Payments under indemnity not a remittance
In Sehgal & Anor v HMRC [2022] UKFTT 312 (TC), the First-tier Tribunal (FTT) held that arrangements under which the taxpayers settled a debt indemnity arising from a share sale did not give rise to a remittance to the UK, under section 809L, Income Tax Act 2007 (ITA 2007).
Background
In February 2010, two UK resident but non-domiciled individuals, Raj Sehgal and Sanjeev Mehan (the Appellants), entered into a share purchase agreement (the SPA) to sell their shareholding (41.5% and 31.5%, respectively) in Visage Group Ltd (VGL) to a Luxembourg entity, Centennial (Luxembourg) Sarl (CLS). CLS was a subsidiary of the Li & Fung Group (LFG).
At the time of the SPA, VGL was owed around £6 million by Internacionale Retail Ltd (IRL). IRL was beneficially owned by the Appellants.
Clause 8.1(d)(i) of the SPA imposed certain covenants on the Appellants to indemnify CLS against any losses suffered by it arising from:
• IRL failing to pay any amounts owed by it;
• a waiver by a member of the group relating to any amount owed by IRL.
Shortly after the SPA was signed, it became evident that the £6 million IRL owed VGL was not recoverable. However, LFG was concerned about a potential charge arising if it was to be paid the indemnity outright. At the request of LFG, a series of transactions took place under which a jersey company purchased clothing goods from another company in CLS's group and CLS and the Appellants entered into a side letter agreement in which it was agreed that the payment for the clothing would reduce the amount of the debt to nil. The clothing was worth £200,000 and was gifted to a charity. The side letter also provided that the Appellants would be released from all obligations under the indemnity and CLS would ensure that IRL would not be pursued for the debt. The creditor then issued a credit note to IRL in respect of the debt.
HMRC argued that the provisions of the side letter gave rise to property, money or services derived from the gain on the share sale and used in the UK by the Appellants and IRL, releasing the Appellants from their indemnity obligation and IRL from its debt. Conditions A and B in section 809L, ITA 2007, were therefore satisfied and there was a remittance of the gain to the UK.
The Appellants appealed against HMRC's decision.
FTT decision
The appeal was allowed.
The FTT found that neither the Appellants' rights to have their obligations settled by a third party, nor IRL's rights to have its debts settled by a third party, should be treated as property, as both sets of rights were conditional on performance by the holders of those rights. Once the obligations were settled, there was no continuing right to have the obligations settled, and therefore no ongoing "property", for the purposes of section 809L.
The FTT held that, although a service was provided in the UK both to the Appellants and IRL under the side letter, that service did not derive from the chargeable gains. A payment under an indemnity could not be derived from the gain because a payment under the indemnity would have reduced the amount of the gain. This conclusion was not affected by the way the transactions were structured - the source of the transactions remained the indemnity.
Comment
This is an important decision. HMRC adopted an expansive approach as regards the meaning of remittance.
On the "services" argument, there are various issues with the FTT's analysis. The FTT did not accept that, just as full or partial satisfaction of a liability does not involve the provision of a service to the person satisfying the liability, no service is provided within the normal meaning of the word if the liability is settled by a third party.
For the time being and subject to any appeal, the approach taken by the FTT in identifying when a gain is remitted will be of interest to advisers involved in non-UK domicile matters, as will the restrictive approach taken to the word "property" in the context of intangible rights.
A copy of the decision can be viewed here.