The Commissioners for His Majesty’s Revenue And Customs v Purity Limited

After outlining the statutory scheme, the deputy judge turned to what he regarded as the main legal question arising on such a petition, namely whether HMRC had to demonstrate that the arrangements promoted by the body that was the subject of the petition did not work and that there had been a loss to the public revenue. That question was not strictly in issue on the petition before the deputy judge because HMRC had already established that the company had substantial PAYE and NIC liabilities to HMRC arising from the failure of its tax-related arrangements (which it used itself as well as making them available more widely). He decided nonetheless to deal with the point “as the scope of s 85 is an issue which may arise on a future petition and as the argument was explored before me.”

His starting point was the language of s 85 which, in his view, did not presuppose the existence of a tax liability as a pre-requisite of the ability to present a petition or that of the court to make a winding up order. “Rather,” he said, “the more general wording described above is used and it is left to the Court to determine, on the evidence before it, whether it is just and equitable to wind up the subject of the petition. Of course, it will often be the case that HMRC does allege in the petition that the tax arrangements are ineffective or even that the relevant body has itself incurred a tax liability (as here), but it is not, it seems to me, a requirement.”

The deputy judge went on to conclude that, apart from the broad language of s 85, the nature of the promotion of tax avoidance schemes within the scope of Part 5 Finance Act 2014, and what he described as “the background materials” (a consultation paper of 23 March 2021 entitled Clamping down on promoters of tax avoidance and the responses) made clear that s 85 was directed at “a range of potential circumstances and not just a case in which HMRC can assert and prove that the relevant arrangements were not effective.”

In the present case HMRC relied on three grounds on which the company, Purity Ltd, should be wound up:

1. the company’s operations had resulted in a substantial loss of tax to the detriment of the public revenue;
2. it had demonstrated a lack of transparency with regard to its employees and HMRC (employees had been given a variety of inconsistent explanations when they asked about the nature of their tax arrangements, appeared to have been misled or misinformed about those arrangements, and had been encouraged not to assist HMRC or provide them with information);
3. its business had been a continuation of the business of another company which had been abandoned following an investigation by HMRC and following which it had gone into creditors’ voluntary liquidation.

The deputy judge was satisfied that each of those grounds had been made out and, whether looked at individually or taken together, justified the conclusion that it was just and equitable to wind up the company in the public interest. He went on to make the usual compulsory order, notwithstanding the fact that Purity was also in creditors’ voluntary liquidation, giving the following reasons for doing so:

1.  He followed the decision in Re Alpha Club Ltd [2002] EWHC 884 in which the company had been wound up in the public interest even though it was in voluntary liquidation and the factors relied on in that case, including the need for an investigation by an independent office-holder; the desirability of sending a message that the type of business being conducted was not acceptable; and the availability of wider powers to a compulsory liquidator where suspected offences were involved:

“I consider that these considerations apply with similar force in the case of Purity, particularly the need to make it clear to promotors of tax avoidance scheme that they can and will be made subject both to scrutiny by the Court on a winding up petition and, if winding up is justified, to the full powers available to a compulsory liquidator. These powers cannot be avoided by the simple expedient of stopping the company’s business, appointing a voluntary liquidator (who may well not have the funds to investigate historic events), and moving on.”

1. He also identified the availability of relief under the Company Directors Disqualification Act 1986 as a relevant factor, in particular the provision made by s 8ZF for possible compulsory disqualification in respect of a director or shadow director of a company wound up under s 85 Finance Act 2022. “It is plainly desirable,” he said, “that this provision is available where the grounds for such a winding up are present and it would be wrong for the effect of this statutory provision to be avoided by a voluntary liquidation.”

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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