The Insolvency Service is to use artificial intelligence to root out rogue directors who deliberately wind up their companies to avoid tax and escape their debts, but the agency has admitted its new team cannot tackle the £800 million problem alone.
The chancellor committed £25 million over five years in November’s budget to fund a 50-member unit tasked with investigating suspicious corporate deficits. Its purpose is called “abusive phoenixism”, the practice of liquidating or dissolving a company to escape tax debts and creditors, only for the business to rise again under a new corporate shell.
Phoenixism accounted for 22 per cent of the £3.8bn of total tax losses in 2022-23, according to HM Revenue & Customs estimates, and the practice has long plagued small firms that go unpaid when a customer or supplier collapses and quietly reappears under a new name.
Dave Magrath, director of investigations and enforcement services at the Insolvency Service, said the enforcement results were “really important” but warned they would not be enough. “On their own, they will not solve the problem. The problem is very big and it requires people in our policy to really consider that conflict in between. [directors] to begin with [companies] and together with phoenixism. “
The taskforce, which began work in April and expects to be fully operational next year, has grown as a result of joint work between HMRC, Companies House and the Insolvency Service. It will rely heavily on technology to achieve its goals. “We look at hundreds of thousands of companies that dissolve every year,” Magrath said. “We need some technical power to help us sharpen and find the needle in the haystack where the danger lies.”
The move follows a damning report by the National Audit Office in 2024, which found that small businesses were easily exploiting weaknesses in government systems to avoid tax and that there was a lack of focus on phoenixism. The watchdog, which also warned that small businesses account for around 80 per cent of tax evasion in the UK, revealed that the Insolvency Service had issued just seven directors for phoenixism between 2018-19 and 2023-24, out of 6,274 ineligible directors in total.
As part of the drive to prevent more corrupt directors, the Company Directors Termination Act will be amended, following a recent consultation, to expand the circumstances in which directors who breach the law can be removed. The change coincides with Companies House’s rollout of identity verification for directors, another move aimed squarely at phoenix operators.
Recent cases show the extent of the abuse. The owner of a Burton fire alarm installation company was banned after paying himself almost £400,000 to two companies while giving HMRC just £5,368, while an Oxfordshire landscaping manager ignored his director’s ban and left £300,000 in tax unpaid on two companies. In one of the most extreme examples, a director linked to more than 400 companies was banned for nine years for helping struggling firms break through the insolvency process.
Magrath acknowledged the difficulty of balancing between allowing businessmen who fail with legitimate reasons to try again and holding abuses, especially at a time when the country is “fighting for economic growth”. He said he hoped the “heart of a solution” would emerge from the latest legal debate, which could see restrictions applied to directors with a pattern of repeated, damaging failures in low-level cases, while still allowing them to “participate in the economy”.
Caroline Sumner, chief executive of R3, the commercial arm of restructuring, turnaround and insolvency specialists, welcomed the team as a response to a “long-standing problem”.
“Phoenixism undermines confidence in the business environment and can leave creditors, including small businesses and HMRC, out of pocket, so co-operation is essential,” he said. “Measures such as strengthened identity checks on directors and improved data sharing should make it easier to identify and act on misconduct.
“Ensuring that the director’s revocation program is rigorously implemented and that there are adequate resources and capabilities to pursue repeat offenders will be critical to the success of this task force.”
