In November 2025, the UK government announced a joint strategy involving HMRC, the Insolvency Service, and Companies House to tackle contrived insolvencies and the growing misuse of phoenix companies. The initiative represents a significant shift in how government departments investigate businesses that repeatedly close to avoid paying tax and other liabilities.
While genuine business failures are an unavoidable part of the commercial landscape, authorities are becoming increasingly concerned about directors who deliberately abandon companies with outstanding debts and then continue trading through a newly established business.
The government’s latest measures are designed to strengthen enforcement, improve information sharing, and hold directors accountable for tax avoidance schemes that rely on repeated company closures.
What Is a Phoenix Company?
A phoenix company is a new business that emerges after an existing company has been liquidated or dissolved, often operating in substantially the same way as the previous company.
Typically, the new company may have:
- The same directors or shareholders.
- The same business activities.
- The same customers and suppliers.
- Similar assets and trading arrangements.
- The same or a very similar company name.
The practice is commonly known as phoenixism because the new company appears to rise from the ashes of the previous business.
Importantly, creating a new company after closing an old one is not automatically illegal. Business owners may legitimately close an unsuccessful company and start a new venture.
However, problems arise when directors intentionally use insolvency procedures to avoid paying creditors, particularly HMRC, while continuing to operate essentially the same business.
Why Do Some Directors Use Phoenix Companies?
One of the primary reasons behind phoenixing is the potential tax advantage associated with closing a company.
Normally, company profits are distributed to shareholders as dividends, which are subject to dividend tax rates. In some cases, these rates can reach 39.35%.
However, when a company is formally wound up, distributions to shareholders are usually treated as capital distributions rather than income. This means they may be taxed under Capital Gains Tax (CGT) rules, where the highest rate is currently 24%.
The difference between dividend tax rates and CGT rates can create a significant tax-saving opportunity.
Some business owners have attempted to take advantage of this by:
- Closing an existing company.
- Receiving the company’s retained profits as a capital distribution.
- Paying tax at the lower CGT rate.
- Starting a new company that continues the same business activities.
HMRC considers this arrangement to be a form of tax avoidance when the main objective is to convert income into a capital gain.
Business Asset Disposal Relief (BADR)
The tax advantage can become even more attractive when Business Asset Disposal Relief (BADR) applies.
BADR reduces the tax payable on qualifying gains arising from the disposal of business assets. Although the relief has become less generous in recent years, the current 18% tax rate may still provide a considerable saving compared with dividend taxation.
This difference in tax treatment is one of the main reasons why HMRC closely monitors company liquidations followed by the creation of near-identical businesses.
The Targeted Anti-Avoidance Rule (TAAR)
To prevent directors from using company liquidations to obtain tax advantages, HMRC introduced the Targeted Anti-Avoidance Rule (TAAR).
Under these rules, HMRC can treat liquidation proceeds as income rather than capital gains if the company closure is primarily intended to reduce an individual’s income tax liability.
The TAAR applies when all four conditions below are satisfied.
Condition A: Ownership Requirement
The individual receiving the distribution must have held at least a 5% interest in the company immediately before the winding-up process began.
Condition B: Close Company Requirement
The company must have been a close company at some point during the two years before the winding up.
Condition C: Continuing Business Activities
The individual must continue to carry on, or become involved in, the same or a similar trade within two years of receiving the distribution.
Condition D: Tax Avoidance Purpose
It must be reasonable to conclude that one of the main purposes of the winding up was to avoid or reduce an income tax liability.
HMRC examines both the circumstances surrounding the liquidation and the events that occur after the company has been dissolved.
If the tax authority determines that the liquidation was primarily designed to achieve a tax advantage, the proceeds may be reclassified as income and taxed accordingly.
HMRC’s Increased Focus on Directors
Traditionally, a limited company is responsible for its own debts, including unpaid taxes.
However, HMRC already has powers that allow it to pursue directors personally in specific circumstances.
One of these powers involves issuing a Joint and Several Liability Notice (JSLN).
A director may become personally responsible for company tax debts if HMRC believes there has been:
- Repeated tax avoidance.
- Deliberate tax evasion.
- A pattern of phoenix company activity.
- Multiple company failures involving unpaid tax liabilities.
The government’s new strategy indicates that these powers may be used more frequently in the future.
Security Deposits for High-Risk Businesses
HMRC also plans to expand the use of security deposits for businesses that are considered high risk.
These deposits may be required to cover future liabilities, including:
- VAT.
- PAYE.
- National Insurance contributions (NICs).
- Other tax obligations.
A company that continues trading after being instructed to provide a security deposit but fails to do so could be committing a criminal offence.
How the New Government Strategy Will Work
The latest initiative brings together three government bodies:
- HMRC.
- The Insolvency Service.
- Companies House.
The departments will share information more effectively to identify suspicious company closures and investigate directors who repeatedly establish successor companies.
The strategy aims to:
- Detect abusive company closures earlier.
- Prevent tax losses.
- Improve director accountability.
- Strengthen enforcement against deliberate tax avoidance.
Greater collaboration between these departments means that directors engaging in repeated phoenix activity are more likely to be identified.
Practical Considerations for Business Owners
If your company is experiencing financial difficulties, it is important to seek professional advice before considering liquidation.
Business owners should remember that:
- Closing a company does not automatically eliminate tax liabilities.
- HMRC can review transactions that occur before and after liquidation.
- Starting a new company after liquidation may trigger additional scrutiny.
- Directors can become personally liable in certain circumstances.
A genuine business failure is very different from deliberately using insolvency to avoid paying taxes. Understanding that distinction is essential.
Frequently Asked Questions (FAQs)
1. Is creating a phoenix company illegal?
No. Creating a new company after closing a previous business is not automatically illegal. Problems arise when the closure is designed primarily to avoid paying creditors or obtaining an unfair tax advantage.
2. What is a contrived insolvency?
A contrived insolvency occurs when a company is intentionally closed to avoid debts while the same business continues through a newly established company.
3. What is the TAAR?
The Targeted Anti-Avoidance Rule allows HMRC to treat liquidation distributions as income rather than capital gains when a company is wound up mainly to obtain a tax advantage.
4. Can HMRC hold directors personally responsible for unpaid taxes?
Yes. HMRC can issue a Joint and Several Liability Notice in cases involving repeated tax avoidance, deliberate tax evasion, or persistent phoenix company activity.
5. How long does HMRC monitor activities after a company is wound up?
Under the TAAR, HMRC considers whether an individual becomes involved in the same or a similar business within two years of receiving the liquidation distribution.
Final Thoughts
HMRC’s tougher stance on contrived insolvencies sends a clear message to directors who repeatedly use company closures to avoid paying taxes.
While insolvency procedures remain an important tool for businesses facing genuine financial difficulties, the deliberate misuse of these procedures is becoming an increasingly significant enforcement priority.
Directors considering company liquidation should seek professional tax advice to ensure that their actions comply with current tax legislation and do not unintentionally trigger HMRC’s anti-avoidance rules.