HM Revenue & Customs (HMRC) has suffered a loss of over £800m, a figure higher than previously estimated, due to a tax loophole exploited by small businesses in the º£½ÇÊÓƵ.
This loophole, known as 'phoenixing', involves companies repeatedly liquidating and then re-establishing themselves as new, debt-free entities, as reported by .
The tax authority reported a loss of £836m to this practice in the 2022-23 tax year, the most recent period for which data is available. This figure is 45% higher than the £570m loss estimated in earlier reports.
HMRC attributes this loss to delays in companies declaring insolvency during the pandemic era.
Phoenixing was responsible for approximately one-fifth of HMRC's tax losses, i.e., money owed but uncollectable, for the 2022-23 tax year.
HMRC seeking to tackle 'phoenixism'
HMRC is now taking steps to combat 'phoenixism', a practice that is especially common among retail firms and is illegal when used to evade tax and other debts.
Dan Neidle, founder of Tax Policy Associates, explained to the FT: "If I have a building company and I go bust and I set up another building company, that is not a scam . . . But when someone does it deliberately to engineer an escape from their creditors, be it HMRC or anyone else, that is a scam."
A report on tax evasion by the National Audit Office (NAO) last year revealed that HMRC estimated total losses from tax evasion between 2022 and 2023 to be £5.5bn. Small businesses were attributed with causing 81% of this loss, marking a 66% surge since 2019 to 2020.
Gareth Davies, Head of the audit office, previously criticised HMRC for placing "too little emphasis" on addressing "widely used methods of evasion" such as phoenixism. In her spring statement in March, Chancellor Rachel Reeves pledged to "tackle 'phoenixism'" and outlined a joint initiative between HMRC, corporate registry Companies House, and the Insolvency Service.
The group's action plan includes ramping up demands for upfront payments, increasing the use of enforcement sanctions, and holding more directors accountable for their company's taxes. An HMRC spokesperson stated: "As the Chancellor announced in her Spring Statement, the government is taking action to improve collaboration between HMRC, Companies House, and the Insolvency Service to tackle those using contrived corporate insolvencies and dissolutions – so-called 'phoenixism' – to evade tax."
