Sehgal v HMRC – further developments on the remittance basis and the meaning of "service"

23 April 2024

Whether the remittance basis remains relevant in the medium to longer term is the topic of the moment after the pre-general election announcements by the Chancellor and Shadow Chancellor; yet in the recent past as the post-2017 reforms have taken hold, positions taken by HMRC have started to make operating certain aspects of the system challenging. One such position has been on the definition of the provision of a "service", which HMRC have been keen to expand the ambit of, with a view to increasing their reach by widening the definition of remittance.

The recent decision of the Upper Tribunal (UT, presided over by a High Court judge) in Sehgal v HMRC [2024] UKUT 00074, on appeal from the FTT, attempts to redefine the meaning of “service” for remittance purposes and can be interpreted as a material blow to HMRC’s ambitions in this area after what they will have interpreted as a comforting decision in the court below. Specifically, the UT disagreed with HMRC’s view that the concept of “service” (in s. 809L Income Tax Act 2007) should be interpreted broadly: instead, the UT decided that the term should be understood in the ordinary sense of the word, as services provided on a commercial basis in exchange for payment. The UT’s judgment goes on to provide guidance on the location of the provision of a service. The decision gives welcome clarity for taxpayers attempting to understand the highly complex concept of a remittance.

The remittance basis – easy conceptually, hard in practice

Under current, i.e. pre-2025, rules, anyone who is UK resident but non-UK domiciled (and not “deemed domiciled” in the UK for tax purposes) may choose to pay UK tax on the "remittance" basis, rather than the "arising", i.e. worldwide, basis. Broadly speaking, this means that - focusing on their non-UK income and gains - such taxpayers are only subject to UK tax on such funds if they are "remitted" to the UK. A remittance can include a bank transfer of income or gains, 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).

The scope of the remittance basis rules has been considered countless times by the UK courts. Given recent announcements by both the Chancellor and the Shadow Chancellor in relation to reforms to the regime and the remittance basis of taxation, it remains to be seen whether this is soon to become a minority sport. However, despite current proposals to implement reforms from April 2025, it appears that the existing remittance basis rules will continue to apply to pre-6 April 2025 foreign income and gains, and so the concept of a remittance may well retain a level of significance for some time to come.

Involved factual background

To understand Sehgal’s significance, it is helpful to summarise its salient facts.

The taxpayers had agreed to sell a company (Company A) to a third-party purchaser. The sale agreement included a specific indemnity given by the taxpayers in favour of the purchaser. This indemnity was engaged when another company owned by the taxpayers (Company B) failed to discharge a debt owed by Company B to a subsidiary of Company A (the Subsidiary).

However, for accounting reasons, the purchaser did not want any payments to be made under the indemnity. Accordingly, the taxpayer and the purchaser agreed to enter into a somewhat convoluted arrangement whereby the value of the debt would be discharged by another method.

First, the taxpayers procured that one of their portfolio companies would purchase goods from the purchaser’s group (using proceeds from the sale of Company A which comprised foreign gains) at an overvalue equivalent to the value of the debt owed by Company B to the Subsidiary.

In consideration for the purchase at an overvalue, the taxpayers and the purchaser then entered a side letter, which had three relevant terms:

  • the taxpayers were released from the indemnity they had given to the purchaser;
  • Company B was released from its obligation to pay the debt owed to the Subsidiary; and
  • the purchaser agreed to ensure that the Subsidiary would not pursue Company B for payment of the debt.

The result of this arrangement was that the purchaser’s group received the value of the debt without payment being made under the indemnity.

The FTT’s decision: can releasing someone from an obligation amount to a "service"?

The issue before the FTT was whether the rights granted to the taxpayers pursuant to the side letter in exchange for the transaction at an overvalue (funded using foreign gains) constituted a remittance (under s. 809L) as either:

  • property brought to, received, or used in the UK; or
  • a service provided in the United Kingdom, for the benefit of the taxpayers.

The FTT determined as follows:

  • where a contractual right was conditional (in this case the taxpayers would only be released from their obligations under the indemnity if the overvalue purchase occurred) that right does not amount to "property" for remittance purposes;
  • the agreement to release an indemnity, and the agreement to waive a debt due from a third party (as opposed to between a creditor and debtor), could amount to the provision of a "service" for remittance purposes (HMRC’s preferred recent stance); and
  • the fact that (a) the side letter was governed by UK law and (b) the debt being released was a UK situs debt under normal UK situs principles (as the companies were in the UK), meant that the service would have been provided in the UK.

Nonetheless, the FTT found in favour of the taxpayers, hence the appeal by HMRC.

The FTT noted that, notwithstanding that a service was being provided in the UK, there was no remittance in the circumstances because that service did not "derive" from the taxpayers’ income or chargeable gains.

However, and somewhat troublingly for remittance basis users, the FTT accepted a broad interpretation of the scope of what constitutes a service and whether it is provided in the UK. Read our previous analysis of the FTT’s decision.

The UT’s view – no it can’t… That is not what s809L(2)(b) is there for.

The UT upheld the FTT’s decision but, importantly, disagreed with some of the FTT’s reasoning, in other words, how they reached the conclusion that HMRC lost the case. Key points from the UT’s judgment are set out below.

  • The UT agreed with the FTT that conditional contractual rights did not amount to "property" for remittance purposes, and so this point was not pursued further by HMRC.
  • The UT’s primary disagreement with the FTT’s decision concerned whether the waiver of a right under an indemnity, and the subsequent waiver of a debt by a third party, constitutes a "service" for remittance purposes. Disagreeing with the FTT, the UT concluded that the release from an indemnity and waiver of a debt would not constitute a service for remittance basis purposes.

Here, the UT noted that the word "service" should be understood in the ordinary sense of the word, which normally refers to a service provided on a commercial basis in exchange for payment. Put simply, the benefit conferred on the taxpayers resulting from the transaction did not amount to anything that would fall into the normal understanding of the word "service".

In the UT’s view, “if Parliament had intended that the conferring of any kind of benefit with a monetary value to the recipient should potentially give rise to a remittance, then it could easily have provided for that with appropriate wording, but it did not do so.” This conclusion (known to be contrary to HMRC’s recent stance) provides some comfort that in determining whether a service has been provided, the plain meaning of the word "service" should be adopted.

  • The UT also took the view, contrary to the FTT, that the governing law applicable to an agreement is insignificant in determining where a service is being provided, pointing out that parties can and often do decide to use the law of England and Wales where the connection to the UK is limited.

Similarly, the fact that, in this case, the debt had a UK situs is not the key question when determining where a service is provided.

Rather, the UT’s view is that, in these types of situations, services are provided in the location where the provider of the services is located. Here, the company providing the supposed service was a Luxembourg company, and so even if it were determined that a service was provided, the UT’s view was that the provision of any service would be in Luxembourg, irrespective of the taxpayers being in the UK.

The UT illustrated this point by reference to the provision of professional advice from an overseas jurisdiction to a UK resident, concluding that it should not be considered as being provided in the UK; rather, it would be provided from where the professional adviser is located. In the UT’s view, it is the location of the provider rather than the recipient that is relevant (although the UT did acknowledge that this would not be the case in all circumstances, for example, "telecommunication services supplied to an individual in a particular country…are physically enjoyed by the individual in the country in question, wherever in the world their provider may be").  

  • As a more general point underlying the whole interpretative approach, the UT considered the purpose of the remittance basis rules. HMRC had argued that these rules were intended as anti‑avoidance provisions and should therefore be interpreted widely and purposively.

The UT strongly disagreed, and took the view that the normal, narrower rules of legislative construction should apply. In doing so, they clearly take the view that a wider reading of the remittance rules is not likely to be appropriate in most circumstances.

This case has some significance as it will be binding on the FTT. It provides clarity on the meaning of "services" under the remittance rules, and the UT’s stance will be welcomed by taxpayers surprised by the recent HMRC position. Nonetheless, remittance basis users should ensure that they take detailed advice before entering into any arrangements with a UK connection which may involve the transfer of unremitted income or gains, particularly knowing that HMRC are on the lookout for indirect remittances via the service route.