'Tackling Phoenixism' was Spring Statement's vow, so will contractors be hit?

Buried in the small print of March’s apparently inconsequential fiscal update for contractors, Spring Statement 2025, was a pledge by chancellor Rachel Reeves to “tackle phoenixism.”

But with that pledge warning that officials will be “making more directors personally liable for company taxes,” there will invariably be consequences for at least some contractors, writes Gareth Wilcox, partner at Opus Restructuring & Insolvency.

What Spring Statement 2025 said versus what it really meant

According to the March 26th Spring Statement, at the end of December 2024, the stock of tax debt – unpaid tax liabilities owed to HMRC, was over £44 billion.

Context? That’s more than double the level five years ago.  

Around £20 billion of these outstanding tax debts are over 12 months old and therefore harder for HMRC to collect. 

All of this is despite efforts made by HMRC to reduce the ability of taxpayers to rack up substantial debts.

The RTI and MTD fixes. Sort of...

Those efforts have been in the shape of Real Time Information (RTI) for PAYE and the much-delayed, phased introduction of Making Tax Digital (MTD). 

Both RTI and MTD were designed to give HMRC greater visibility on tax debt and enable earlier enforcement. But clearly, the duo have not had the desired effect, although ‘success’ will no doubt have been skewed by the forbearance provided to taxpayers during the covid-19 pandemic.

One interpretation is that these two measures, as much as they’ve been showpieces, haven’t sufficiently plugged the tax gap, or reduced the tax debt mountain. And so the government wants to now get serious about “tackling phoenixism.”

HMRC sounds very much on board for tackling phoenixism

Even if the Revenue stands by the effectiveness of RTI and MTD, which it probably would do), its now-retired top taxman was asked recently how concerned he was if phoenixism has increased since the pandemic.

The then-CEO of HMRC, Jim Harra said: “In 2022-23, we believe that about 15% of all the losses to non-payment came from phoenixism. It was somewhere between £500 million and £600 million. That is not within our statistics, because it is an operational estimate”.

Hara added that £600m was “a significant amount of money that we want to tackle,” and he said it emanates from “a very egregious type of behaviour.”

What Spring Statement 2025 says on Tackling Phoenixism

At Spring Statement 2025, at chapter 2.25, HM Treasury states:

“HMRC, Companies House, and the Insolvency Service are delivering a joint plan to tackle those using contrived insolvencies to evade tax and write off debts owed to others.

“This includes increasing the use of upfront payment demands, making more directors personally liable for company taxes, and increasing the number of enforcement sanctions to double the amount of tax protected to £250 million by 2026‑27.

What is Phoenixism?

At this stage, it might be worth defining what 'Phoenixism' actually is.

Well, there is no specific or legal definition.

My definition, as an insolvency practitioner in the contractor space?

Phoenixism generally refers to the liquidation of a deliberately (or recklessly) debt-laden company, with a new ‘phoenix’ entity ready to rise from the (metaphorical) flames.

Various parties have differing ideas of what constitutes ‘phoenixism’ Indeed, the “Tackling Phoenixism” statement at Spring Statement 2025 even has its own. It refers to tackling “those [individuals] using contrived insolvencies to evade tax and write off debts owed to others”. 

Personal liability for limited company director threat

The government goes on to promise the use of upfront payment demands, and what I warned about at the top -- making more limited company directors personally liable for their company taxes.

The Treasury also wants to boost enforcement sanctions to double the amount of tax protected to £250 million by 2026‑27.

To some extent, this latter pledge is not new, insofar as the use of sanctions is an existing cosh that HMRC uses to tackle phoenixism.

Taxman is already brandishing two coshes a lot more often

We can go further. Aside from director disqualifications which are ongoing, following insolvency proceedings we’re  seeing an increase in HMRC using its powers to issue more:

• Personal Liability Notices; and
• VAT bonds

What is a Personal Liability Notice? (‘PLN’)

A Personal Liability Notice is exactly what it sounds like! 

The effect of a PLN is to transfer a tax liability which has been unpaid by a company (or limited liability partnership) to one or more of its directors/officers personally, such that they are not liable for the company’s debt (or a part of it). 

Amounts sought under a PLN can include interest and/or penalties on the principal sum. These amounts are subject to the usual recovery process, i.e. can result ultimately in the bankruptcy of the individual(s) being pursued.

PLNs put paid to the protection ‘LTD’ is meant to afford

The issuing of a PLN is clearly a significant departure from the generally held principle that a company is a separate legal personality, and from that of limited liability (albeit this protection is principally for shareholders rather than directors). 

As such, PLNs are only designed to be issued when a company fails to pay its taxes, and HMRC believes that the directors were responsible for the failure, either through negligence or intentional wrongdoing. 

What is a VAT bond, or VAT security bond?

A VAT security bond is a sum of money that must be paid to HMRC by a company, director or other officer.

A VAT bond is calculated by HMRC typically based on 4-6 months’ previous VAT returns.

The issuing of a VAT security bond means HMRC believes a taxpayer presents a risk of non-payment of its VAT liability. And ordinarily, such a bond arises from a previously connected business failure; poor payment history with HMRC, or if a director/officer is suspected of deliberately failing to meet HMRC liabilities (and/or been uncooperative with HMRC).

What happens when HMRC issues a tax bond?

HMRC will typically normally hold security for VAT for at least 12 months for a business on monthly returns and 24 months for a business on quarterly returns.

During this time, the Revenue will monitor the tax affairs of the business and return the security when it considers that there’s no longer a risk that the business will fail to pay its VAT bill. 

Clearly, then, a VAT security bond can have a significantly adverse impact on the cashflow of a business.

Keep in mind, HMRC can issue bonds for other taxes, which operate in a similar manner, but VAT appears to be the most common liability bonds relate to.

What should directors do on receipt of a PLN or VAT bond notice?

Both processes have appeal procedures available, which are subject to strict timelines that will be outlined in the notice issued by HMRC. 

As such, affected parties should take formal advice at the earliest opportunity.

And there are various professionals and skilled legal advisers who specialise in this area.

Greater uncertainty when talking to insolvent company directors

In my experience as an insolvency practitioner, the increase in HMRC action of this type inevitably leads to a greater level of uncertainty when speaking to directors of insolvent companies. 

Most directors we speak to are going through a difficult time. Very often, they’re looking for some level of certainty as to what they can expect from an insolvency process. 

Since the issuing of PLNs and bonds is within the gift of HMRC, it is difficult to guide clients, precisely, as to whether they are likely to receive one or not. 

Inertia, the downward spiral

What directors of insolvent companies should be clear on, however, is that taking professional advice and appropriate steps will not make an existing position worse.

The consequences of inaction, and allowing matters to spiral further, will almost invariably result in a poorer outcome. 

Moreover, inertia can increase the likelihood of enforcement action, whether from HMRC or others.

Murray’s made clear that tackling phoenixism remains on the agenda

My expectation is that this advice – ‘consult an expert sooner rather than later’ – will hold true when, not if, the ‘tackling phoenixism’ proposals come to fruition. 

I hope that the proposed “joint plan” will be based on a consultation which HMRC has not issued or even suggested a timeline for, perhaps as it has three already open. But be in no doubt, “tackling phoenixism” is coming. Only on April 8th, in the House of Commons, the Exchequer Secretary to the Treasury James Murray MP said that to “tackle a range of sources of tax avoidance and the tax gap,” the government would soon be “tackling phoenixism.”