Purkiss v Kennedy & Ors ([2025] EWCA Civ 268): Redefining the Limitations on Tax Mitigation under Section 423 of the Insolvency Act 1986

Introduction

In the landmark case of Purkiss v Kennedy & Ors ([2025] EWCA Civ 268), the England and Wales Court of Appeal (Civil Division) revisited the application of section 423 of the Insolvency Act 1986 in the context of transactions designed to avert tax liabilities. Central to the proceedings were questions regarding whether the Company, Ethos Solutions Limited, had deliberately structured its arrangements so as to prevent an income tax and national insurance contributions (NIC) liability from arising. The case involved a complex tax avoidance scheme whereby services rendered by employees were rechanneled through a trust arrangement – the Ethos Solutions Ltd Business Bonus Trust – thereby raising issues under the statutory framework for transactions that are entered into at an undervalue. The dispute was initiated by the liquidator, who sought recovery of amounts that should have been deducted and paid to HM Revenue and Customs (HMRC), contending that the scheme was devised with a prohibited purpose under section 423(3) of the 1986 Act.

Key parties in this dispute include Ethos Solutions Limited (the Company), its directors (including Mr Justin Webster and Mr Jeremy Clark), various respondents involved in the scheme, and HMRC whose challenge ultimately shaped the interpretative framework adopted by the court. The scheme was marketed with assurances that the loans provided by the trust would not be taxable benefits. However, its operation resulted in payments made without the necessary deductions, a fact that later gave rise to significant tax liabilities.

Summary of the Judgment

The Court of Appeal, with unanimous agreement from Lord Justice Newey, Lord Justice Jeremy Baker, and Lord Justice Lewison, dismissed the liquidator's appeal. The trial judge had determined that while the transactions entered into by Ethos Solutions Limited were, in effect, at an undervalue – thus contributing to the Company’s insolvency – the evidence was insufficient to establish that the Company had a “prohibited purpose” under section 423(3) of the Insolvency Act 1986. Specifically, it was held that preventing a tax liability from arising, a fundamental characteristic of legitimate tax planning, did not fall within the ambit of transactions designed to prejudice the interests of HMRC. Consequently, the Company’s arrangement, despite its artificial structure and reliance on an offshore trust, did not contravene the specific prohibitions of section 423 as interpreted by the judge.

The judgment was supported by detailed analysis of the statutory framework and a careful evaluation of the evidence relating to the Company’s intentions. In both its primary case (that the scheme was structured to prevent HMRC from asserting a claim) and its alternative case (that the scheme was intended to impede recovery if a tax liability arose), the liquidator’s argument was found lacking. Accordingly, the appeal was dismissed.

Analysis

Precedents Cited

The judgment made extensive use of earlier decisions to contextualize the application of section 423. Prominent among the precedents were:

El-Husseiny v Invest Bank PSC [2025] UKSC 4: This case clarified that the court’s inquiry under section 423 must focus on the debtor’s actual subjective purpose rather than what a reasonable person might infer. This established that actual intention—especially in the context of preventing a claim—must be proven.
Hill v Spread Trustee Co Ltd [2006] EWCA Civ 542: Arden LJ emphasized that the debtor’s intention to place assets beyond the reach of creditors must be positively demonstrated. The requirement that a transaction be entered into “for the purpose” of frustrating a claim was reaffirmed in this case.
Inland Revenue Commissioners v Hashmi [2002] EWCA Civ 981: Here, the court explained that the purpose behind a transaction – if proven as a deliberate scheme – must be specific and intentional, rather than a mere consequence.
JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176: This recent precedent supported the notion that a transaction that includes any element of a prohibited purpose (even if alongside legitimate reasons) can fall within the scope of section 423, as long as it meets the necessary threshold.

The court also referenced earlier cases like Dextra Accessories Ltd and Sempra Metals Ltd, alongside the guiding principles from IRC v Duke of Westminster and IRC v Brebner on the legitimacy of tax mitigation measures. These citations provided the framework to contrast acceptable tax planning with unacceptable tax avoidance.

Legal Reasoning

The Court’s legal reasoning was multifaceted. The core objective of section 423 of the Insolvency Act is to ensure that debts are satisfied before entering into transactions akin to gifts or other transfers at an undervalue. The judgment carefully distinguished between:

Preventing a tax liability from arising – a central feature of legitimate tax planning, and
Prejudicing the interests of a creditor (in this case, HMRC) – which requires the transaction to be entered into with the explicit aim of frustrating a claim that is either current or may become forthcoming.

The judge reasoned that a scheme structured to avoid the accrual of tax liabilities does not necessarily prejudice HMRC’s interests because, if no liability arises, no claim will exist. Transposing the test for a prohibited purpose to include all forms of tax mitigation would, as noted in the judgment, lead to the anomalous result where even legitimate tax planning would be rendered illegal. Hence, the court required that the intention must specifically aim at frustrating a claim rather than merely preventing a debt.

Additionally, while the liquidator attempted to support an alternative argument—that the Company’s arrangement was designed to create obstacles for HMRC in the event of an adverse ruling—the evidence, including internal communications and correspondence with HMRC, was judged insufficient. The judge highlighted the absence of clear documentary evidence of an intention to withhold information or impede recovery actions by HMRC, underscoring that the mere use of an offshore trust did not automatically imply a prohibited motive under section 423.

Impact on Future Cases and the Relevant Area of Law

The decision in Purkiss v Kennedy & Ors establishes a significant legal precedent that will likely influence future insolvency and tax avoidance cases. The core impact is twofold:

Clarification of Section 423: The ruling delineates the limits of section 423 by affirming that not all transactions aimed at reducing tax liabilities qualify as having a “prohibited purpose.” This nuanced interpretation distinguishes genuine tax mitigation from arrangements that contravene the statutory prohibition against defrauding creditors.
Guidance on Evidentiary Requirements: Future cases will need to meet a high evidentiary threshold to demonstrate that a transaction was entered into for the express purpose of prejudicing a creditor’s ability to claim. The emphasis on establishing the debtor’s subjective intention clearly sets a more rigorous standard for liquidators and HMRC.

Moreover, this judgment reinforces the longstanding principle that while tax planning activities may be complex or even artificial in structure, they are not automatically deemed fraudulent under insolvency law—provided that they do not deliberately seek to frustrate creditor claims.

Complex Concepts Simplified

To aid understanding, several complex legal distinctions were clarified in this Judgment:

Undervalue Transaction: A transaction is considered “at an undervalue” when the value received by the debtor is significantly less than that given. In this case, the incoming administration fee was substantially lower than the outgoing liability incurred by the Company.
Legitimate Tax Mitigation vs. Prohibited Tax Avoidance: The court distinguished between acceptable tax planning—where the objective is simply to reduce the tax burden—and prohibited conduct where the sole or primary purpose is to prevent a potential creditor’s claim. Preventing a debt from arising is not the same as deliberately impeding recovery.
Subjective Intention Requirement: The cases cited emphasized that it is the debtor’s genuine, intended purpose that is determinative, rather than merely the outcomes of the transaction. This means that unless clear evidence shows that the scheme was designed to frustrate a creditor’s claim, the transaction remains within the bounds of acceptable legal practice.

These clarifications ensure that while creditors can challenge genuinely abusive transactions, the law does not penalize all forms of tax efficiency.

Conclusion

The judgment in Purkiss v Kennedy & Ors marks an important development in insolvency and taxation law by setting clear boundaries on what constitutes a “prohibited purpose” under section 423 of the Insolvency Act 1986. The Court of Appeal ruled that the Company’s arrangement—even if artificially structured and involving an offshore trust—did not evidence a deliberate intention to prejudice HMRC’s interests by frustrating a potential claim. Instead, the measure was part of a tax planning strategy arguably inherent in legitimate tax mitigation.

The key takeaway for legal practitioners, liquidators, and HMRC is that while the law remains vigilant against abusive transactions that cheat creditors, it also protects legitimate methods of reducing tax liability. Future cases will likely reference this decision when evaluating whether a transaction was entered into with the sole purpose of frustrating creditor claims or was simply a well-executed tax management strategy.

In sum, Purkiss v Kennedy & Ors both reinforces and refines the legal framework governing transactions at an undervalue, ensuring that the statutory principle of “debts must be paid before gifts are made” is applied in a manner consistent with modern commercial practices.