Phoenixing A Hidden Risk in the Security Industry Supply Chain

Phoenixing is a serious and widespread form of business abuse that poses significant financial, legal and reputational risks particularly within the security industry. Companies that unknowingly procure services from a phoenixed business can find themselves exposed to HMRC scrutiny, unpaid tax liabilities and regulatory breaches.

Understanding what phoenixing is, why it is so common in the security sector and how HMRC treats it is essential for protecting your business.

What Is Phoenixing

Phoenixing occurs when a company deliberately shuts down, often leaving behind unpaid debts such as VAT, PAYE, National Insurance, or supplier invoices and then re emerges under a new company name. The new entity typically

• Operates in the same industry
• Uses the same directors or shadow directors
• Retains the same staff clients uniforms and branding
• Continues trading as if nothing has changed

Like the mythical phoenix rising from the ashes the business appears reborn while its liabilities are abandoned.

Phoenixing is not a legitimate business rescue. HMRC classifies it as tax evasion or tax avoidance depending on intent and actively investigates companies involved.

Why Phoenixing Is So Common in the Security Industry

The security industry is particularly vulnerable to phoenixing due to a combination of structural and commercial pressures including

• High labour costs including wages pensions and holiday pay
• VAT and PAYE heavy payroll models
• Low margins and aggressive undercutting
• Ease of forming new limited companies
• Complex subcontracting chains

Some operators use phoenixing as a deliberate business model, undercutting compliant firms by avoiding tax, allowing the company to fail and restarting under a new entity. This distorts competition and draws increasing attention from HMRC across the entire supply chain.

How Procuring From a Phoenixed Company Can Damage Your Business

Even where a business believes it is acting in good faith, engaging a phoenixed supplier can create significant exposure.

HMRC Supply Chain Risk

HMRC expects businesses to take reasonable care over who they trade with. Where a supplier is clearly connected to a previously insolvent company, HMRC may argue that the risk should have been identified and rightly so.

This can lead to
• Denial of VAT reclaims
• Extended HMRC audits
• Joint and several liability considerations

Reputational Damage

Clients (particularly public sector bodies and critical infrastructure operators) expect robust due diligence. Association with phoenix operators can result in lost contracts failed tenders and long term reputational harm.

Regulatory and Compliance Exposure

Use of non compliant suppliers may trigger concerns from auditors, insurers, accreditation bodies and end clients, potentially placing certifications and approved supplier status at risk.

Operational Instability

Phoenixed businesses are often financially fragile, which in turn increases the likelihood of wage disruption, staff turnover, poor service delivery, or sudden contract failure.

HMRCs Stance on Phoenixing

HMRC treats phoenixing as a serious abuse of the tax system and has expanded its enforcement powers to combat it.

These include
• Director disqualification for repeated insolvencies
• Personal Liability Notices making directors personally responsible for tax debts
• VAT security deposits for newly formed companies
• Active tracking of connected companies and individuals
• Criminal prosecution in cases of deliberate fraud

Crucially, HMRC does not focus solely on the failed company, it examines connected parties, beneficiaries and supply chain relationships.

Phoenixing Red Flags What to Look Out For

The following indicators may suggest that a supplier is a phoenixed company or closely connected to one. While no single factor is decisive, multiple red flags should prompt enhanced due diligence.

Company and Director History

• Directors or shareholders linked to multiple dissolved or insolvent companies
• Directors who previously ran a security company that collapsed or was wound up following a creditor petition (including petitions issued by HMRC)
• Newly formed companies connected to recent compulsory liquidations
• Frequent changes of company name, directors or registered address
• Use of family members, associates or nominee directors to distance individuals from past failures
• Evasive or incomplete explanations when questioned about prior insolvencies or HMRC action

Trading Patterns

• The new company operates in exactly the same sector as a recently failed business
• Same contracts, same clients and same operational footprint as the previous company
• Immediate access to large contracts despite minimal trading history
• A business that presents itself as established despite being newly incorporated

Branding and Assets

• Identical or near identical branding, websites, email domains or contact details
• Staff uniforms, vehicles or equipment carried over from a failed company
• Transfer of assets at little or no commercial value
• Marketing materials reused with minimal changes

Pricing and Commercial Behaviour

• Pricing that appears unsustainably low when lawful wages, pensions and tax obligations are considered
• Pressure to bypass formal procurement or due diligence processes
• Resistance to contractual tax compliance warranties
• Unusual or opaque payment arrangements

Tax and Financial Indicators

• History of unpaid VAT, PAYE or National Insurance in linked entities
• Delayed or inconsistent VAT registration
• Requests to invoice through multiple companies
• Reluctance to provide VAT, PAYE or tax compliance documentation

Employment Practices

• Staff moved immediately from a failed company without a clear TUPE process
• Complaints regarding late wages or missing payslips
• Cash in hand practices or unclear payroll structures
• High staff turnover shortly after contract commencement

Protecting Your Business

To mitigate phoenixing risk businesses should

• Conduct company and director history checks (including credit checks)
• Identify patterns of insolvency or creditor led liquidations
• Challenge pricing that appears commercially unrealistic
• Obtain written confirmations of tax and employment compliance
• Keep records of all due diligence steps taken

Demonstrating reasonable care is critical should HMRC ever review your supply chain decisions.

Conclusion

Phoenixing is not an isolated issue, it is a persistent and damaging practice within the security industry. Procuring services from a phoenixed company, even unknowingly, can expose compliant businesses to financial loss, regulatory scrutiny and reputational harm.

Strong governance, informed procurement and proactive due diligence are essential to protecting your business and maintaining trust in an industry where reliability and integrity are paramount.

‍