The fundraising agency Bluefrog has reformed after going into liquidation owing more than £2m to HM Revenue & Customs.

Bluefrog Ltd, which was founded in 1997 and whose clients included the RSPB, Marie Curie and Barnardo’s, owed £2.1m of VAT and another £300,000 to other creditors.

It went into liquidation in April and has since reformed as Bluefrog Fundraising with the same staff and clients at the same London office.

Mark Phillips, a director of both companies, said he felt “absolutely awful” about the closure of the company while it owed money. “Bluefrog has always been an ethical organisation,” he said.

Phillips attributed Bluefrog Ltd’s demise to new guidance on direct marketing services and VAT, which HMRC introduced in 2015.

Until then, many direct marketing companies believed the costs of producing mail packs could be zero-rated for VAT purposes if they were produced by a single source. But two years ago HMRC said this was wrong and such costs should be treated as standard-rate services.

It introduced transitional arrangements that exempted companies from action for past errors if they notified HMRC that they would apply the standard rate from the end of November 2015.

Phillips said he was unaware of the guidance or the transitional arrangements until a tax inspection last year, which resulted in Bluefrog Ltd being hit with a £2m-plus demand for VAT backdated to 2011.

Phillips said this left the company with no choice but to file for liquidation. He said he knew of other agencies that were continuing to wrongly zero-rate services. “This is going to hit a lot of people,” he warned.

“We had five VAT inspections in 20 years and never avoided paying tax. But when you are hit with something like this that is applied retrospectively, what can you do? This has been one of the worst experiences of my life.”

He said Bluefrog consulted lawyers about challenging HMRC, but was told it would cost £160,000 just to start a challenge and there was no guarantee of success.

Phillips said charity clients had been informed about the situation and pledged to attempt to pay back creditors “even if it takes 20 years”.

HMRC did not respond to questions before Third Sector‘s deadline.