Sehgal v HMRC: the remittance basis and the meaning of service

07 October 2022

UK residents who are domiciled outside the UK and have lived here for less than 15 years are usually eligible to pay tax on the remittance basis. Broadly, this means that they are only subject to UK tax on their foreign income and gains if the foreign income and gains are “remitted” to the UK.

A remittance can include physically bringing property to the UK (such as importing a car purchased using foreign income) or paying for a service received in the UK (such as using foreign income to pay a plumber to carry out work at a UK home).

In Sehgal v HMRC [2022] UKFTT 00312 (TC), the FTT considered whether entering into an agreement to waive a debt or release an indemnity could give rise to a taxable remittance. The case merits detailed study for any remittance basis taxpayers entering into agreements which have a connection to the UK.

The facts of the case are complex, but revolve around a side letter entered into as part of an agreement by the taxpayer to sell a company (Company A) to a third party purchaser. The side letter had three relevant terms:

  • the taxpayer was released from an indemnity it had given to the purchaser in respect of an outstanding debt owed to a subsidiary of Company A by another of the taxpayer’s companies (Company B);
  • Company B was released from its obligation to pay the debt to the subsidiary of Company A; and
  • the purchasers agreed, having bought Company A, to ensure that Company A’s subsidiary did not pursue Company B for payment of its debt.

HMRC argued that these contractual rights were themselves “property” which was used or received in the UK since they accrued at least in part to UK companies. In short, they argued that where there is a contract, the underlying property (i.e. the exchange of payments and goods/services) and the contractual rights to receive those payments/goods/services should, at least in more complex situations, be treated as separate items of property which need to be analysed separately for remittance purposes.

HMRC also said that the purchaser agreeing to release the indemnity, procure the waiver of the debt and arrange for its subsidiary not to pursue the debt was a service provided in the UK (the debts were UK situated).

The FTT considered the nature of “property” in a remittance context and found that, where a contractual right was conditional (i.e. it fell away on performance of the contract – as an example in a contract for the purchase of an apple, there is a contractual right to payment and a contractual right to receipt of an apple, but when the payment is made and the apple handed over the rights have no further use) it could not amount to “property” for remittance purposes.  

The FTT did however find that an agreement to release an indemnity, and an agreement to waive a debt due from a third party (but not a simple waiver between creditor and debtor) could amount to services for remittance purposes. Where the underlying obligation was owed by a UK entity, the service would be performed in the UK – so there would be a remittance if the payment for the service (i.e. the consideration for the release/waiver) derived from non-UK income or gains.

This conclusion may be a surprise to many observers, as it appears to extend the meaning of “service” significantly beyond previously understood limits. That said, HMRC (who lost the case despite winning the argument on services) are widely expected to appeal, so more guidance may be forthcoming in the near future.

In the meantime, remittance basis taxpayers should take detailed advice before entering into any agreements with a UK connection if the consideration to be provided represents unremitted overseas income/gains.