What is Small Business Phoenixing in UK?

HMRC’s latest annual report shows that losses from small-business phoenixing reached £836 million in 2022–23, a 45% increase on previous estimates. The practice now accounts for about a fifth of HMRC’s overall tax losses. The Chancellor has announced plans to tackle the problem through joint action by HMRC, Companies House and the Insolvency Service.

In this article, we will explain what phoenixing is, why it is a particular problem among small businesses, and outline the penalties that directors face when using it illegally. We will also explore how HMRC investigates phoenixing, the warning signs it looks for, the role of Companies House, and the resources available to help businesses avoid accidental breaches. Finally, we will set out how Apex Accountants can provide expert support to help directors stay compliant and protect their business from risk.

What is phoenixing?

Phoenixing (sometimes called “phoenix trading”) occurs when a company enters insolvent liquidation and the directors form a new company using the same or similar name in order to continue trading. The new entity often carries on the same business but without the liabilities of the former company, leaving creditors (including HMRC) unpaid. HMRC’s internal manual on the Targeted Anti‑Avoidance Rule (TAAR) notes that phoenixism allows individuals to convert what would otherwise be dividends into capital receipts; the new company “rises from the ashes” of the old one. Deliberately using phoenixing to escape tax liabilities is illegal.

What is small‑business phoenixing?

Small‑business phoenixing is the abuse of this tactic by directors of small and micro companies. The Insolvency Service reports that phoenixing often involves close companies (five or fewer shareholders) where the owners have a 5% or greater shareholding. HMRC estimates that about 81% of tax evasion losses come from small businesses, with a significant portion linked to phoenixism. Retail and construction sectors are particularly vulnerable to this abuse.

Government response to phoenixing

Phoenixing takes place when a company is closed down and a new business is created in its place.

• In some cases, it is a legal restart after genuine financial difficulty.
• In other cases, it is used to avoid paying taxes, suppliers, or other debts.
  

When directors deliberately shed liabilities and start again debt-free, HMRC treats it as tax evasion.

Scale of the problem

The most recent data shows that phoenixing made up nearly 20% of HMRC’s total tax losses. The pandemic delayed insolvency declarations, which contributed to the rise. Reports also suggest the practice is common among small firms, particularly in retail and construction.

The Chancellor has pledged stronger action. A joint strategy now links HMRC, Companies House, and the Insolvency Service. Planned measures include:

• Higher upfront payment requirements.
• Wider use of enforcement powers.
• Greater personal liability for directors.

These steps aim to stop deliberate abuse while still allowing genuine business recovery.

Penalties for small‑business phoenixing

Penalties for illegal phoenixing vary depending on the circumstances and laws breached:

• Income tax charges and penalties – under the TAAR, distributions from a winding up that meet the four conditions are taxed at dividend rates. This can result in a higher tax bill than the entrepreneur expected.
  
• Joint and several liability – when HMRC issues a joint and several liability notice, directors and other individuals can be held personally liable for the company’s tax debts. Individuals who ignore such notices risk civil recovery and insolvency.
  
• Civil penalties and enforcement sanctions – HMRC can demand security deposits, impose penalties, and use enforcement sanctions. The transformation roadmap aims to double the amount of tax protected to £250 million by 2026‑27 through increased sanctions.
  
• Director disqualification and criminal prosecution —Directors who breach insolvency legislation by continuing to trade under a prohibited name can be disqualified for up to 15 years and may be prosecuted. The Insolvency Service reports a case where a director running multiple phoenix companies received an eight‑month suspended prison sentence and a five‑year disqualification.
  
• Further criminal offenses— HMRC can bring charges for fraudulent trading, tax evasion, or other offences under the Fraud Act or Insolvency Act. Serious cases may lead to imprisonment, fines and the confiscation of assets.

Where to find more information about HMRC’s efforts

Useful resources for understanding HMRC’s response include:

• HMRC’s Transformation Roadmap – published in July 2025. The roadmap explains that HMRC is working with the Insolvency Service and Companies House to crack down on contrived insolvency and abusive phoenixism by increasing the use of upfront payment demands (securities), making more directors personally liable for company debts and boosting enforcement sanctions gov.uk.
  
• Company winding‑up TAAR manual (CTM36305) – the HMRC internal manual sets out the conditions under which HMRC will treat liquidation distributions as income rather than capital. It includes examples of phoenixism and details the four conditions.
  
• Insolvency Service’s Director Information Hub – launched in 2023. The hub provides bite‑sized guidance to help directors understand their duties, recognise signs of distress and avoid insolvency.
  
• HMRC’s tax fraud reporting service – GOV.UK includes an online form and fraud hotline for reporting suspected tax avoidance or evasion.
  
• Companies House business plan and blog – these explain how new powers under the Economic Crime and Corporate Transparency Act allow Companies House to query and remove false information and implement identity verification to help disrupt phoenixism.
  

How does HMRC investigate phoenixing?

HMRC investigates phoenixing through a combination of civil powers, targeted anti‑avoidance rules and criminal enforcement. Key tools include:

Targeted Anti‑Avoidance Rule (TAAR)

HMRC will treat a liquidation distribution as an income distribution (subject to dividend tax) if four conditions are met: the individual held at least a 5% interest; the company was a close company within the previous two years; the individual resumes the same or similar trade within two years; and obtaining a tax advantage was one of the main purposes. HMRC interprets the “similar trade” condition broadly – carrying on the same activity as a sole trader, through a partnership or through another company can trigger the rule. The TAAR denies the lower capital gains tax rate, thereby removing the tax benefit of phoenixing.

Joint and several liability notices

Under Finance Act 2020, HMRC can issue a notice making directors or participants personally liable for the tax debts of companies where there is repeated insolvency followed by phoenixing. Once issued, the individual becomes jointly and severally liable for the outstanding tax.

Enforcement with the Insolvency Service

HMRC works closely with the Insolvency Service to investigate breaches of company and insolvency law. The Insolvency Service’s annual report notes that phoenixing is a priority and gives examples where directors have been prosecuted and disqualified for breaching section 216 of the Insolvency Act 1986; one director received an eight‑month suspended prison sentence and a five‑year director disqualification for operating multiple phoenix companies.

Collaboration with Companies House

New powers allow Companies House to share data with HMRC and the Insolvency Service, remove incorrect information and strike companies off the register more quickly. HMRC uses this data to identify patterns of repeated insolvency, suspicious director activity and false addresses.

Upfront payment demands

HMRC can require businesses considered high risk (for example, those with a history of default) to provide a security deposit before trading. The transformation roadmap indicates that HMRC will increase use of these securities to deter phoenixism.

Resources to help businesses avoid accidental phoenixing

Directors who want to avoid inadvertently falling foul of the anti‑phoenix rules should:

• Use the Director Information Hub for guidance on their duties, day‑to‑day business management and recognising distress. The hub includes topics such as spotting the signs of company distress, turning the company around and consequences of insolvency.
  
• Watch for financial distress signals – the Insolvency Service lists warning signs such as persistent cash‑flow problems, late payment of bills, delaying PAYE or National Insurance contributions, high interest on loans and low profits despite strong sales. Early action can help companies restructure rather than resort to illegal phoenixing.
  
• Obtain professional tax advice before winding up a company. The TAAR can apply if a person holds 5% or more of a close company and restarts a similar trade within two years.
  
• Ensure compliance with Companies House filing requirements. New identity verification rules and stricter removal powers mean false or misleading filings are more likely to be detected.
  

How to report suspected phoenixing

Anyone can report suspected phoenixing or tax evasion to HMRC by:

• Completing HMRC’s online fraud reporting form on GOV.UK.
  
• Calling the HMRC Fraud Hotline on 0800 788 887 (or +44 203 080 0871 from outside the UK). The hotline is open Monday to Friday, 9am to 5pm. Reports can be made anonymously, and HMRC keeps details confidential.
  

For fraudulent use of the dissolution process, members of the public can also complain to Companies House using its “Report it to us” service. This supports HMRC and the Insolvency Service in identifying misuse of company dissolutions.

Warning signs HMRC looks for

HMRC and the Insolvency Service look for patterns that indicate abusive phoenixing. Common warning signs include:

• Repeated insolvency followed by new companies carrying on identical trades under the same directors.
  
• Directors with a history of liquidating companies and immediately forming new entities.
  
• Transfers of assets to a new company for little or no value, leaving creditors unpaid (often identified through insolvency investigations).
  
• Requests for payments to a different company while employees, management and operations remain unchanged – this can indicate a shift to a new, debt‑free entity.
  
• Low tenders or quotes that are below market rates and cannot be sustained.
  
• Late or missing PAYE/NIC payments; HMRC lists delaying tax payments as a sign of a company in distress.
  
• Changing company names and directors but keeping the same management and staff.
  
• Not providing payslips or superannuation/pension contributions to employees – while this guidance originates from the Australian Taxation Office, the same warning signs often flag potential illegal phoenixing.
  

Business owners should seek advice if they see these signs within their own organisation or when dealing with suppliers or contractors.

Role of Companies House

Companies House is no longer simply a passive register. The Economic Crime and Corporate Transparency Act 2023 has given it new powers to play an active role in preventing phoenixism and economic crime. According to Companies House’s 2024‑25 business plan:

• It now acts as a gatekeeper of company information, with authority to query and remove false, misleading or incorrect data.
  
• It can remove suspicious registered office addresses and officer details; by January 2025 it had removed over 60,000 suspicious addresses and 47,200 officer addresses.
  
• From March 2025, Companies House gained powers to strike off companies quickly if registered on a false basis and to require all directors and people with significant control to verify their identity. Identity verification makes it harder for directors to hide behind false names when repeatedly forming phoenix companies.
  
• It shares intelligence with HMRC and the Insolvency Service as part of a joint plan to tackle phoenixism.
  

By improving the accuracy of company data and working with other agencies, Companies House helps identify repeated insolvency patterns, suspicious director behaviour and fraudulent filings. This data supports HMRC’s investigations and allows early intervention.

How Apex Accountants Can Help

We support tighter rules to reduce the abuse of insolvency law. However, legitimate business owners who need to restructure should not be penalised. The right advice can help companies exit financial distress while staying fully compliant.

At Apex Accountants, we provide:

• Compliance guidance: We help directors understand HMRC’s TAAR conditions and ensure that any winding‑up is compliant, preventing inadvertent tax penalties.
  
• Risk assessment: We analyse clients’ trading patterns and director histories to flag potential phoenixing risks before HMRC does.
  
• Restructuring support: If a company is in distress, we advise on rescue options and legitimate liquidations, so owners can restart without breaching anti‑phoenix rules.
  
• HMRC liaison: Our experts manage communications with HMRC, including responses to joint liability notices and security deposit requests.
  
• Reporting and training: We assist with fraud reporting and deliver training to staff on recognising red flags and complying with new Companies House identity‑verification requirements.

Conclusion

Small-business phoenixing has become a growing concern, with HMRC losses now exceeding £800 million. To address this, HMRC is stepping up its approach through targeted anti-avoidance rules, joint and several liability notices, closer collaboration with Companies House and the Insolvency Service, and tougher penalties for illegal phoenixing.

For directors, it is vital to understand legal duties, recognise early signs of financial distress, and seek timely professional advice before winding up a company. Acting responsibly reduces the risk of breaching anti-phoenixing rules and protects both businesses and the wider tax system.

At Apex Accountants, we support directors in managing company restructuring, compliance, and tax planning in line with HMRC requirements. Our team offers clear, practical guidance to help businesses make the right decisions, avoid penalties, and continue trading on a secure foundation. By working with us, business owners can stay compliant, safeguard their reputation, and contribute to a fairer tax environment.

Contact Apex Accountants today to discuss your company’s position and get tailored advice on compliance, restructuring, and future growth.