringing a claim) and
(ii) any waiver or forgiveness by any member of the Group in respect of any amounts owed by Internacionale Retail Limited to any member of the Group prior to Completion (limited to amounts so waived, less costs and expenses in bringing a claim);
[14] Shortly after the sale was completed, it became clear that the debt due from IR to Visage could not be recovered. This triggered clause 8.1 of the SPA and the Appellants were under an obligation to indemnify the purchaser (Centennial). (“the Indemnity”)
[15] Li & Fung, however, were concerned about the effect on its own financial reporting of a...
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