As the FT notes this morning:
HM Revenue & Customs has lost hundreds of millions of pounds more than previously estimated to an insolvency practice open to abuse by small businesses, underlining the challenge to the UK authority as it seeks to curb tax losses.
HMRC lost £836mn to “phoenixing” — where companies are repeatedly liquidated and set up under new names, sometimes deliberately to avoid payment of tax and other debts — in the 2022-23 tax year, the latest for which data is available.
This is an issue that I have been talking about for more than 15 years now.
My logic has always been very straightforward. Limited liability is a privilege granted by society. It is not a right. It is something that can and should be withdrawn if it is abused. We have to understand that.
If someone abuses limited liability by creating a series of companies with the obvious intent of leaving liabilities behind in each one, defaulting on tax and other obligations, then they are abusing the privilege society has granted them. The whole point of the law is to penalise those who break the codes of conduct and standards of behaviour that make it possible for us to work together in harmony.
The way to tackle this is obvious. There has to be a change in the law. If a company collapses and the tax authority is the main creditor, and there is no sign that the company has tried to settle its debts over a reasonable period (more than just a month or two), then the presumption should be that this was deliberate. The directors should then be made personally liable for the tax the company owes, having knowingly traded while insolvent for their own benefit.
We should not require a liquidator to prove this.
We should not require HMRC to prove guilt.
Instead, HMRC should be able to raise assessments against directors in such cases. It would then be the directors' responsibility to prove that they are not liable. There is nothing radical in this. Estimated assessments have a long history in UK tax practice, and this is simply another area where they should apply.
Finally, as I have long suggested, it should be a legal obligation that every bank, accountant, and lawyer in the UK supplying services to any legal entity must report, at least once a year and to the best of their knowledge:
- What that entity is.
- Where it can be located.
- Who its directors are, and where they can be located.
- Who its beneficial owners are, and where they can be located.
- The total sum deposited in its bank accounts during any designated 12-month period, such as its accounting year.
The last item might be hard for lawyers and accountants to verify if they do not handle the accounts of the entity, but for banks, this could be automated in seconds. And lawyers and accountants should already hold the other data because of money-laundering regulations, and the data that they could supply would be valuable corroborating information in pursuit of these missing millions, or more likely billions.
If this information were supplied, and there is no reason it could not be, HMRC would have everything it needed to enforce the law. It would even have data that could form the basis for estimating tax liabilities if a company failed to declare them.
It baffles me, bemuses me, and profoundly frustrates me that this is not done. I am entirely happy with limited liability, so long as it is not abused. It is, however, beyond my comprehension that so many limited companies are required in the UK, and I strongly suspect abuse is widespread. I also suspect the loss is far greater than £836 million a year, when the total small business corporation tax gap exceeds £14 billion.
What frustrates me most is that the government appears to value the privileges of limited companies above the rights of people who need income and support to survive in our society. That preference is shown in the imposition of austerity and in cuts to benefits when action to tackle tax abuse is easily possible.
It really is time for Labour to show it has principles and act. A simple measure in the forthcoming Budget could resolve this issue, largely once and for all. But will they act? Let's see.
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At a time when Financial Abuse is an increasingly ‘hot topic’ in relationships why isnt it a hot topic with Companies because thats just what it is.
While tax abuse can be tackled now, a wider reform of Limited Liability is needed and in particular to look at the risks it should protect against
I am not an expert but yes, I think it really is that simple. Directors need to held responsible.
I would add that it is not just HMRC that suffers from this unethical (illegal?) activity. Other creditors, including employees, get shafted in a liquidation while the original owners cherry pick the assets from the liquidator to, in effect, carry on the same business having shed a load of liabilities.
Thanks
I am amazed at how many new forms of abuse – and their names – now exist.
It tells you something doesn’t it?
I agree there’s a problem with interpretation of ‘wrongful or fraudulent trading’ – only the most extreme cases are ever pursued, and never for small businesses (the potential proceeds are less than the legal costs). There’s also an interpretation issues with the 2002 administration procedure and the resulting insolvency ‘pre-pack’ – phoenixing even if the majority creditor – often HMRC – objects, and sometimes even continuing to pay the old directors while creditors remain unpaid. Truly baffling.
It sounds straightforward – the way the abuse of limited liability is carried out, and the way to stop it, as banks, accountancy firms and law firms have the information and data. The question is, why have successive governments taken no interest?
It’s almost guaranteed to make the average employee feel like a hen in a battery cage – instead of proud to make our contribution. Outside, we see the peacocks strutting, and the ostrich senior politicians with their heads in the sand. Our tax system is rotten. Thank you RJM for shining the light.
“Our tax system is rotten”. To the Core!
I am pretty certain that having the directors liable for unpaid PAYE/NI used to be the case, but not sure when it was stopped.
My father always said to avoid anything to do with construction that had a date in the company name, e.g. Bodgit (2025) Ltd
But they will have never declared PAYE owing – they will have just taken the money
A simple change in the law, ” wrongful or fraudulent trading” change to ” the director’s unreasonable continued trading of the company”?
A much lower standard of proof than the current quasi criminal definition.
This literally just happened for the third time with the landlords at our local pub. HMRC are owed £400k which I assume is unpaid VAT.
This was reported in the local newspaper and commented on on social media. Outrage from some folk was met with ‘it’s tough out there, give them a break’ and ‘they are nice people’, ‘hospitality is a difficult business since COVID’. It’s theft and fraud and a contributor to degraded tax revenues and services. Quite why this isn’t a priority is beyond me – the current process just teaches perpetrators they can get away with this time and time again
Much to agree with
This reminds me of a BBC radio programme many years ago in which they reported on Phoenixing. One of the individuals in the discussion had served time for his offence and protested about the severity of his punishment with the a phrase that has stuck in my mind ever since: “but it was only fraud”!
Bizarre, but that is what they think. They believe that this is victimless crime.
It’s important not to throw the baby out with the bathwater in this area. We would all like to see the grifters and fraudsters held to account, but it would be a pity if innocent people got caught up too.
For example, there have been a few times in my life where a company I was involved in was trading whilst technically insolvent. We have always been careful to minute the board’s view that the situation was temporary (which it always turned out to be), but I can imagine a scenario where something unexpected derailed the board’s expectations leading to an awkward situation.
On the other hand, I have long advocated a ‘three strikes’ rule for directors — three insolvencies within a certain period (seven years, maybe?) and you are automatically barred from holding directorships, unless you show through some review process that such disbarment is unreasonable.
As I made clear, evidence of genuine commercial failure should always be acceptable as a defence.
I completely agree that there should be legal obligations – but directors of a UK limited liability company can, under certain circumstances, become personally liable for ltd company actions or omissions, including phoenixing – indeed HMRC is launching a joint initiative with Companies House and The Insolvency Service to tackle phoenixism. Various events can and will trigger an HMRC check, and the Insolvency Service, working with HMRC investigates directors for misconduct in respect of various triggers, including a pattern of repeated closures of companies and repeated setting up of new companies. There are ongoing staff increases in HMRC for compliance officers and staff and debt management staff, and I understand that the crackdown on phoenixism is a major priority for HMRC. The plan announced earlier this year is to hire 5500 compliance officers and 2400 debt management staff over 4 years, and an additional 500 compliance staff to supplement the 5000 such staff announced previously. However specialist staff must be procured and trained, so I have no idea of timeline, but there are already specialist units set up. It interests me that it seems that HMRC are possibly poaching some such staff from other countries (non-UK) ‘Tax’ Offices. HMRC can bring criminal charges if they believe that those who use phoenixism to restart a company under a different name are avoiding (or evading) tax. Clearly this will take time and if debts are not shown on the Balance Sheet on the cessation/closure of a company, then the task becomes more difficult. However the intention is that directors will face greater accountability for tax avoidance with the possibility of being held personally responsible for unpaid taxes. New funding is to be used to modernise HMRC’s technology etc including using advanced data analyticals to better identify and target compliance risks, including those relating to phoenixism. Without such methods to be used by HMRC, there is of course the ‘whistle blowing’ of overheard bragging in the pub (or the coffee house) – reports can be made in total anonymity to HMRC Fraud Hotline, to the NCA, or even to Crimestoppers – none of us likes to pay more tax when others are deliberately avoiding or evading the system.
Susan, I agree with you, such provisions exist, but they are rarely used, and are difficult to prove. I am trying to change the focus here to require that the directors have to prove they are innocent, rather than a liquidator or HMRC proving that they are guilt.y £836 million og fraud requires that.
While the HMRC and insolvency service makes various promises they have done so for many years and nothing has changed. Serious crime gets reported and nothing done or the insolvency service just sends a lame warning letter to the offender even when huge sums and significant harm involved.
From bitter personal experience, I have no expectations of anything changing and of the law actually being properly enforced.
I have long been very angry about this.
Richard – I thoroughly agree with your comments although I would add that even when proved the insolvency service often just sends out a warning letter. Or may go for striking off a director but even that is easy to get around and of little concern for many. As I’m sure you know, it doesn’t stop you from being an employee, share-holder or having a family member front the next company (latter is I believe illegal, but can be hard to prove).
Agreed
We have no effective company law in the U.K. and have never had a government that cares.
HMCR needs a shake-up in this matter. They obviously do not employ enough accountants and auditors to check on tax fraud. Austerity partly to blame, yet they usually trot out the excuse that fraud prevention and enforcement isn’t cost effective. Or, simply offer no reason for not doing it more thoroughly.
If they offered decent salaries, they would get enough capable staff to really get to grips with the fraud cost effectively. And, it would be much fairer.
A lot of it is under the remit of the insolvency services but I’ve read they often fail to act even when insolvency solvency practitioners have reported very serious matters to them.
Insolvency service also sometimes just sends out a warning letter to the offender even when there has been a criminal offence and serious harm has been committed.
Should this man be in charge of Durham County Council?
https://northeastbylines.co.uk/news/politics/durham-reform-leaders-struggles-in-hospitality/
Durham County Council even mentioned in Private Eye.
https://x.com/PrivateEyeNews/status/1928364490833199417
“phoenixing” … there’s a new vocabulary entry for me! But a search at DDG suggests it’s Brit-speak and hasn’t made it over to the western side of the Pond yet.
I am surprised at that, James. I always thought it was America that made a noun into a verb and we English had to accept it.
Insolvency and phoenixing is a favoured tool of rogue builders.
Victims essentially have no recourse as, if sued, the builder just goes insolvent and then sets up a near-identical company. For this reason, the accepted legal wisdom is to not bother suing the builder as they will just go insolvent and set up again. The rogue builders know that the lawyers will tell you this and they know that they can operate with complete impunity. Hence, its a growing problem with rogue builders and
Also, as recently published by Which? rogue builders know the chance of Trading Standards acting these days is next to zero. https://www.which.co.uk/news/article/is-trading-standards-doing-enough-to-catch-criminals-alOK41s5yHD8
Rogue builder victims also routinely let down by police / insolvency service / HMRC who fail to act, this even when there is clear evidence of fraud, dangerous work, vulnerable victims etc. The vast majority of rogue builder victims never see back a penny even if they have watertight evidence.
I’ve heard of heard of houses being repossessed, people being left with unmortgageable homes, breakdowns, suicides, people forced to live in dangerous houses (and people suffering serious injuries), and even one murder due to rogue builders. Yet the authorities stubbornly refuse to act.
HMRC of course also losses out when these companies go insolvent and many building firms are allowed by HMRC to rack up unpaid taxes over multiple years. I’m told they tell HMRC that they can’t pay their tax this year but they have a big contract next year and so will pay next year. And then repeat again for a few years and then go insolvent.
My rogue builder went insolvent owing nearly £1M to HMRC and company phoenixed with same premises and management, and many of the same staff and even clients (I imagine the HMRC is in the dark about clients being brought across to the new company).
There are things which are not true in that article.
Trading Standards do share information throughout the country.
I know someone in trading standards who has made more for their council than they have been paid. They also got money repaid for all the people who had been conned.
However, one of the problems is that not all TSOs have the qualifications to inspect financial affairs of those rogue traders, and have to rely on other bodies to do that. They also have to rely on police to go with them to raid offices and home premises.
Just like the police, etc., there just aren’t enough of them.
Many councils outsource TS these days , and like all outsourcing, it actually costs the councils more in the long run.
People only think about trading standards when things have gone wrong. They don’t realise all the other things that they do, like taking counterfeit clothing, cigarettes and vapes off the streets, and inspecting takeaways and food premises. Most TSOs work overtime, sometimes working from 7 am to 10pm.
They don’t deserve to be blamed by Which for things that have gone wrong.
Even getting in touch with them has changed recently, usually involving Citizen’s advice offices now.
There are of course some very good and dedicated people in Trading Standards and some Trading Standards do seem to regularly prosecute rogue builders, e.g. I’ve noticed that Suffolk and Cornwall seem to prosecute a lot.
It is well documented though that Trading Standards is very much a postcode lottery. Some have not prosecuted a single rogue builder for years.
There are many horrific stories out there about how people have been treated and let down by Trading Standards. The lack of funding certainly doesn’t help, but this is not the only problem.
You may want to read about the fight that victims of Steven Gent went through to have him prosecuted. You can also read some of the rogue builder victim websites to see the reality of how some Trading Standards function.
As you say, Trading Standards does a lot of work on vapes and counterfeit products. This is leading to many feeling that this is being prioritised at the expense of enforcing consumer rights. I agree that this is not the fault of individual Trading Standards as I’m sure the orders will come from those above.
I’d better tell all those people in trading standards from Hampshire up to Northumberland, with Yorkshire, Cambridgeshire and Norfolk in between, who are working on all those areas you mention that they are not working hard enough.
Lots of them are ex-police who think trading standards is easy, until they start working there. They soon change their minds.
Do counterfeit electrical goods not matter, or children’s clothes that are supposed to be fireproof but are not?
Who is your aggression aimed at?
It seems unjustified.
No one seems to be arguing against Trading Standards here.