HM Revenue & Customs (HMRC) has lost more than £800m – more than previously estimated – through a tax loophole open to abuse by small businesses in the UK.
The practice, known as ‘phoenixing‘, is where companies are repeatedly liquidate then set up as a new, identical, debt-free business.
The tax authority lost £836m to this practice in the 2022-23 tax year, the latest for which data is available, 45 per cent higher than the £570m estimated in previous reports.
HMRC put the loss down to pandemic-era delays in companies declaring insolvency.
Phoenixing accounted for around a fifth of HMRC’s tax losses i.e. money owed but unable to be collected, for 2022-23.
HMRC seeking to tackle ‘phoenixism’
The practice, which is particularly prevalent among retail firms, is illegal when used to avoid paying tax and other debts.
“If I have a building company and I go bust and I set up another building company, that is not a scam . . . But when someone does it deliberately to engineer an escape from their creditors, be it HMRC or anyone else, that is a scam,” Dan Neidle, founder of Tax Policy Associates, told the FT.
A National Audit Office (NAO) report on tax evasion last year found HMRC estimated a total of £5.5bn in losses from tax evasion between 2022 and 2023, with 81 per cent of the loss attributed to small businesses – a 66 per surge since 2019 to 2020.
Head of the audit office Gareth Davies, said at the time that HMRC have “too little emphasis” on fixing “widely used methods of evasion” like phoenixism.
In the spring statement in March, Chancellor Rachel Reeves vowed to “tackle ‘phoenixism’” and set out a joint campaign between HMRC, corporate registry Companies House and the Insolvency Service.
Measures being implemented by the group include increased demands for payments upfront, greater use of enforcement sanctions and making more directors liable for their company’s taxes.
An HMRC spokesperson said: “As the Chancellor announced in her Spring Statement, the government is taking action to improve collaboration between HMRC, Companies House, and the Insolvency Service to tackle those using contrived corporate insolvencies and dissolutions – so-called ‘phoenixism’ – to evade tax.”
