Carey Street Investments Ltd (In Liquidation) v Brown [2024] EWCA Civ 571
In the recent case of Carey Street Investments Ltd (In Liquidation) v Brown, the Court of Appeal ruled that the trial judge had been correct in finding that there was no evidence the director of two companies had, in breach of his director’s duties and with a view to evading corporation tax on capital gains, agreed to the transfer of two London properties to their parent companies at a substantial undervalue.
Carey Street Investments Ltd (In Liquidation) v Brown deals with two vitally essential matters directors of companies must concern themselves with, namely directors’ duties and tax law, particularly the difference between tax avoidance and tax evasion (the former being legal, the latter carrying a custodial sentence).
Before looking at the facts of Carey Street Investments Ltd (In Liquidation) v Brown, it is helpful to outline the law briefly as it relates to tax evasion.
What is tax evasion?
Tax evasion is the deliberate non-payment of tax, for example, not declaring taxable income and accepting cash-in-hand payments. This is in contrast to tax avoidance, which involves averting paying taxes through legal methods, such as setting up offshore companies or trusts to avoid paying UK taxes.
The Taxes Management Act 1970 (TMA 1970) provides for the offence of income tax evasion. Section 106A states that a person commits an offence if they are knowingly concerned about the fraudulent evasion of income tax by themselves or another person. The offence does not apply to things done or omitted before 1 January 2001.
Other ways a person can defraud HMRC or the Department for Work and Pensions (DWP) include:
- Making a false statement (whether written or not) relating to income tax.
- Delivering (or causing to be delivered) a false document relating to income tax.
- Failing to account for VAT.
- Withholding PAYE and National Insurance.
- Failing to register for VAT.
- Failing to disclose income.
Along with statutory offences, there is a common law offence of cheating the public revenue.
The majority of tax evasion offences require individuals to engage in fraudulent conduct, implying an act of dishonesty. This might involve using false invoices to decrease the taxable profits of a business or knowingly understating income in an annual return.
The test for dishonesty is:
- What was the Defendant’s actual state of knowledge or belief as to the facts?
- Irrespective of the Defendant’s belief about the facts, was their conduct dishonest by the objective standards of ordinary decent people?
Dishonesty is a key element of tax evasion offences and must be proved if the Prosecution is to achieve a criminal conviction.
The facts in Carey Street Investments Ltd (In Liquidation) v Brown
The Claimant companies were both in liquidation and owed substantial debts to HMRC. They brought a claim against the director of both companies, alleging he had transferred property to their parent companies at a substantial undervalue in breach of his director’s duties with a view to evading tax.
The claim was time-barred unless section 21 of the Limitation Act 1980 applied. Section 21 provides that generally, the limitation period for breach of trust is six years from the date of breach.
Mr Robin Vos sitting as a Deputy High Court Judge dismissed the claim.
On appeal, the Court concluded that the Deputy High Court Judge reasoned that the properties were transferred at what the Director believed were the correct market values. He therefore made findings of fact taking this into consideration. Looking at the judgment as a whole, it was clear that the Deputy High Court Judge did not proceed on the basis that there was no possibility of the Director having been dishonest. Instead, he reasoned that upon examination of the Director’s motivations as a whole, that the Director acted in a way that he believed was in the Claimant companies’ best interests.
The Court of Appeal concluded that it had no basis to interfere with the Deputy High Court Judge’s decision. It was also unable to contradict his decision that the Director did not deliberately organise independent valuations of the properties in question out of fear that this would confirm they were worth more than he sold them for.
Final words
Although the Court of Appeal acknowledged that a different judge may have come to an alternative conclusion on the facts, it was not for the Court of Appeal to contradict Mr Vos’s findings. This case highlights that an appeal court cannot overturn a lower court’s decision merely because it might have reached a different conclusion given the factual circumstances. Instead, there must be some mistake in the way the law was applied or the law itself to justify such a decision.
To find out more about how our Company Law Solicitors can help you with disputes regarding directors’ duties, tax evasion allegations, or any other company law matter, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.
Note: The points in this article reflect sanctions in place at the time of writing, 30 November 2024. This article does not constitute legal advice. For further information, please contact our London office.
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