HM Revenue & Customs (HMRC) has reported a loss exceeding £800 million due to a tax loophole exploited by small businesses in the UK, known as ‘phoenixing’. This practice involves companies repeatedly liquidating and then reforming as new, identical, debt-free entities.
In the 2022-23 tax year, HMRC lost £836 million to this practice, marking a 45 per cent increase from the £570 million previously estimated. The tax authority attributes this loss to delays in insolvency declarations during the pandemic era. Phoenixing accounted for approximately 20 per cent of HMRC’s uncollected tax losses for that period.
The practice of phoenixing, particularly prevalent among retail firms, is illegal when used to evade tax and other debts. Dan Neidle, founder of Tax Policy Associates, explained that while starting a new company after a legitimate business failure is not inherently fraudulent, deliberately doing so to evade creditors, including HMRC, constitutes a scam.
A report by the National Audit Office (NAO) last year revealed that HMRC estimated total losses from tax evasion at £5.5 billion between 2022 and 2023, with 81 per cent attributed to small businesses. This represents a 66 per cent increase since the 2019-2020 period. Gareth Davies, Head of the NAO, noted that HMRC places too little emphasis on addressing common evasion methods like phoenixism.
In the spring statement in March, Chancellor Rachel Reeves committed to tackling ‘phoenixism’ through a joint campaign involving HMRC, Companies House, and the Insolvency Service. The measures being implemented include increased demands for upfront payments, greater enforcement sanctions, and holding more directors accountable for their companies’ taxes.
