The Insolvency Service is to deploy artificial intelligence to root out rogue directors who deliberately fold their companies to dodge tax and walk away from their debts, but the agency has admitted its new taskforce cannot fix an £800 million problem on its own.

The chancellor committed £25 million over five years in November’s budget to fund a 50-strong unit dedicated to investigating suspicious company insolvencies. Its target is so-called “abusive phoenixism”, the practice of liquidating or dissolving a company to escape tax liabilities and creditors, only for the business to rise again under a new corporate shell.

Phoenixism accounted for 22 per cent of the £3.8 billion in total tax losses in 2022-23, according to HM Revenue & Customs estimates, and the practice has long been a source of frustration for the small firms left unpaid when a customer or supplier collapses and quietly reappears under a new name.

Dave Magrath, director of investigation and enforcement services at the Insolvency Service, said enforcement outcomes were “really important” but warned they would not be enough. “On their own, they won’t solve the problem. The problem is a much greater one and it probably needs some of our policy people to really think about that tension between [directors] starting [companies] again and phoenixism.”

The taskforce, which began work in April and expects to be fully operational next year, grew out of joint work between HMRC, Companies House and the Insolvency Service. It will lean heavily on technology to find its targets. “We’re looking at the hundreds of thousands of companies that dissolve every year,” Magrath said. “We need some tech power to help us hone in and find the needle in the haystack around where the harm is.”

The move follows a damning National Audit Office report in 2024, which found that some small businesses were easily exploiting weaknesses in government systems to evade tax and that there had been a lack of focus on phoenixism. The watchdog, which also warned that small businesses account for around 80 per cent of UK tax evasion, revealed that the Insolvency Service had disqualified just seven directors for phoenixism between 2018-19 and 2023-24, out of 6,274 disqualified directors in total.

As part of the drive to ban more rogue directors, the Company Directors Disqualification Act is set to be amended, following a recent consultation, to widen the circumstances in which law-breaking directors can be struck off. The reform sits alongside Companies House’s rollout of identity verification for directors, another measure aimed squarely at phoenix operators.

Recent cases illustrate the scale of the abuse. The owner of a Burton fire alarm installation company was banned after paying himself almost £400,000 across two companies while handing HMRC just £5,368, while an Oxfordshire landscaping boss ignored his director ban and left £300,000 in unpaid tax across two companies. In one of the more extreme examples, a director linked to more than 400 companies was banned for nine years for helping struggling firms subvert the insolvency system.

Magrath acknowledged the difficulty of striking a balance between allowing entrepreneurs who fail for legitimate reasons to try again and clamping down on abuse, particularly at a time when the country is “striving for economic growth”. He said he hoped the “heart of the solution” would come from the recent civil enforcement consultation, which could see restrictions applied to directors with a pattern of repeated, harmful failures in lower-level cases, while still allowing them to “contribute to the economy”.

Caroline Sumner, chief executive of R3, the trade body for restructuring, turnaround and insolvency professionals, welcomed the taskforce as a response to “a longstanding issue”.

“Phoenixism undermines confidence in the business environment and can leave creditors, including small businesses and HMRC, out of pocket, so co-ordinated action is essential,” she said. “Measures such as strengthened identity checks for directors and improved data sharing should make it easier to identify and act on misconduct.

“Ensuring that the director disqualification regime is robustly applied and that there are sufficient resources and powers to pursue repeat offenders will be critical to the taskforce’s success.”

Amy Ingham

Amy is a newly qualified journalist specialising in business journalism at Business Matters with responsibility for news content for what is now the UK’s largest print and online source of current business news.

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