HMRC is what is called a “sophisticated creditor” in that they know all the best methods of collecting in overdue taxes. What is more, they have economies of scale that ensure that it is worth their while to chase even the smallest of debts.
HMRC will use various methods to ensure that taxpayers pay what is due:
- Seizure of Goods
- The use of penalties to deter non-compliance
- Statutory demands
- Winding up petitions
HMRC is responsible for all taxes and duties and there is no particular difference in the methods used for collecting taxes, whichever type of tax it is. VAT and PAYE are perhaps pursued more readily as they do make up the largest types of tax that a company pays. VAT in particular as the company in question has in effect collected the tax from its customers and should pass it on to HMRC.
The steps that are taken by HMRC - HMRC debt collection process
In the first instance HMRC will start collecting in debts by issuing payment reminders and these can be in the form of letters and even SMS texts. Failure to pay the amount owed may well mean that it is outsourced to a HMRC debt collections agency. HMRC have started to use these debt collection agencies more and more in recent years. The amount HMRC pays to private-sector debt collectors has quadrupled in the past 5 years, suggesting it may be stepping up the pressure on people who cannot pay their tax bills.
HMRC debt collection agencies are as follows:
- 1st Locate (trading as LCS)
- Advantis Credit Ltd
- Bluestone Credit Management Ltd
- BPO Collections Ltd
- CCS Collect (also known as Commercial Collection Services Ltd)
- Oriel Collections Limited
- Past Due Credit Solutions (PDCS)
These agencies are likely to start sending more reminders in a more aggressive manner threatening legal action or the seizure of goods.
Control of Goods
As registered bailiffs, the agency may well take action to take control of goods or property at the companies registered address, to then sell on at auction in order to settle the debt. This is known as distraint. For more information on the regulations see here.
The officer either from the HMRC, or a certified bailiff contracted by HMRC, is issued with a Writ of Control. They will then send the Notice of Enforcement to the debtor, on 7 clear days’ notice, excluding Sundays and bank holidays.
This notice period gives the debtor an opportunity to contact HMRC and either pay in full or request/negotiate payment by instalments.
If payment in full is not made within this 7 day period or an installment arrangement agreed, the officer will attend the debtor’s premises after the expiry of the 7 clear day notice period to take control of goods (formally called seizure). If the debtor doesn't sign a Controlled Goods Agreement (formerly Walking Possession) or make payment in full, the officer can make arrangements to remove goods and sell the goods over which he has taken control (seized).
Obviously in many cases the value of goods belonging to the company is not enough to cover the costs of the debt. However the threat of removal can focus minds and funds found elsewhere.
If the seizure of goods does not yield results then HMRC may as a last resort issue a winding up petition.
Winding up petition
Please refer to this page for information about the winding up petition process.
In essence HMRC will instruct its solicitors to petition the court to rule that the business cannot pay its debts and should be closed and wound up. This means that the debt to HMRC cannot get any worse as the company will stop trading. It is unlikely in most cases that HMRC will get its money except perhaps in the more high profile cases such as with football clubs that are often saved at the last minute when faced with a petition.
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Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.