Purkiss (as Liquidator of Ethos Solutions Limited) vs. Kennedy & Others – High Court – [2024] EWHC 1081 (Ch) – Case Summary

This case concerned the liquidator of Ethos Solutions Limited seeking orders under section 423 Insolvency Act 1986 against individuals who participated in a tax avoidance scheme. The scheme involved remuneration payments to an offshore trust, intended to avoid income tax and national insurance contributions, which was later deemed ineffective by the Supreme Court in a precedent case. The liquidator argued that the transactions were at an undervalue and for a prohibited purpose, thereby prejudicing the interests of HMRC. The respondents disputed the claims, leading to a trial to determine the legitimacy of the transactions and the applicability of section 423.

TLDR:

• The liquidator of Ethos Solutions Limited initiated proceedings against participants in a tax avoidance scheme.
• The scheme was designed to avoid income tax and NIC through payments to an offshore trust.
• The Supreme Court had previously ruled in a similar case that such schemes were ineffective.
• The liquidator claimed the transactions were at an undervalue and for a prohibited purpose under section 423 Insolvency Act 1986.
• The respondents contested the liquidator's claims, leading to a trial.
• The court had to determine whether the transactions were at an undervalue and if the company had a prohibited purpose.

The factual background of the case involves Ethos Solutions Limited, an umbrella company promoting a tax avoidance scheme. The company's strategy was to have individuals become employees and receive most of their earnings as 'loans' from an offshore trust, aiming to avoid tax liabilities. After HMRC assessed the company with a substantial tax and NIC liability, the company entered into creditor's voluntary liquidation without addressing the assessment or appealing.

The liquidator's case hinged on the argument that the transactions were at an undervalue and carried out with the prohibited purpose of avoiding tax, thus prejudicing HMRC's interests. The respondents accepted the scheme as a composite transaction but denied that it was at an undervalue or for a prohibited purpose. The court's analysis focused on whether the scheme resulted in the company receiving less consideration than the liabilities it accrued and if the primary purpose was to evade HMRC's claims.

The court concluded that the transactions were indeed at an undervalue, as the company incurred a tax liability significantly exceeding the sum received for the transactions. However, the court did not find a prohibited purpose as per section 423(3) of the Insolvency Act 1986. The intention to minimize tax liability did not equate to an intention to prejudice the interests of HMRC. Consequently, the court dismissed the liquidator's application.

The case highlights the complexities surrounding tax avoidance schemes and the legal interpretations of transactions at an undervalue and prohibited purposes within insolvency proceedings.

Legal representatives: Hugh Sims KC and Simon Passfield KC (instructed by Clarke Willmott LLP) for the Applicant. Mr Setu Kamal for the Respondents.

Judicial Panel: The Honourable Mr Justice Rajah

Case Citation Reference: [2024] EWHC 1081 (Ch)