HMRC loses £1.2m non-dom case against fashion duo
Will Drysdale, Reporter, Accountancy Daily
After the First Tier Tribunal sided with the two non-doms, HMRC has lost an appeal at the Upper Tribunal over whether tax was payable on the remittance basis
Raj Sehgal and Sanjeev Mehan are UK residents but non-domiciled individuals (non-doms). At the time of the HMRC inquiry in dispute, they were part owners (38% each) of Internacionale Retail, a high street and online fashion brand, which collapsed in 2019.
The appeal concerned whether Sehgal and Mehan were liable on the remittance basis for certain payments made by an offshore company controlled by them to a third party offshore company under chargeable gains rules.
Both went to the First Tier Tribunal (FTT) after HMRC decided that tax was owed on payments between companies held offshore in which shares were sold to and from by the pair.
HMRC argued that each respondent was liable for £606,480 in tax for the 2010/11 tax year, which they were notified of by closure notices on 20 July 2020. The pair were major shareholders in Visage Group up until 25 February 2010, when they sold their shares to Centennial sarl, based in Luxembourg.
At the time of the sale, the pairs’ fashion retailer Internacionale, which is a subsidiary of Jersey based SKS1 Limited, owed Visage a £6m group loan. This was subsidised with a credit note, noting that ‘Visage Ltd shall not pursue’ Internacionale for the money.
The money was owed by SKS and Internacionale after the purchase of £200,000 worth of clothes for €6.8m (£5.8m) from Miles Fashion, a German company owned by Li & Fung Trading. All of the clothes were donated to charities in Africa.
HMRC argued that the ‘relevant debt’ in question was the pre-existing debt owed by Internacionale to Visage. It said that by injecting the €6.78m into SKS and procuring its payment on to Miles, the taxpayers have used either their foreign gains or money derived from those gains indirectly ‘in respect of’ the debt owed to Visage, because the payment that they made was ultimately used to settle that debt.
At the Upper Tribunal HMRC asserted that under section 809L Income Tax Act 2007 ‘it is common ground that if the taxpayers’ chargeable gains were “remitted to the United Kingdom” then it should have won the appeal at the FTT.
Christopher Stone KC from Devereux Chambers represented HMRC and opened his argument at the Upper Tribunal saying, ‘various loopholes, flaws and anomalies’ exist throughout section 809L. The legislation ‘was aimed at taxing gains that were not “genuinely” kept offshore and were “in effect” remitted to the UK in such a manner that the individual has the use or enjoyment of them in the UK’.
His first ground of appeal was the ‘property analysis’ issue. The judges shut this down before Stone could get very far as ‘he would face significant difficulties in persuading us that the FTT’s conclusion on the “property analysis” was wrong’.
Because of this, Stone began on ground two of his argument. This involved ‘whether the property or service derived from gain’.
Stone also claimed the FTT had failed to realise that condition B was met because ‘the taxpayers had used their chargeable gains outside the UK’, which took into account the ‘relevant debt’.
Ground four was the ‘money analysis’, in which Stone covered conditions A and B. The first was met because the money had been used in the UK for the benefit of the respondents, and their companies. B was met, according to Stone, as ‘the money was used, rather than being derived from the chargeable gain’ and had not been used overseas.
The Upper Tribunal decided the services that were provided were not carried out in the UK, convinced by the respondents’ counsel, Michael Firth KC.
Judge Justice Johnson said: ‘Mr Firth pointed out the only statutory enquiry required is whether the service is “provided in the United Kingdom”. This leaves open the possibility that it might be “provided” in another jurisdiction’, adding that the ‘service’ regarding the transfer of funds was carried out in Luxembourg.
‘We therefore reject HMRC’s “money analysis”.
‘We consider that the FTT erred in law in accepting HMRC’s “service analysis”. We consider that no service was provided in the UK to the taxpayers or Internacionale by reason of the transactions under consideration.
‘If we are not correct in that view, we consider that the FTT also erred in its finding that any property or service was derived from the taxpayers’ chargeable gains.
‘Whilst we find that the FTT decision contains errors of law, on a correct analysis we agree with the final result.’
Accordingly, the appeal was dismissed.
An HMRC spokesperson told Accountancy Daily: ‘We note the decision of the tribunal and are considering next steps.’
Upper Tribunal ruling, HMRC v Raj Sehgal, Sanjeev Mehan [2024] UKUT 74 (TCC)
