New rules to crack down on ‘phoenix companies’ confirmed for April 2020

Company directors who attempt to “sidestep” their tax liabilities by forcing their company into insolvency will face tougher penalties from next year.

The new legislation has been published as part of the new Draft Finance Bill 2019/20.

According to the document, the ‘tax abuse using company insolvencies’ rule will target those who “artificially and unfairly” seek to avoid their tax liabilities, “arising from avoidance, evasion or ‘phoenixism’, through the misuse of insolvency of companies”.

Phoenixism and phoenixing are the terms used to describe the process of carrying on the same business activities through a series of companies where each becomes insolvent. While the insolvent company’s business continues, it does not carry its debts over to the new company.

The Government is now looking to stamp out this activity by making directors and other persons connected to the company “jointly and severally liable for the avoidance, evasion or ‘phoenixism’ debts of the corporate entity”.

The new legislation is expected to go into effect from April 2020.

Welcoming the move, Stuart Frith, President of insolvency and restructuring trade body R3, said: “Our members have long raised concerns that some directors are deliberately dissolving businesses to avoid paying their debts. A strengthened disqualification regime will be an important part of ensuring that directors are less likely to walk away from their responsibilities.”

The news comes shortly after the Government confirmed its intentions to make HM Revenue & Customs (HMRC) a preferred creditor in insolvency with respect to certain taxes.

The rule aims to return taxes that are temporarily held by a business, such as income tax and VAT, to the treasury as intended.