Behind with TAX or VAT Payments? – What happens if a company cannot agree to HMRC payment terms

If a company or individual falls behind with TAX or VAT payments, there may be an opportunity to negotiate payment terms with HMRC, or enter into a formal Time to Pay Agreement (which we have looked at in a previous blog).   Let’s assume that a company has been unable to agree terms with HMRC and the debt falls to EIS (Enforcement & Insolvency Service) to recover.  The first recovery process that HMRC will consider will be to take control of goods or distraint.  HMRC will ordinarily only consider distraint where the business is reliant on goods or chattels such as restaurants and bars, motor trade, retail, manufacturing etc.  For businesses that do not have much in the way of physical assets, HMRC is more likely to obtain judgement or issue a statutory demand.

To distrain, HMRC will send a notice of enforcement and no less than 7 clear days later, HMRC will send either one of its own field officers or a bailiff from one of 13 private sector debt collection agencies to attend at the premises.  Bailiffs from the private sector are known as Enforcement Agents (previously Certified Bailiffs) and whilst they are not officers of the Court, as the Court certifies them, they are required to adhere to certain standards of conduct and competence.  The same applies to HMRC field officers.

HMRC field officers and enforcement agents can force entry into commercial premises but not residential premises without a warrant.  If premises are mixed use, entry can only be gained by a normal entry point e.g. a door but not for example an open window.  Certain items are excluded from distraint such as tools of trade and perishable items.  Third party goods are also privileged and cannot be seized however the bailiff is likely to require clear evidence that any third party goods in a premises actually belong to the third party.  Where for example a successor business has taken over the assets from a company indebted to HMRC, the bailiff is unlikely to accept a change of ownership unless the new company can evidence the purchase of the assets and provide evidence that it is the trading entity (for example being party to a lease, having utility bills in its own name etc).

Caution is required however where assets are sold to a new company prior to liquidation, the director of the old company cannot be a director of the new company if it has a similar name.  If the director does act as a director of new company and new company has a prohibited name (a name that is so similar that it suggests a connection), he is guilty of a criminal offence and can be personally liable for the debts of the old company.  There are 3 exemptions to this rule; (i) where the new company has traded for a period of 12 months or more (ii) where a Court Order is obtained allowing the director to act and (iii) where a new company purchases the assets from a liquidator (the director cannot however, be involved in the promotion, formation or management of the new company with a prohibited  name until after the assets have been purchased by the new company from the liquidator).  Whilst a company can be liquidated voluntarily within a two-week period, this may however cause problems with continuity of service and may not be possible in some cases.

The enforcement officer or field officer will take an inventory of assets and unless the debtor enters into a Controlled Goods Agreement (by making an offer to pay) goods can be seized for sale.  If a Controlled Goods Agreement is prepared but not signed, goods can be seized.  If the Controlled Goods Agreement is signed but subsequently not adhered too, the enforcement office or field officer can attend on 2 days’ notice to seize goods for sale.

If you or any of your clients have received notice of distraint or consider that HMRC may be looking to commence recovery action, please do not hesitate to contact us as soon as possible.  Early advice is recommended as once the bailiff attends, negotiations can be far more problematic and options may be limited.