Purkiss v Kennedy and Ors [2025] EWCA Civ 268 – Purkiss v Kennedy & Ors [2025] EWCA Civ 268 (14 March 2025)
The Court of Appeal recently dismissed the Liquidator’s appeal against the judgment of Mr Justice Rajah and considered the application of section 423 of the Insolvency Act 1986, where transactions have been entered into with a view to avoiding tax liabilities.
In short, the Court of Appeal found that a transaction entered into with the intention that no tax liability should arise, was not an intention to prejudice a claim for that tax liability nor put assets beyond the reach of HMRC.
Where arrangements lawfully reduce or prevent tax arising, the Court was not satisfied that it involved a section 423(3)(b) prohibited purpose. It was questionable whether HMRC could have “interests” affected, as required under that section.
Background
Mr Purkiss was the Court appointed liquidator of Ethos Solutions Limited. ESL was an umbrella company which promoted and operated a tax avoidance scheme. The scheme’s intended effect was that self-employed individuals who participated in it could avoid paying income tax and national insurance contributions on their remuneration.
Individuals who provided their services on a consultancy or independent contractor basis, became employees of ESL and delivered their services to the end user through ESL.
The bulk of the remuneration for the individual’s services was paid by ESL to an offshore employee benefit trust from which the individuals requested and received loans.
Following previous High Court decisions, the intention was that ESL would have no liability to deduct income tax from the payments it made to the employee benefit trust. However, many years after the creation of ESL, the Supreme Court’s decision in RFC 2012 plc v AG for Scotland [2017] UKSC 45, held that Dextra Accessories Ltd v Revenue and Customs Comrs [2002] STC (SCD) 413 and Sempra Metals Ltd v HMRC [2008] STC (SCD) 1062 had been wrongly decided. As a result of the decision in RFC 2012, income tax on emoluments or earnings is due on money paid as a reward or remuneration for the exertions of the employee, no matter whether they are paid to the employee personally or via a third party, such as the trustee of a trust.
HMRC subsequently assessed ESL as being liable for income tax and national insurance contributions in an amount of over £2 million. ESL entered into a CVL, without appealing or making a payment under the assessment.
ESL’s Liquidator sought an order against 62 individuals, that the payments to workers constituted transactions defrauding creditors under section 423 of the Insolvency Act. By the time of trial, 23 Respondents remained. It was the Liquidator’s case that: -
- ESL’s scheme was a composite transaction at an undervalue within the meaning of section 423
- ESL entered each transaction for a purpose prohibited by section 423(3)
- The Court should exercise its discretion to make orders against the Respondents.
High Court Decision
At first instance, Mr Justice Rajah held that section 423(1) was made out and the transactions were at an undervalue. However, the Judge was not persuaded that ESL has entered the transaction for a prohibited purpose; he found that a transaction which was entered into with the intention that no tax liability should arise from it, was not an intention to prejudice a claim for that tax liability for the purposes of section 423(3)(b).
The Liquidator’s alternative case was that the Court should infer ESL had entered each transaction for the purposes of placing assets beyond the reach of HMRC. The Judge found there is a difference between a consequence and its purpose. The Liquidator had to show that a purpose of ESL in setting up the scheme, was that if it failed, its implementation would nevertheless impede HMRC from recovering tax.
However, there was no evidence of any such intention; the Liquidator failed to show that section 423(3) was satisfied.
The Liquidator appealed.
Court of Appeal Decision
The Court of Appeal dismissed the Liquidator’s appeal and upheld Mr Justice Rajah’s decision.
In his judgment, Newey LJ, with whom Lewison and Jeremy Baker LJJ unanimously agreed, concurred with paragraph 46(b) of Mr Justice Rajah’s judgment noting that the terms of section 423 did not support the Liquidator’s primary case.
Newey LJ added that
“Where a person succeeds in preventing a tax liability from arising, there will simply not be a person who “is making or may make” a claim with “interests” to be prejudiced.”
Newey LJ went on to note that the Liquidator was in effect seeking to construe section 423(3)(b)
“…as if it included the word “otherwise”, and so referred to prejudicing the interests of a person in relation to a claim “which he is making or may otherwise make”.
The Court of Appeal held that is not what section 423(3) (b) says.
The Liquidator failed on the alternative ground of appeal, namely that the ESL’s purpose in entering into each composite transaction was to make it more difficult for HMRC to recover tax in the event that the scheme was ineffective to avoid a liability to tax arising.
The Court of Appeal noted that there was no documentary evidence “recording, or even hinting at” the intention alleged by the Liquidator.
Newey LJ observed that whilst it was highly probable that ESL were aware that there was a chance that HMRC would try and challenge ESL’s scheme, it did not
“…automatically follow from either that [chance] or the use of an offshore trust that the scheme was structured as it was in order to make it more difficult for HMRC to recover tax should the scheme prove ineffective.”
Takeaways
This decision reiterates that for a section 423 application to succeed, the Court must be satisfied that the debtor “actually had the purpose” of either putting the assets beyond the creditor’s reach or prejudicing the interests of a creditor in relation to the claim which he is making. It is a subjective test, which was not made out in this case.
As an aside, had the Liquidator’s claim succeeded, it may well have fired the starting gun to bring actions against workers under arrangements similar to ESL’s scheme.
