The Insolvency Service is launching a new taskforce to crack down on rogue directors who deliberately fold their companies to avoid tax and walk away from their debts. The agency will deploy artificial intelligence to identify suspicious company insolvencies and root out abusive phoenixism, a practice that accounted for 22 per cent of the £3.8 billion in total tax losses in 2022-23.
The taskforce, which began work in April, will rely heavily on technology to find its targets. It will analyze the hundreds of thousands of companies that dissolve every year, using AI to hone in on the needle in the haystack and identify where the harm is.
The Insolvency Service has admitted that its new taskforce cannot fix the £800 million problem alone. The agency has received £25 million in funding over five years to support the 50-strong unit dedicated to investigating suspicious company insolvencies.
Phoenixism has long been a source of frustration for small firms left unpaid when a customer or supplier collapses. The practice has also been criticized by the National Audit Office, which found that some small businesses were easily exploiting weaknesses in government systems to evade tax.
The Company Directors Disqualification Act is set to be amended to widen the circumstances in which law-breaking directors can be struck off. This reform is part of a broader drive to ban more rogue directors and prevent phoenix operators from exploiting weaknesses in government systems.
Recent cases illustrate the scale of the abuse. A director linked to more than 400 companies was banned for nine years for helping struggling firms subvert the insolvency system. Another director was banned after paying himself almost £400,000 across two companies while handing HMRC just £5,368.
The Insolvency Service's director of investigation and enforcement services, Dave Magrath, acknowledged the difficulty of striking a balance between allowing entrepreneurs who fail for legitimate reasons to try again and clamping down on abuse. He hopes that the recent civil enforcement consultation will provide the solution.
The taskforce's success will depend on ensuring that the director disqualification regime is robustly applied and that there are sufficient resources and powers to pursue repeat offenders. The trade body for restructuring, turnaround and insolvency professionals, R3, has welcomed the taskforce as a response to a longstanding issue.
