The Commissioners for HMRC v Raj Sehgal & Anor

For the remittance rules, Income Tax Act 2007, section 809L must be construed purposively and realistically, but it is not thereby treated as an anti-avoidance provision requiring an artificially broad interpretation. A benefit consisting of the release or waiver of liabilities is not ordinarily a “service”. Where a service is provided by an overseas person, its place of provision is ordinarily the provider’s location, not the recipient’s location or the location of the subject matter. A pre-existing debt does not relate to a later payment or service which is arranged to secure its waiver. A transaction legally distinct from an indemnity payment may nevertheless produce property or a service derived from chargeable gains. The appeal was dismissed because the alleged service was not provided in the United Kingdom, and the alternative statutory analyses failed.

Two UK-resident, non-domiciled taxpayers sold shares in a UK company. After an associated company’s debt became irrecoverable, the taxpayers were potentially liable under an indemnity given to the purchaser. A Luxembourg company agreed that the liability and the associated UK inter-company debt would be released following an overseas payment by a Jersey company to a German company. The payment was financed from proceeds received on redemption of loan notes connected with the share sale.

The First-tier Tribunal decided that the arrangements did not produce a taxable remittance under section 809L of the Income Tax Act 2007. HMRC appealed, arguing principally that a service had been provided in the United Kingdom, that the relevant property or service was derived from chargeable gains, and that the gains had been used in respect of a relevant debt.

1. Appeal dismissed. Although the First-tier Tribunal had erred in accepting HMRC’s service analysis and in treating the arrangements as merely a change in the form of an indemnity payment, its ultimate conclusion was correct.
2. Section 809L is to be construed under the ordinary purposive approach: the court asks whether, viewed realistically, Parliament intended the provisions to apply to the transactions. The provisions are not to receive a specially broad interpretation merely because they address perceived loopholes, flaws or anomalies.
3. The benefits conferred by the arrangements—release of the taxpayers from the indemnity and waiver or non-enforcement of the company’s debt—did not fall within the ordinary meaning of “service”. Commercial services normally involve activity provided in exchange for payment. A benefit with monetary value is not necessarily a service.
4. In any event, the alleged service was provided by Centennial, a Luxembourg company. Section 809L asks where the service was provided, not where the recipient or subject matter was located. If the service had a geographical place of provision, it was Luxembourg rather than the United Kingdom.
5. The “relevant debt” provisions could not apply. The pre-existing debt owed by IR to Visage did not relate, directly or indirectly, to the later payment or alleged service arranged to secure its waiver.
6. If the property or service analyses had succeeded, the relevant property or service would have been derived from the chargeable gains under section 809L(3)(b). The arrangements created rights and obligations distinct from the original indemnity, and could not be treated simply as a change of form because their funds originated in loan-note redemptions.
7. The money analysis also failed. Money paid overseas was not thereby used in the United Kingdom. Further, the proceeds were not themselves the chargeable gains, while section 809L(3)(b) addressed money derived from gains. HMRC had withdrawn the property analysis.

• Upper Tribunal (Tax and Chancery Chamber): HMRC appealed the First-tier Tribunal’s decision released on 31 August 2022. The Upper Tribunal found errors of law but dismissed the appeal because the correct analysis led to the same result.