Tax avoidance scheme was not a transaction defrauding creditors

The liquidators of a company set up to operate an EBT tax avoidance scheme brought claims under s.423 IA 1986, alleging that the transactions had been entered into for the purpose of putting assets beyond the reach of HMRC.

At first instance the judge dismissed the claim, deciding that the purpose of the transactions was not to put assets out of reach, but to prevent a liability arising to HMRC at all.

On appeal, the liquidators argued that the judge had been wrong to hold that the purpose of preventing HMRC from making a claim was not a prohibited purpose, and that he should have concluded that the company's purpose was to make it more difficult for HMRC to recover tax if the scheme was ineffective.

The Court of Appeal dismissed the appeal. The principle behind s.423(3) was that debts had to be paid before gifts could be made. That principle was not offended where a person acted to stop a debt coming into existence. The appellant's case would mean that any steps taken to minimise tax, and all legitimate tax avoidance, would be a prohibited purpose, which would be a remarkable outcome. 

The trial judge had found that there was no evidence of an intention to make it more difficult for HMRC to recover tax if the scheme was ineffective. It was highly probable that the company's directors were aware that there was a chance that HMRC would seek to challenge its scheme, but it did not automatically follow from that or from the use of an offshore trust that the scheme was structured to make it more difficult for HMRC to recover tax if the scheme was ineffective. The judge’s conclusions were rationally supportable and were not open to challenge.

Purkiss v Kennedy [2025] EWCA Civ 268.

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