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)
A company may apply to the registrar to be struck off the register and dissolved. The company can do this if it is no longer needed. For example, the directors may wish to retire and there is no one to take over from them; or
it is a subsidiary whose name is no longer needed; or it was set up to exploit an idea that turned out not to be feasible. Some companies who are dormant or non trading choose to apply for strike off. If you have
decided that you no longer want to retain your company and wish to have it struck off, the registrar will not normally pursue any outstanding late filing penalties unless you restore the company to the register at a later stage.
Form DS01 is used to apply for striking off and guidance GP4
Consultants who work as contractors often build up funds their limited companies, they do this as a safe guard because being a contractor, there can be gaps between contracts and they will need cash to carry themselves through to the next contract.
But what if they decide to retire or they get offered their dream job as an employee, they may have lots of assets and cash in their company, perhaps more that £25,000.
They might even find that their main client insists they become employees for example
Some of the BBC’s biggest freelance stars could be asked to join the payroll or leave the corporation, as a new test aims to clear up tax issues.
It is part of a clampdown on the use of personal service companies (PSCs) and a move to tax more freelancers at source.
How could they close the company and use Entrepreneurs Tax Relief to pay 10% tax?
They could use a Members Voluntary Liquidation (MVL).
The Insolvency Practitioner will ask the Contractor’s Accountant to confirm that the clients tax affairs are inorder and that appropriate advice has been given
Final Accounts will need to be prepared and creditors paid
A Declaration of Insolvency will be signed – The declaration of insolvency demonstrates that the company will be able to settle or secure liabilities and the costs of liquidation within 12 months
A meeting of Shareholders will appoint the Insolvency Practitioner
Notices will be posted at Companies House and in the London Gazzette
Then the MVL can be a carried out and funds distributed
Arrangements can be put in place to allow the directors access to funds during the process
Using an MVL should mean you can claim Entrepreneurs Tax Relief and pay 10% tax.
Before doing an MVL you should consider whether alternative options such as paying dividends might be more appropriate or whether the cost of the MVL exceeds the potential tax saved or whether Strike Off and ESC C16 could be used.