HMRC adds a new tool to its enforcement belt: public interest winding-up

HMRC v Purity Limited [2025]  (“Purity”) marks the first successful use of HMRC’s new power under section 85 of the Finance Act 2022, to seek the compulsory winding up of a company on public interest grounds. Andrew de Mestre KC’s judgment provides important early guidance on the scope of this power and importantly confirms that HMRC is not required to establish a final tax liability before invoking it. Ultimately, the focus is on whether the company’s conduct as a promoter of tax avoidance means that it is just and equitable for the business to be brought to an end. Purity marks the first successful use of this new power, designed to strengthen HMRC’s ability to intervene meaningfully against avoidance models and  forms part of ever-increasing powers available to HMRC to tackle promoters of tax avoidance.

Legislation

Section 85 of the Finance Act 2022 gives HMRC the power to petition for the winding up of a company, where it appears expedient in the public interest, and for the protection of the public revenue. The power is targeted at promoters of tax avoidance schemes (“POTAS”) and is linked directly to the existing POTAS regime under Part 5 of the Finance Act 2014. The court is able to order the winding up in cases where it finds it just and equitable to do so.

The Section 85 power applies to any ‘relevant body’ which means a body, including a partnership, that carries on a business as a promoter within the meaning of Part 5 of Finance Act 2014. It also applies to connected entities and specifically extends to arrangements involving indirect taxes.

In such petitions brought by HMRC, it is for the court to determine whether it is just and equitable for the relevant body to be wound up. Early guidance from the court confirms that in reaching their conclusion, they will consider the totality of the evidence before it and balance any competing reasons why the company should or should not be wound up.

Purity Limited

Purity Limited operated as an umbrella company whose business involved acting as employer for individual workers engaged via employment agencies. Roughly 90% of the workers were paid under a structure combining a minimum wage PAYE salary, with the balance of their earnings paid as an advance through purported loans. HMRC took issue with this aspect of the business.

The appeal of the arrangement was founded in the significant reduction of PAYE and NIC deductions. HMRC calculated that in a single calendar year through to August 2023, Purity made loans of £45m, liable to over £20m in tax payable.

HMRC presented its petition on three principal grounds:

1. The arrangements caused substantial detriment to the public revenue
2. The arrangements involved a lack of transparency, such as inconsistent and misleading explanations being given to workers about the arrangements and steps taken to discourage cooperation with HMRC’s enquiries
3. Purity represented a continuation of materially similar arrangements previously operated by Alpha Republic (of which a number of the same individuals and entities were involved), which had ceased trading following HMRC intervention.

The court accepted that each of these grounds, when taken together, engaged the public interest and demonstrated that it was just and equitable for Purity to be wound up under section 85 of the Finance Act 2022.

The principal legal question addressed by HMRC was whether or not it must demonstrate that the relevant arrangements promoted by the subject of the petition do not work and, therefore,  there has (definitively) been a loss to the public revenue. This is an important point as it determines at what stage HMRC can invoke this new power and whether it can be used as an early tool in investigations into promoters of tax avoidance. Although this was not directly relevant to the facts of Purity as it could be established here that it had substantial liability to HMRC, the judge nonetheless considered the point for the benefit of future cases. The court agreed that section 85 did not require HMRC to prove that a scheme has failed or more pertinently, that a final tax liability has been established.

The Section 85 provision is designed to be deployed as a preventative enforcement tool, allowing HMRC to intervene where a business model poses a real risk to the public revenue, rather than waiting for the conclusion of lengthy tax disputes. The Section 85 power is also drafted wide enough to be available to HMRC in a range of circumstances, not just where HMRC can assert and prove that the arrangements were not effective.

Effect of the decision in strengthening HMRC’s powers

The Purity decision confirms that section 85 Finance Act 2022 significantly enhances HMRC’s ability to disrupt tax avoidance at an operational level, rather than posing challenges against individual schemes or assessments. HMRC may deploy the section 85 power without awaiting the outcome of underlying tax disputes, allowing it to interrupt the ongoing operation of avoidance models where they pose a continuing risk to the public revenue. The decision signals a more aggressive and preventative approach by HMRC in tackling tax avoidance scheme operators, thus combining existing powers with the use of insolvency powers.

The availability of compulsory winding up also brings with it the full scope of investigative powers, akin to that of an official liquidator. In addition, a winding-up order under section 85 will engage the director disqualification regime, including the potential for mandatory disqualification applications by HMRC. This reinforces personal accountability and signals that the consequences of promoting tax avoidance schemes extend beyond the corporate entities. It is anticipated that this will effect change in acting as a key deterrent to individuals operating tax avoidance schemes.

The section 85 power forms part of an expanding suite of powers available to HMRC designed to tackle those involved in the promotion of tax avoidance. This has been a key priority for the government for many years, who are seeing tangible success from their efforts with the amount of revenue lost to marketed tax avoidance having fallen from an estimated £1.5 billion in the tax year 2005 to 2006 to £0.5 billion in the tax year 2021 to 2022.