Published on 25 February 2011 by Tony Groom

Evidence is emerging that HM Revenue and Customs is adopting a tougher approach to PAYE, VAT and tax arrears and increasingly using its powers of distraint to take over control of the goods, stock and assets of businesses.

In one example this week, just two hours after rescue adviser Tony Groom, of K2 Business Rescue, was appointed by a company in difficulties, HM Revenue and Customs (HMRC) officers appeared at the premises and levied distraint on all the company’s assets and stock. He reports that he is hearing similar stories from other turnaround and restructuring professionals.

The issue of a distraint notice (a C204 notice, also called a distress or walking possession notice), under HMRC powers allows it to take control of everything seized and while it does not necessarily remove property at that point, it means that the company cannot continue trading and is effectively put out of business because it is prevented from using its stock and cannot either sell or give away anything that has been distrained.

This walking possession is used rather like Winding Up Petitions (WUPs) when HMRC has exhausted attempts to communicate with the company.  The communication leading up to it is generally in the form of letters advising the company that HMRC intends to take action. While the proposed action is normally specified, HMRC is not obliged to give a date for their intended action.

The shock for most companies is when HMRC follows through with the actual action because it appears to come as a surprise. However when they review their correspondence it should not have been.

Following issue of the C204 the company is normally given just five days to come up with the money it owes. If the company does not pay or come up with alternative proposals, HMRC or an appointed agent can then take everything away for sale.

This hardline change of tactics comes after figures were published at the end of January showing that the HMRC rejection rate for Time to Pay (TTP) arrangements had more than doubled in 2010, climbing from 2.7% in 2009 to 5.8% in 2010.

These percentages seem small in view of the measures being taken when agreement is not reached. HMRC seems to want to get the message across that it will take the action necessary when companies fail to respond to their correspondence.

TTP is a very real solution for companies that cannot pay. The scheme, introduced in November 2008 in response to the recession, had been welcomed, particularly by small businesses, as being one of the most effective tools for helping companies to survive the recession.

However, Andrew Cave, spokesman for the Federation of Small Businesses, said his organisation had been hearing from some businesses that they had received letters saying that the scheme was now being wound up. This has been denied by HMRC, whose spokesman said the scheme was still available and the criteria for agreeing arrangements had not changed in any way

Tony Groom says he does not believe that the scheme is being wound up as his experience is that they are being considered, but that HMRC is wanting TTP arrangements to be shorter payment periods, often three months.

While for the last two years HMRC has supported government policy of providing a light touch approach to businesses in difficulty, it is responsible for collecting arrears and not for saving businesses.

“It would appear that the government was alarmed at the high value of outstanding HMRC arrears, which would explain the shift in HMRC action,” he says.  “While levying distraint was very much a collection tool used by HMRC up to seven or eight years ago, since then it has more commonly collected debt by county court or winding up petitions.”

This also suggests a change in Government policy as HMRC has no direct responsibility for helping companies to continue to trade.  Tony Groom asks: “Do the politicians want companies to continue trading or do they just want their money regardless of the effect it might have on the economy’s ability to recover from the recession? They are basing the recovery on private sector growth, relying on it to create the jobs needed to absorb public sector redundancies.”

The Enterprise Act of 2004 removed the HMRC status as a preferential creditor in insolvent companies. It would seem that this more aggressive use of their power to seize goods is a way of restoring the preferential status without the requirement of a judgement. Until this recent development most enforcement action had been carried out by bailiffs and sheriffs collecting outstanding judgement debts on behalf of creditors.

Although HMRC has issued letters of warning about its intention to activate its distraint powers, he says, in the past few years he is not aware of them being followed up: “This is a very big and significant shift in behaviour”.

If a company receives a notice of intention to either wind up or distrain it should not delay in seeking the services of insolvency or turnaround advisers.