How Failing Companies Dodge Tax Via ‘Phoenixing’ 

A rising follow, often known as ‘phoenixing’, is costing HMRC hundreds of thousands in misplaced tax income, the Monetary Instances reviews.

The time period refers back to the tactic of repeatedly liquidating a restricted firm after which re-registering underneath a brand new title, generally intentionally, to dodge tax payments and different money owed. One seen instance is likely to be the fixed churn of candy outlets on Oxford Road.

The impression of this phenomenon on HMRC is critical. Within the 2022–23 tax 12 months alone, phoenixing firms accounted for an estimated £836 million in misplaced income—the newest 12 months with accessible knowledge.

What’s phoenixing?

Phoenixing is a phenomenon the place firm administrators liquidate a failing enterprise and instantly arrange a brand new one underneath a distinct title. Basically, they’re providing the identical items or companies and following the identical enterprise mannequin, simply with a recent id.

Many phoenixing firms do that intentionally to keep away from paying taxes or different money owed, which frequently go unpaid as a result of the previous firm’s belongings have been dissolved. Unsurprisingly, HMRC finally ends up feeling the impression.

When accomplished deliberately, phoenixing is against the law and regarded tax evasion. Administrators caught within the act can face disqualification, prosecution, and reputational harm, penalties that can take greater than a reputation change to repair.

Which firms are phoenixing?

Phoenixing can occur in any sector, however a typical real-world instance is a number of of the US-themed candy outlets you would possibly see strolling down Oxford Road. 

It’s additionally frequent in building and retail companies. These industries typically have excessive turnover, tight margins, and a enterprise mannequin that may be simply re-established, making them extra liable to phoenixing.

It’s essential to notice, nonetheless, that not each enterprise that rises from the ashes counts as phoenixing. Real closures and restarts occur on a regular basis, for instance, when entrepreneurs pivot, restructure, or launch new ventures. 

Serial entrepreneurs are free to legally begin new companies, however they need to ensure to not seem as if they’re “dumping” money owed by leaving liabilities behind within the previous firm.

Insolvency vs liquidation – what’s allowed?

It’s simple to combine up insolvency and liquidation, however they’re two separate issues. 

Insolvency occurs when an organization can’t pay its money owed when they’re due, whereas liquidation is the formal means of closing an organization and distributing its remaining belongings. 

In each instances, administrators have authorized duties to behave responsibly, prioritise collectors, and keep away from taking shortcuts that would break the regulation.

Legally, administrators are inside their rights to begin a brand new enterprise after submitting for insolvency. Nevertheless, there are guidelines: you’ll be able to’t reuse the identical or a really comparable firm title inside 5 years with out permission from the court docket.

For SMEs, the most secure method is to hunt skilled recommendation, keep clear information, and avoid taking shortcuts. Following the foundations protects each your enterprise and popularity, plus it retains you on the correct aspect of HMRC and the regulation.