The Personal Representatives of Mukesh Sehgal & Anor v The Commissioners for HMRC

When the time came for preparation of the tax returns of MS and PS, the process in all relevant years was managed and largely dealt with by Deloittes on their behalf. By way of preparation, Deloittes compiled the information known to them and sent out checklists of information they required to complete the returns. Upon receiving the responses, they prepared draft returns including all the relevant information compiled from their own files and the responses received back from MS and PS.

A representative of Deloittes would then arrange a meeting with MS and PS and go through the draft returns with them. MS and PS would seek to understand the returns as best they could, but essentially they relied on the expertise of Deloittes. PS in particular would ask questions at the meeting to satisfy herself that everything had been done correctly. At the end of the meeting they would sign the returns, which would then be submitted to HMRC by Deloittes.

The cash proceeds received on the disposals of the shares in VGL were included in the returns for the tax year 2005-06; a note explaining the disposal and referencing the loan note element was included in the “Additional information” box in each return.

The returns which are in issue in these proceedings in relation to the penalties which HMRC have imposed are those for the tax year 2006-07, which we infer were submitted in late 2007 or January 2008. No entry of any gain on the disposal of the loan notes was included in either return, however the return of MS included the following text in the “Additional information” box:

The return of PS for 2006-07 contained a note in exactly the same terms (but with the different amounts of her holdings of shares and loan notes).

The fact that both notes incorrectly referred to the Isle of Man rather than Jersey was not noticed at the time was but was pointed out by Deloittes in their initial response dated 19 February 2009 to HMRC’s letters opening enquiries into the 2006-07 tax returns of MS and PS (see below).

HMRC opened enquiries into the 2006-07 returns of MS and PS on 8 January 2009. It is not necessary here to recount the detail of the enquiries, save to say that they involved lengthy exchanges of correspondence, meetings, an Alternative Dispute Resolution (“ADR”) process and judicial review proceedings, as well as some periods of delay on both sides. On 25 January 2019 HMRC finally issued closure notices (amending the self-assessments of MS and PS) and related penalty determination letters, which were confirmed in statutory review letters issued on 19 July 2019 (in relation to MS) and 20 August 2019 (in relation to PS). MS and PS subsequently appealed to the Tribunal.

Section 12 TCGA provided, so far as relevant, as follows:

Section 275 TCGA, headed “Location of Assets”, provided, so far as relevant, as follows:

At the time relevant to these appeals s 95 Taxes Management Act 1970 (“TMA”) provided as follows:

Section 100 TMA provided that, in cases such as the present:

Under s 100B(2) TMA the Tribunal is empowered, on appeal, to reduce or increase the amount of any penalty:

It is agreed that the burden lies on HMRC to show that the Appellants are liable for a penalty. There is no suggestion of fraud in this case, so the burden lies on HMRC to establish that MS and PS acted negligently in delivering their respective returns, if those returns are found to have been incorrect.

Mr Firth KC, in seeking to argue that the assets in question (i.e. the loan notes) were “situated outside the United Kingdom” for the purposes of s 12 TCGA at the time of their redemption, sought to rely on s 275(1)(e) TCGA, on the basis that they were “registered” in Jersey at that time, the records of information maintained about them by or on behalf of ML’s Jersey directors as part of its accounts process amounting to a register for these purposes. As to the content of those records, he relied on the letter dated 5 November 2014 from AAJ referred to at [28] above.

On the basis of that letter, he submitted that ML recorded, in relation to each loan note, the identity of the loan note holder and the quantum of his/her holding.

This, he submitted, was sufficient to amount to a “register” to render the loan notes “registered” in Jersey at the relevant time. Whilst there was, he accepted, no direct authority on what constituted a register for the purposes of s 275(1)(e) TCGA, there were several cases in which the meaning of “register” and/or “registered” had been considered.

First, in WT Ramsay v IRC [1979] STC 582, the Court of Appeal was considering arguments as to why a particular debt was not a “debt on a security”. One of the arguments relied on by the taxpayer was that there was no register, to which Templeman LJ responded by saying that “a register is only a record of the identity of lenders and their assignees”. The House of Lords did not disagree with this.

Second, in Collins v British Airways Board [1982] QB 734, which was concerned with limitation of liability in relation to lost baggage, a reference to “registered baggage” in the Warsaw Convention was under consideration. The term was not defined in the Warsaw Convention, so the Court of Appeal examined the question from first principles. Lord Denning MR (with whom the other members of the Court agreed) said this:

On this basis, Mr Firth submitted that a “register” is simply a “list of persons or things of which it is important to keep a record”.

As to the question of any required format for a “register” to be constituted, he referred to Re Land Credit Company of Ireland (1873) LR 8 Ch App 831. In that case, a company had become insolvent and the court was considering the liability of its former members to contribute to it. Under the relevant Companies Act, “every other person who has agreed to become a member of a company under this Act, and whose name is entered on the register of members, shall be deemed to be a member of the company.” The company in question had maintained two books, one formally entitled “Register of Members” (which contained only the names of the original shareholders) and a second book, specifically referred to in the first, which gave “the whole information which was intended by the Act of Parliament to be given by the register of members”. James LJ (with whom Mellish LJ agreed on this point) said that the second book was “in fact and in truth, a second volume of the register of members”, and he was “satisfied that it was intended to be the register of members subsequent to the list of the original members”. Therefore, the former member whose name had been entered into the second book was to be treated as a member of the company and was accordingly liable to contribute in its insolvency. This meant, Mr Firth submitted, that anything which contained all the relevant information required to be recorded should be regarded as being a “register” of it.

In the modern era, of course, he submitted that the maintenance of a hard copy record was not necessary, referring to s 1135(1) Companies Act 2006, which provides as follows:

Accordingly, he submitted that a register, in relation to loan notes, need be nothing more than a record of the existence of the loan notes along with the identity of their holders which is maintained by the debtor as a record of such information. This was a matter of substance rather than form. Furthermore, there was no reason why information recorded by a company as part of its accounting processes could not amount to a register – accounting records include lists of things of which it is important to keep a record and do so precisely because it is important to keep a record of those things. There was no reason to draw an artificial line between records maintained as part of accounting processes and records which could be regarded as “registers”. Given the limited information required to be kept (the amounts of the loan notes and the details of their holders), no more formality was required beyond the reflection of the relevant details in ML’s accounting records.

Mr Firth went on to submit that since registers in electronic form were clearly allowable, the question arose as to the location of such a register. As to that, an electronic register that was accessed and maintained by the Jersey directors of a Jersey company in Jersey was, in his submission, plainly situated in Jersey. This point had not been raised by HMRC and was therefore explored no further, but he observed that the complexities that might be caused by cloud storage and the uncertain location of such data storage were obviously not as widespread in 2006 as they might be now.

Ms Choudhury KC submitted that whilst no particular form was required to constitute a register, guidance from the Courts in other cases indicated that there were two key characteristics of a “register”, neither of which was present in this case.

First, she submitted, a record could not be a register unless it had been prepared for the purpose of serving as such. Whilst acknowledging the comments of Lord Denning in Collins, she submitted on the basis of Re Printing Telegraph & Construction Co of Agence Havas, ex parte Cammell [1894] 2 Ch 392 (where a company attempted to rely on allotment sheets as a register of shareholders) that “preparatory materials” could not constitute a “register”. In that case, Lindley LJ had said this (at 398):

Agreeing, Lopes LJ said this (at 399):

The second key characteristic of a “register”, she submitted was that it must be open to public inspection. In support of this, she again cited Re Land Credit Co, in which James LJ had said that the second book was “in fact the only book, from which a person having occasion to ascertain anything with regard to the state of the company could get the information which he desired to have.”

In support of this proposition, she also cited the obiter comments of Rix LJ in R (oao Heather Moor & Edgecomb Ltd) v Financial Ombudsman Service [2008] EWCA Civ 642. The Financial Ombudsman was required to maintain “a register of each money award and direction made”. In fact, the Ombudsman had sought to comply with that rule by keeping an internal database which was not available for public inspection. Rix LJ observed (at [90]) “I have my doubts as to whether such an internal data base amounts to a “register” properly so called. A register is an official list or record. It may be that it can be kept in any form, but I suspect that it needs to be open to public inspection.”

Ms Choudhury submitted that neither requirement was met here. The trial balances (and, by extension, the underlying accounting records) were plainly not prepared for the purpose of serving as a register (as was tacitly acknowledged by an attempt, after the event, to create a more formal register at a later date – see [22] above). And there was no suggestion that any of the trial balances (or, by extension, the underlying accounting records) was intended to be available for public inspection. Furthermore, it could not be rational for the thoroughness (or otherwise) of a debtor company’s internal record keeping practices to determine whether a particular debenture was registered or not, in a situation where the creditor under it would have no means of establishing the facts.

In argument, she moderated her position somewhat in relation to the “available for public inspection” requirement, but still asserted that a document could only be a register if it was available for some kind of inspection by those with a valid right to do so (as the loan note holders had in this case under the clause 11 in the loan note Deed Poll – see [7] above); accordingly the form of the document was relevant, in that it should contain the required information in readily accessible and directly applicable form, and that requirement was not satisfied by requiring a so-called “register” to be extracted or pieced together from a wider pool of records.

Ms Choudhury submitted that PS and MS had failed to follow the advice given to them by Deloittes in relation to the redemption of the loan notes. Deloittes had advised them that the funds to redeem the loan notes would be transferred to ML at the same time as it was substituted as the debtor under the loan notes; however it had never had a bank account. Further, and “more importantly, despite Deloitte’s [sic] clear advice”, the loan notes were not registered in Jersey. It was submitted that MS and PS had therefore “failed to act on the advice they received”. In spite of instructing professional advisers, they had failed to communicate properly with them, which meant they had taken no steps to ensure that their returns were prepared on the basis of the transactions as they were actually implemented. In her submission, given the warning that had been given about the need to follow the timetable and steps exactly, a prudent and reasonable taxpayer would not have delivered their return without confirming that they had been exactly followed. The stated general reliance on Deloittes and the other professionals instructed by them was insufficient to exonerate PS and MS from negligence in the delivery of their incorrect returns. This was brought into sharp relief by the fact that PS had actually taken the step of telephoning to ensure that the redemption money would be paid into the correct account; in Ms Choudhury’s submission this clearly demonstrated that PS was in a position to check that the transactions were all being correctly implemented in accordance with the step plan. She also submitted that their failure to seek specific reassurance from Deloittes that everything had been done properly before signing their returns amounted to negligence.

She cited the observations of the FTT in Hanson v HMRC [2012] UKFTT 314 at [23] – [24]:

Ms Choudhury submitted that these appeals were analogous to the first extreme identified in Hanson in that by failing, before signing their tax returns, to seek any reassurance that those returns were prepared on the basis of the facts as they actually were, they had failed to reveal a gain on disposal of a UK-situs asset, corresponding closely to a failure to disclose a source of income.

Whilst HMRC had at an earlier stage admittedly stated that “MKS was not negligent, and did, in fact, take reasonable care”, this was not determinative as it was quite legitimate for HMRC to change their minds after more consideration of the facts.

Mr Firth submitted that it was important to be clear that the “negligence” that HMRC had to establish was not negligence in failing to follow Deloittes’ advice, but negligence in delivering an incorrect return. He cited Magic Carpets (Commercial) Limited v HMRC [2023] UKFTT 70 at [93] (in which the extended time limits under s 36 TMA for making an assessment were under consideration):

He submitted that the tax returns in this case had been prepared by Deloittes, the same firm as had advised on the transactions and arranged their implementation. As far as MS and PS were concerned, Deloittes were well aware of the advice they had given, and of what had happened, and had prepared the returns accordingly. They had relied on them in doing so, and by preparing the returns in the way they had, Deloittes were effectively confirming that the steps they had designed had been adequately implemented. Here, he cited HMRC v Bella Figura [2020] UKUT 120 (TCC)) at [61(1)]:

In summary, he submitted that “the clear evidence is that [MS and PS] took advice and relied on professionals both as to the implementation of the advice and completion of their tax returns in light of what had been implemented. That amounts to reasonable care.”

The key question with which we are concerned is whether the loan notes are to be regarded as having been situated in Jersey at the time of their redemption pursuant to s 275(1)(e) TCGA: “… registered … debentures are situated where they are registered and, if registered in more than one register, where the principal register is situated”.

It is clear that to fall within this provision, any debentures must be “registered debentures”, and that their registration must be effected in a “register” which is situated in a particular place. This leads logically on to an examination of what might, in the present case, be argued to be a relevant “register” at the time of the redemptions. It seems to us that there are four possibilities:

A consideration of these four possibilities leads us straight into the central question addressed at some length by both counsel: what is needed to constitute a “register” for the purposes of s 275(1)(e) TCGA? In essence, Mr Firth contends that a “register” is nothing more than a record of any type, maintained in any format and for any purpose, which contains a list of things which it is important should be recorded, and which is maintained in order to keep a record, for whatever purpose, of those things – in this case the core details of the holdings (the names of the loan note holders and the values of their respective holdings of loan notes). Ms Choudhury on the other hand contends that a record can only be a “register” if it is prepared and maintained with the purpose of serving as a formal record, available for inspection, of the specific information required to be kept (implicitly, not intermixed with other information irrelevant to that purpose).

In the present case, the Deed Poll which constituted the loan notes set out very specific requirements as to what information was supposed to be inserted in the register, what its legal effect was and how and where it was to be maintained and made available for inspection. Those requirements became binding on ML upon its substitution as debtor under the loan notes. Clearly the accounting records of ML upon which the Appellants now seek to rely did not even attempt to comply with these requirements, and whilst that does not of itself mean that different records from those required under the Deed Poll could not have amounted to a “register” for the purposes of s 275(1)(e) TCGA, it gives some illustration of what was considered to be the appropriate content and format of a “register” in this case. Indeed, clause 10 of the Deed Poll made it clear that the register was to be the authoritative record, so far as VGL was concerned, of the ownership of the loan notes (see [7] above).

We consider that, as Ms Choudhury submitted, a “register” in the present context is something qualitatively different from a simple “record” (or even a collection of records). The words “register”, “registered” and “registration” in our view connote a degree of formality and specificity about the interlinked elements of (i) the information which is to be included, (ii) the formality of the way in which it is to be recorded and (iii) the intended purpose of recording it (which, in our view, should be so as to serve as a single identifiable formal point of reference to which recourse can be had in order to obtain an authoritative statement of the information recorded in it).

We then consider the detail of what is actually argued by Mr Firth to amount to the “register” in this case. The best argument available to him on the facts is that some unspecified accounting records which have not been put in evidence, made on an unknown date, from which various later trial balances were derived which showed the names of the two loan note holders and the amounts of loan notes respectively held by them, are sufficient to constitute a “register” of those loan notes.

There are a number of problems with this argument. First of all, there was no evidence before us that the underlying accounting records upon which he seeks to rely had even been brought into existence by the time the loan notes were redeemed on 12 May 2006 (remembering that the restructuring of the loan note obligations to substitute ML as the debtor only took place the day before). Nor was there any evidence before us as to precisely what the content of those records was or how they were structured, once they were created. It is therefore impossible to ascertain whether any identifiable section of them would have contained the names and loan note holding values of MS and PS: the best Mr Firth can argue is that all that information would have been contained there somewhere if a proper search had been made, and invite us to find that the records did exist by the time the redemptions took place.

We do not consider this comes close to establishing that, by the time of redemption on 12 May 2006, there existed a “register” of the loan notes in Jersey, in which MS’s and PS’s loan notes were “registered”, for three reasons:

It follows that we do not consider either the first or third possibility identified at [70] above can apply. Whichever of the second or fourth possibilities is correct, the appeals must fail in any event.

It follows that we do not consider that the loan notes were registered in a register situated in Jersey within s 275(1)(e) TCGA at the time of their redemption. The loan notes were either unregistered or, if they were registered, it was in the original register maintained on behalf of VGL in the United Kingdom. If the first, then since MS and PS were both resident in the United Kingdom at that time the loan notes instead fell within s 275(1)(c) TCGA; and if the second, then the loan notes were situated in the United Kingdom pursuant to s 275(1)(e) TCGA. In either case, we must dismiss the appeals insofar as they relate to the liabilities to capital gains tax on the redemptions.

We essentially agree with Mr Firth that in a situation where MS and PS had engaged reputable and apparently competent advisers to give them advice on what steps to take, to supervise the implementation of those steps and then to draw up their returns in full knowledge of the steps that had been taken, HMRC face an uphill battle in demonstrating that they had acted negligently in delivering the returns, even though they have ultimately turned out to be incorrect.

In a situation where the steps to be taken in the reorganisation were not straightforward and involved instruction of overseas professionals and extensive and complex documentation, we consider it unrealistic to expect MS and PS to have overseen the details of all the steps themselves, nor do we consider that they acted negligently by not seeking explicit confirmation from Deloittes that all the transactions in the original plan had been implemented correctly before signing the returns that were drafted for them by Deloittes – in the circumstances, it is quite clear that it was reasonable for MS and PS to take the view that Deloittes, in drawing up the returns as they did, were implicitly confirming that the transactions had all been carried through as originally intended.

This view is only reinforced by a close consideration of the “step plan” document which, according to HMRC, MS and PS should have explicitly enquired about. The relevant text in the final version said this (see [18] above):

This text is itself ambiguous. Whatever the writer of the step plan actually intended, in context “The Loan Note register” being referred to can only have been the original loan note register of VGL (since ML could not at that time have already held a register which needed to be “updated”). The plan contains no reference to the need for a new register to be created offshore by the substituted debtor company. The same is true of the more detailed commentary set out in “Step 1” of the “Loan Note Planning” report by Deloittes, reproduced at [12] above. So even on a close reading of these documents, MS and PS would not have been aware of the right questions to ask in order to uncover the problem which has subsequently come to light.

In short, in the circumstances we agree with Mr Firth’s submission that “the clear evidence is that [MS and PS] took advice and relied on professionals both as to the implementation of the advice and completion of their tax returns in light of what had been implemented. That amounts to reasonable care.”

It follows that we consider the penalties to have been incorrectly imposed and we therefore set them aside pursuant to s 100B TMA.

Since we consider the penalties to have been incorrectly imposed and have set them aside, we do not need to address the question of whether the mitigation allowed by HMRC was appropriate. Nonetheless, we consider it appropriate to make some comment on the mitigation allowed by HMRC.

First, they allowed 15% mitigation (out of a normal maximum of 20%) for “Disclosure”, for the following stated reason:

In our view, this amounts to penalising MS and PS for simply not agreeing with HMRC’s interpretation of the law, rather than failing to provide full disclosure during the course of the investigation. Had we been considering mitigation, we would have seen no justification for anything less than full 20% mitigation under this heading.

Second, HMRC allowed 35% mitigation (out of a normal maximum of 40%) for “Co-operation”, for the following stated reason:

Having reviewed the conduct of the investigation, and the various delays on both sides we would, were the matter relevant, have seen no justification for allowing less than the full 40% mitigation under this heading.

Third, HMRC allowed 25% mitigation (out of a normal maximum of 40%) for “Seriousness”, for the following stated reason:

For the reasons given above, we do not consider that criticism of MS and PS for failure to ensure correct implementation of the transactions can be justified. The amounts involved were however very significant, which in our view would justify some small penalty loading under this heading, and if it were relevant we would have allowed 30% mitigation under this heading.

Overall, therefore, if we had considered the imposition of penalties to be appropriate, we would have found that a 10% penalty rather than a 25% penalty should have been imposed in each case, and we would have reduced the penalties accordingly.

We dismiss the appeals against the liabilities to capital gains tax – see [77] above.

We allow the appeals against the penalties and we set them aside in full – see [84] above.

If we had been satisfied that penalties were appropriate, we would have reduced them to 10% – see [92] above.

To the above extent, the appeals are accordingly ALLOWED IN PART.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.