UT/2022/000154 - [2024] UKUT 00074 (TCC)

The transactions giving rise to the disputed charge under s 809L ITA 2007 arose from the sale by the Appellants, two UK resident but non-domiciled individuals, of a company in which they were the major shareholders in 2010.

On 25 February 2010, the Appellants entered into an arm’s length agreement (the Share Purchase Agreement (“SPA”)) to sell their 31.5% (SM) and 41.5% (RS) shares of Visage Group Ltd (“VGL”) to Centennial (Luxembourg) Sarl (“Centennial”), a Luxembourg resident subsidiary of the Li & Fung Group. The consideration was a mix of cash and loan notes issued by the purchaser, some of which were to be issued on deferred and earn out terms.

At the time of the sale, Internacionale Retail Ltd (“IR”), another company indirectly beneficially owned by SM (38%) and RS (38%), owed Visage Ltd (a subsidiary of VGL, “Visage”) approximately £6 million. IR was a subsidiary of SKS1 Limited, a Jersey company. (“SKS”)

Clause 8.1(d)(i) of the SPA provided

“The Individual Sellers hereby covenant with and undertake to indemnify the Purchaser fully on demand and to keep it indemnified against any and all Losses incurred, suffered or sustained by them or asserted against it or any member of the Group or any member of the Purchaser's Group, or any or all of them arising out of any of the following:

Shortly after the sale was completed, it became clear that the debt due from IR to Visage could not be recovered. This triggered clause 8.1 of the SPA and the Appellants were under an obligation to indemnify the purchaser (Centennial). (“the Indemnity”)

Li & Fung, however, were concerned about the effect on its own financial reporting of a straightforward payment of the indemnity amount and therefore requested that the Appellants’ obligations be discharged in a less straightforward way that Li & Fung hoped would not create any charge to profits.

A First Supplemental Agreement was entered into on 3 August 2010 which amended clause 8.1(d) of the SPA to read as follows (see clause 2.2 of the Supplemental Agreement):

“(d)

(i) any failure by Internacionale Retail limited to pay any amounts owed by it to any member of the Group as at the Completion Date (or by any other company to pay equivalent amounts which have been agreed in writing by the Individual Sellers' Representative and the Purchaser to replace the relevant Internacionale Retail Limited debts) prior to 15 September 2010 (limited to amounts so owed plus costs and expenses in bringing a claim) and

(ii)

any waiver or forgiveness by any member of the Group in respect of any amounts owed by Internacionale Retail Limited to any member of the Group prior to Completion (limited to amounts so waived, less costs and expenses in bringing a claim);”

In the event, what happened was that SKS bought clothing goods from Miles Fashion Ltd (“Miles”), a German resident subsidiary of Li & Fung (Trading) Limited for €6,783,000. Those goods were only worth approximately £200,000 and were ultimately gifted to a charity in Africa. (“the Compensatory Transaction”)

The money SKS used was contributed by the Appellants (and to a lesser extent two others) and was monies received by them in accordance with the original SPA (by redeeming loan notes).

With reference to these events, a side letter (the “Side Letter”) was entered into on 23 December 2010 between Centennial and the Appellants (Footnote: ¹) whereby it was agreed between Centennial and the Appellants that:

Following the transactions, as referred to above, Visage issued a credit note to IR for £6m in respect of the £6m debt (“the Credit Note”).