Phoenix Rising

'Phoenixism' is a term used to describe the practice where directors carry on the same business or trade successively through a series of two or more companies.

Each of the companies in turn becomes insolvent, leaving large unpaid PAYE and NIC debts. A company will typically transfer its business, minus its debts, to the new company.

Only essential trade suppliers will be paid in full before the transfer, so that PAYE and NIC often remain deliberately outstanding. The new company will often trade from the same premises and may use a similar name 'Phoenix companies' are also known as successor companies but, in the eyes of HMRC, there is a difference.

'Phoenixism' is generally viewed by HMRC as being detrimental to the department whereas the creation of a successor company is generally to be encouraged for various reasons:

    •    A successor company will generally pay more for the assets of the liquidated company resulting in higher dividends to the creditors; and
    •    It is better that the trade of the liquidated company is somehow continued thereby contributing to the economy through employment, payment of taxes and products.

Where the creation of a successor company is part of a deliberate strategy by the directors to avoid Crown debt, or other debt, then it is regarded as being detrimental to HMRC. Such situations are described as 'contrived liquidations'. In these situations where the directors attempt to walk away from the debts of a failed company and resume management with a new company, HMRC can seek to collect the NIC debt from the directors by serving on them a Personal Liability Notice.

Although not conclusive the following factors can indicate 'phoenixism' to HMRC and cause them to raise a Personal Liability Notice enquiry:

    •    Rapid build up of NIC debts;
    •    Payment of selected debts, e.g trade creditors at the expense of HMRC liabilities;
    •    Transfer of assets, or sale of the assets by the liquidator to a new company or connected officer of the company, possibly at a lower than expected value. This may include transfer of work in progress.

In carrying out its risk assessment of whether or not the previous liquidated company and the successor company should come under closer scrutiny HMRC will consider the following:

    •    How long did the liquidated company trade? A lengthy trading history points to a genuine failure of the company.
    •    Who were the directors?
    •    What was its trade?
    •    Was the company a successor to another liquidated company? A series of previous liquidations points to future contrived liquidations.
    •    Was the company profitable and was its balance sheet solvent at the time of the last accounts?
    •    What was the gap between the last accounts and the liquidation?

HMRC will also obtain information from the creditors' meeting such as:

    •    What were the scale of Crown debts in comparison with non-Crown debts? If the liquidated company met non-Crown debts leaving only Crown debts outstanding, this suggests a contrived liquidation.
    •    Is there any indication that monies owed to some creditors were paid off in preference to others? This is a key indicator of a contrived liquidation.
    •    The make up of Crown debts.

It is perfectly legal to form a new company from the remnants of a failed company but if HMRC suspect foul play then the directors common to the old and new companies can expect to be challenged. So could this apply where a contractor, concerned about their IR35 status, habitually closes down one company and creates a new company? Quite possibly and most likely.