Phoenix Companies and HMRC have become a major focus for government enforcement activity. In November 2025, HMRC, the Insolvency Service and Companies House announced a joint strategy to tackle what are described as contrived insolvencies; situations where businesses are deliberately closed to avoid paying tax while continuing to trade through a new company.
For genuine business owners facing financial difficulties, a fresh start is not unlawful. However, where company liquidations are used primarily to avoid tax liabilities or gain a tax advantage, HMRC is making it clear that tougher action will follow.
What Are Phoenix Companies?
A phoenix company arises when the owners of a company close or liquidate an existing business and shortly afterwards begin trading through a new company carrying out substantially the same activities.
Often, the new business will have:
- The same directors or shareholders
- The same customers and suppliers
- Similar assets and branding
- The same workforce
- The same core business activities
The name comes from the mythical phoenix, a bird that rises from its own ashes.
Not all phoenix companies are problematic. Businesses can fail for legitimate reasons, and company directors are entitled to start again. The concern for Phoenix Companies and HMRC is where directors repeatedly leave behind unpaid tax debts while continuing the same business through a new corporate structure.
Why Are Phoenix Companies and HMRC in the Spotlight?
The Government believes that some directors are deliberately engineering insolvencies to avoid paying tax and other creditors.
As a result, HMRC, Companies House and the Insolvency Service are increasing collaboration and sharing more information to identify patterns of behaviour that suggest abuse.
The focus is on directors who repeatedly liquidate companies with outstanding tax liabilities only to establish replacement businesses shortly afterwards. By combining their resources, the three organisations aim to detect and challenge abusive phoenix activity more effectively.
For business owners, this means a change in scrutiny for company liquidations. They are now likely to face greater scrutiny where there is evidence that the same trade continues under a different company.
Is Phoenixing Illegal?
A common misconception is that phoenixing is automatically illegal.
The reality is more nuanced.
A business owner is generally permitted to close a company and start a new one. Many genuine entrepreneurs have experienced business failure before going on to build successful businesses.
The issue arises when insolvency is used as part of a strategy to avoid paying taxes or obtain a tax advantage.
This distinction is important. The latest measures do not target legitimate business rescue or restructuring. Instead, they focus on arrangements where a company closure is designed primarily to leave liabilities behind while the business itself continues largely unchanged.
How Liquidation Can Create Tax Advantages
Part of the concern surrounding Phoenix Companies and HMRC relates to the tax treatment of company profits.
Normally, company profits extracted as dividends are subject to dividend tax rates, which can reach 39.35% for higher earners.
However, where a company is formally wound up, distributions made to shareholders are generally treated as capital rather than income. This means the proceeds may be taxed under Capital Gains Tax (CGT) rules.
The highest CGT rate is currently 24%, significantly lower than the highest dividend tax rate.
In addition, qualifying shareholders may be eligible for Business Asset Disposal Relief (BADR). Although the relief is less generous than in previous years, the current rate of 18% can still provide a substantial tax saving compared to dividend taxation.
This difference in tax treatment can tempt some business owners to liquidate a company, extract funds at lower capital gains tax rates and then continue trading through a similar company.
What Is the Targeted Anti-Avoidance Rule (TAAR)?
To combat this type of behaviour, HMRC introduced the Targeted Anti-Avoidance Rule (TAAR).
The TAAR allows HMRC to reclassify liquidation proceeds as income rather than capital where the winding up has been undertaken mainly to secure a tax advantage.
For the rule to apply, all of the following conditions must generally be met:
Condition A
The individual receiving the distribution owned at least 5% of the company immediately before the winding up.
Condition B
The company was a close company at some point during the two years preceding the liquidation.
Condition C
The individual continues to carry on, or becomes involved in, the same or a similar trade within two years of receiving the distribution.
Condition D
It is reasonable to conclude that obtaining an income tax advantage was one of the main purposes of the winding up.
HMRC will examine both the circumstances at the time of liquidation and what happens after the company has closed when deciding whether the TAAR should apply.
Can HMRC Make Directors Personally Liable?
Many directors believe that limited liability completely protects them from company tax debts.
While companies are normally responsible for their own liabilities, HMRC has powers to pursue directors personally in certain circumstances.
A key weapon available to HMRC is the Joint and Several Liability Notice. This can be used where HMRC believes there has been repeated tax avoidance, deliberate tax evasion or a pattern of abusive phoenix activity.
For directors involved in repeated company failures with unpaid tax debts, the financial consequences can be significant.
The message from Phoenix Companies and HMRC enforcement activity is clear: limited liability should not be viewed as a shield for deliberate tax avoidance.
Security Deposits and High-Risk Businesses
HMRC also intends to make greater use of its powers to require security deposits from businesses it considers high risk.
These deposits can be demanded in respect of future liabilities including:
- VAT
- PAYE
- National Insurance contributions
- Other taxes
Where a business continues to trade after being required to provide security but fails to do so, criminal sanctions may follow.
This represents another part of HMRC’s wider strategy to reduce tax losses arising from repeated insolvencies.
Frequently Asked Questions
What is a phoenix company?
A phoenix company is a new business that continues substantially the same activities after a previous company has been closed or liquidated.
Is phoenixing illegal in the UK?
No. Phoenixing is not automatically illegal. However, it may become problematic where liquidation is used primarily to avoid tax liabilities or creditors.
Can HMRC investigate directors after liquidation?
Yes. HMRC can investigate directors after a company has been wound up. Moreover, HMRC can use powers such as Joint and Several Liability Notices in appropriate cases.
What is a contrived insolvency?
A contrived insolvency is where a company closure is engineered to secure a tax advantage or avoid paying liabilities while effectively continuing the same business elsewhere.
What is the TAAR?
The Targeted Anti-Avoidance Rule allows HMRC to treat liquidation proceeds as income rather than capital where the winding up is primarily motivated by obtaining a tax advantage.
Conclusion
The increasing focus on Phoenix Companies and HMRC reflects a clear shift in enforcement priorities. Genuine business failures and commercial restructurings remain legitimate. However, HMRC is targeting directors who repeatedly leave unpaid tax debts behind while continuing to trade through replacement companies.
Business owners considering liquidation should ensure there are sound commercial reasons for their decisions, understand the implications of the TAAR and seek professional advice before taking action. In today’s environment, careful planning and transparency are more important than ever.
Your Next Steps
If you are considering closing a company, restructuring your business or want to understand the tax implications of liquidation, taking advice early can help avoid costly mistakes.
If you run a company, have staff and employees, need some support and advice, starting to creak under the strain, now is the perfect time to act.
Our team works with businesses, charities, and not-for-profit organisations to create bookkeeping systems that provide clarity, confidence, and control.
Contact us if you need help figuring how we can help you. For more business and finance , news, advice and tips, don’t forget to subscribe and watch our weekly videos on I Hate Numbers, listen to our weekly podcast I Hate Numbers.
👉Book a FREE 15 min Zoom to see how we can help!
Explore our podcast here
Plan it, Do it, & PROFIT!