Case Digest No. 6 · Contentious insolvency
Section 423 purposes, tax mitigation and appellate review
Purkiss v Kennedy & Ors (Re Ethos Solutions Ltd) [2025] EWCA Civ 268
The Court of Appeal held that entering into a transaction to ensure that a liability does not accrue does not, without more, involve a prohibited purpose under section 423(3) of the Insolvency Act 1986.
Court of Appeal
[2025] EWCA Civ 268
March 2025
Decision at a glance
The question, answer and consequence.
- Legal question
- The central issue was section 423 purposes, tax mitigation and appellate review.
- Court's answer
- The Court of Appeal held that entering into a transaction to ensure that a liability does not accrue does not, without more, involve a prohibited purpose under section 423(3) of the Insolvency Act 1986.
- Practical consequence
- The case illustrates the distinction between legitimate tax planning and the prohibited purpose required by section 423, together with the limits of appellate intervention in evaluative findings. It is particularly relevant when purpose must be inferred from a transaction's context.
Factual background
Ethos Solutions Limited (“the Company”) operated as a tax avoidance scheme designed to enable self-employed individuals to reduce the income tax and national insurance contributions payable on their remuneration. Soon after the Company began trading, however, HMRC started to publish statements that it considered arrangements such as the Company had adopted to be ineffective to avoid tax. HMRC issued determinations assessing the Company as liable for income tax and national insurance contributions and, subsequently, the Company went into creditors’ voluntary liquidation without either making any payment to HMRC or seeking to appeal. This was followed by HMRC submitting a proof of debt. The Company’s then liquidator sought orders under section 423 IA 1986. The Judge dismissed the claim and the subsequently appointed liquidator, Purkiss (“the Liquidator”), challenged the
Issue
The central issue was section 423 purposes, tax mitigation and appellate review.
Procedural history and reasoning
in the Court of Appeal. [2025] EWCA Civ 268 KEY TAKEAWAYS: Entering into a transaction in order to ensure that a liability does not accrue does not involve a section 423(3) Insolvency Act 1986 “purpose”. 1. Parliament is unlikely to have intended s423 to extend to commonplace “tax mitigation” which is not generally considered to be objectionable. 2. The circumstances in which an appellate court is justified in interfering with a finding of fact made by a trial judge are limited to when the court feels “compelled to do so” or where the judge’s conclusions are “rationally insupportable”. 3. The fact that it is quite possible that a different judge would have made different findings does not matter when considering the trial judge’s conclusions. 4. FIRST INSTANCE DECISION The Judge was satisfied that the transactions were “at an undervalue” within the meaning of section 423 IA 1986. The Company “was in a worse position as a result of entering into each Transaction than it would have been had it not entered into that Transaction in the first place”.
The Judge was not, however, persuaded that the Company had entered into the transactions for a prohibited “purpose” as per s423(3) 1A 1986. THE LIQUIDATOR’S PRIMARY CASE “The Company had a prohibited purpose because the Company entered into the Transaction in the mistaken belief that the Respondents could thereby avoid a liability to income tax and NIC from the remuneration for their services to end uses”. It had been argued on behalf of the Liquidator that “an intention to prevent a tax liability arising is an intention to prejudice the interests of HMRC in respect of the hypothetical claim for the tax liability which is avoided”. THE LIQUIDATOR’S ALTERNATIVE CASE The Court should infer that the Company had entered into each transaction for the purpose of placing assets beyond the reach of HMRC. What had to be shown was that “a purpose of the Company in setting up the scheme was that, if it failed, its implementation would nevertheless impede HMRC from recovering tax due to HMRC”. The Judge did not accept that this had been established.
APPEAL The Liquidator challenged the Judge’s conclusions on both his primary and alternative case.
Decision and key points
The Court of Appeal held that entering into a transaction to ensure that a liability does not accrue does not, without more, involve a prohibited purpose under section 423(3) of the Insolvency Act 1986.
- Entering into a transaction in order to ensure that a liability does not accrue does not involve a section 423(3) Insolvency Act 1986 “purpose”.
- Parliament is unlikely to have intended s423 to extend to commonplace “tax mitigation” which is not generally considered to be objectionable.
- The circumstances in which an appellate court is justified in interfering with a finding of fact made by a trial judge are limited to when the court feels “compelled to do so” or where the judge’s conclusions are “rationally insupportable”.
Why this decision matters
The case illustrates the distinction between legitimate tax planning and the prohibited purpose required by section 423, together with the limits of appellate intervention in evaluative findings. It is particularly relevant when purpose must be inferred from a transaction's context.
Particularly relevant to: Office-holders, tax advisers, directors, creditors and insolvency litigators.