Phoenixism is a term used to describe the practice where directors carry on the same business or trade successively though a series of two or more companies. Each of the companies in turn becomes insolvent, leaving large unpaid Income Tax PAYE and NIC debts. A company will typically transfer its business, minus its debts, to the next company. Only essential trade suppliers will be paid in full before the transfer, so that Income Tax PAYE and NIC often remain deliberately outstanding.
The above example is typical of the type of case that HMRC is particularly interested in but it must be remembered that not all phoenix companies are ‘rogue companies’.
A Personal Liability Notice can be considered in situations where the directors attempt to ‘walk away’ from the debts of a failed company and resume management with a new company, sometimes indirectly as a ‘shadow director’ (see NIM12205). The new successor company will often trade from the same premises, using a similar name and with the same assets as the failed company.
Whilst not conclusive the following may indicate phoenixism and a potential 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.
But Phoenixism has also been used by property developers, but now new anti-avoidance tax rules should take away the tax advantages by making the distributions subject to income tax.
This could have a huge impact on the property sector, where it’s common practice for developers to set up a separate company to carry out each individual property development project. When the project is complete, the company is wound up. The use of separate companies followed by their liquidation is essential in managing risk. On liquidation, shareholders receive the retained profits as capital on which CGT must be paid. (Smith & Williamson)
We await the Budget in March for full details, but here is a link to the consultation