In Raj Sehgal and Sanjeev Mehan v HMRC  TC 8581, the First Tier Tribunal (FTT) found that arrangements which resulted in a non-UK entity settling a UK-based indemnity did not represent a taxable remittance for the taxpayers.
- The taxpayers were UK Resident Non-Domiciled individuals claiming the remittance basis of taxation.
- In February 2010, the taxpayers' Jersey company sold shares in Visage Group Limited (Visage), a UK company for cash and loan notes to a third party.
- The taxpayers indirectly owned IR, a company which owed Visage some £6m, this amount was to be indemnified by the taxpayers.
- After the purchase, it became clear that IR could not pay the £6m to Visage and the taxpayers' indemnity was called upon.
- The purchaser was concerned about reporting the indemnity, so requested, via a side letter, that the amount was repaid by way of a non-arms length trading purchase by a Jersey Company, the parent of IR, whereby €200k of clothes was purchased for €6.8m. The funds for this transaction came from the proceeds of redeemed loan notes from the initial transaction.
- Following the transaction, IR was issued with a credit note in respect of the debt.
- HMRC opened an enquiry contending that the side letter and credit note amounted to a Remittance by the taxpayers of part of the gain from the sale of Visage shares as:
- The arrangements represented a non-UK entity settling a UK-based debt.
- The funds used to settle that debt derived from the chargeable gain arising in IR.
- The taxpayers appealed.
The FTT found that there was no chargeable remittance as:
- The side letter did not represent property used in the UK by a relevant person (either IR or the taxpayers).
- A service in the UK had been provided under the side letter.
- However, neither the property nor the service derived from the chargeable gain arising on the underlying share sale.
The appeal was allowed.
UPDATE: This case has been appealed to the Upper Tribunal.
Useful guides on this topic
SRT: Statutory Residence Test
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SDT: Statutory Residence Test Toolkit
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