Phoenixing, Company Closures and the Risks for Directors
Overview
Closing one company and starting another in a similar trade is not automatically unlawful. However, using companies to leave debts behind, move assets beyond creditors' reach or turn income into capital for tax purposes can create serious risks.
On 26th November 2025, the Insolvency Service announced funding for a new Abusive Phoenixism Taskforce to investigate suspicious company insolvencies. The announcement provided £25 million over five years for a 50-person team.
Directors should obtain tax and licensed insolvency advice before closing a company, transferring its business or receiving liquidation proceeds. Tax-debt enforcement, liquidation tax rules and insolvency restrictions are separate issues, and more than one may apply.
Detailed Content
What is phoenixing?
Phoenixing describes a business continuing through a new company after an earlier company has liquidated or dissolved, often leaving debts unpaid. Abusive phoenixism involves using companies repeatedly to evade debts or for fraudulent purposes.
A genuine business failure does not necessarily prevent a lawful fresh start. The purchase of a business from an insolvency practitioner can also be legitimate. However, directors must comply with insolvency law, creditor protections and any restrictions on their involvement in the successor business.
The liquidation tax rule is a separate issue
The winding-up Targeted Anti-Avoidance Rule, or TAAR, is aimed at certain arrangements that convert income into capital. It can apply to solvent liquidations as well as situations involving business closure, and does not depend on unpaid company tax debts.
For UK-resident companies, the relevant rule is in section 396B of the Income Tax (Trading and Other Income) Act 2005. Section 404A addresses non-UK resident companies.
Broadly, all four conditions must be met:
The individual had at least a 5% interest in the company immediately before winding up.
The company was a close company at some point in the two years ending with the start of winding up. A close company is broadly one controlled by a small number of participators, or by participators who are directors.
Within two years of the distribution, the individual carries on or is involved in the same or a similar trade or activity.
It is reasonable to assume that avoiding or reducing Income Tax was a main purpose, or one of the main purposes, of the winding up.
Where the rule applies, relevant liquidation proceeds are taxed as income rather than receiving capital treatment. Statutory exclusions and the precise facts also matter. A similar trade within two years does not, by itself, settle the tax position.
Can company tax debts become a director's personal responsibility?
Limited liability is not an absolute protection. HMRC can issue joint liability notices in specified circumstances involving tax avoidance, tax evasion or repeated insolvency and non-payment.
For the repeated-insolvency route, the conditions include:
A relevant connection to at least two old companies that underwent an insolvency procedure and had tax liabilities in the preceding five years.
A relevant connection to a new company carrying on the same or a similar trade or activity to at least two of those companies.
Total unpaid tax of the relevant old companies exceeding both £10,000 and 50% of their total unsecured liabilities.
All statutory conditions must be satisfied. A notice can cover relevant old-company debts, unpaid tax of the new company and tax arising during a further five-year period while the notice remains effective.
Other personal-liability powers have different conditions. Do not assume that a failed company automatically makes its directors personally liable, or that starting again removes the risk.
Restrictions on reusing a company name
Insolvent liquidation can restrict directors from using the same or a similar company or trading name for five years. The restrictions generally apply to anyone who was a director in the twelve months before liquidation.
These rules can apply even where the business failed honestly. Exceptions or court permission may be available, but strict requirements must be met. Breach can result in criminal proceedings and personal responsibility for debts of the successor company.
The applicable insolvency rules depend on jurisdiction. Obtain advice before reusing a name, including a trading name or brand.
HMRC security notices
HMRC can require security where it considers certain tax payments at risk, including VAT, PAYE and National Insurance contributions.
For VAT, making taxable supplies without providing required security can be a criminal offence. For PAYE and National Insurance, failing to provide security when required can itself be an offence.
Take urgent advice on the notice, its deadline and any review or appeal rights. Do not assume that changing company resolves the requirement.
What directors should do
Keep complete records of liabilities, assets, transfers and decisions. Obtain independent advice before moving customers, contracts, stock, equipment or other assets to a replacement business.
Commercial reasons, fair values and a clear audit trail are important, but do not automatically make a transaction lawful or prevent a tax charge. Where insolvency is a concern, decisions must take creditors' interests into account.
Step by Step Procedure
Prepare an accurate picture of cash, assets, debts and outstanding statutory filings.
List all creditors, including HMRC, employees, suppliers and lenders, and record any personal guarantees.
Obtain licensed insolvency advice promptly if the company cannot pay its debts or may be insolvent. Obtain tax advice before liquidation distributions or restructuring.
Review any proposed continuation of the trade, asset transfer and company-name reuse before taking action.
Assess the winding-up TAAR and any potential joint liability or security requirements separately.
Maintain filings and records as required. Do not make payments, distributions or transfers that could prejudice creditors without appropriate advice.
Respond to HMRC and insolvency correspondence within the applicable deadlines, keeping copies and supporting evidence.
Frequently Asked Questions and Answers
Is phoenixing always illegal?
No. A genuine failure and lawful fresh start can be permitted. Abusive debt avoidance, misconduct and breaches of insolvency restrictions are different matters.
Does a similar trade within two years automatically trigger Income Tax?
No. The winding-up TAAR has several conditions, including an Income Tax avoidance purpose. The two-year period runs from the distribution, and professional assessment is needed.
Can the TAAR apply if my company has paid all its debts?
Yes. It concerns the tax treatment of liquidation proceeds, not simply unpaid debts. A solvent liquidation may still be within scope.
Can I use the old business name again?
Possibly, but insolvent liquidation can trigger prohibited-name restrictions. Obtain specialist advice before using the same or a similar name, even if there was no misconduct.
Can directors become personally liable for company tax?
Yes, where the conditions for a relevant enforcement power are met. Liability is not automatic merely because a company fails.
What if I receive a security notice?
Obtain urgent professional advice. The consequences depend on the tax concerned and the terms of the requirement. Ignoring it can expose you to criminal proceedings.
What should I do if my company cannot pay HMRC?
Seek advice promptly. A payment arrangement may be appropriate where viable, but insolvency options may also need consideration. Do not transfer the business or favour selected creditors without understanding the consequences.
How can 360 Accounts help?
360 Accounts & Bookkeeping can help review company records and tax liabilities, assess the tax implications of proposed closure and assist with HMRC correspondence. Where formal insolvency or legal advice is required, a licensed insolvency practitioner or solicitor should be involved.