DMBM522700 | Debt and return pursuit: PAYE: phoenix companies

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‘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.

Phoenixism occurs when a company ceases trading, sometimes contrived, and having first built up significant debts, disposes of assets to a successor company without paying those debts. Trading continues through the new company (the 'phoenix' company) often with the same director using the same premises, equipment, workforce and sometimes a similar name.

It must be remembered that not all phoenix companies are ‘rogue companies’ and that a successor (‘second’) company may be an honest second attempt following the genuine failure of the first company. More information on successions can be found at DMBM526650.

However, a company that has avoided paying debts in this manner is clearly a risk to its creditors. This risk increases substantially where a succession has occurred more than once. These companies are sometimes also referred to as Multi Business Failure (MBF) companies.

Experience shows that phoenix companies present a higher risk of non-compliance and may result in a substantial tax loss to the Department. There have been a number of cases where each of a succession of companies has become insolvent leaving large unpaid Income Tax and NIC debts. Typically, only essential trade suppliers will have been paid so as to enable the successor company to continue in business.

The following common features may indicate phoenixism:

• rapid build up of PAYE

• payment of selected debts (preference)

• transfer of assets, possibly at undervalue, including work in progress to a new company or a connected person; this may occur later at arms length sale by the liquidator to the directors of the new company

• withdrawal of previously undrawn remuneration and directors' loans to the company

• redirection of sales proceeds to the new company which may also pay selected debts of the old company but not Crown debts.

From 6 April 2012, HMRC can require employers to pay a security where there is serious risk that they won’t pay over their PAYE or Class1 NICs. The Securities team in Special Investigations (SI) will implement it, but DMB, RIS and Local Compliance need to be aware of the new power. A security is usually either:

• a cash deposit from the business or director held by HMRC or paid into a joint HMRC/taxpayer bank account

• a bond from an approved financial institution which is payable on demand.

Where SI identifies, or is notified of, a phoenix company they will forward a stencil for DMB. Once notified you should:

• note IDMS notes and assets page including the date notified

• cross reference any other HMRC debt within IDMS

• set the Phoenix signal on BROCS (using function ATD at set up/taxpayer level) and ETMP (using the change button on the RTI flags tab) which will automatically update IDMS with the signal; the signal must not be set manually on IDMS, otherwise it will not pass to the BROCS/ETMP record

• make any relevant designatory data changes; for example, address, phone numbers, EMY

• ensure the scheme is closely monitored

• not delay in proceeding with enforcement action (normally EIS)

• consider quantification where you are unable to establish the debt.

If you become aware of possible phoenixism in day-to-day work, you should consider whether it would be appropriate to submit the case for the imposition of a security deposit - see DMBM569500.

If the company has remained fully complaint for 18 months from the phoenix notification date, you can remove the phoenix signal on BROCS/ETMP and add a further note of your action on IDMS notes and assets page.