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Written by Robert Moore Marketing Manager 2 March 2022

What is distraint?

Creditors have the right to distraint, which is the ability to seize assets in lieu of debts, once they have been granted a court order. When it comes to HMRC, they can skip the process since they do not need a court order. However, they still have to adhere to strict regulations if they intend to recover their debts by way of distraint. 

So, what is distraint?

HMRC may issue what is a notice of enforcement by way of distraint, enabling them to retrieve any debts they have outstanding from businesses. Often it is due to late payment of taxes. To go about this a County Court Judgment will be sent to the debtor, with the hope that they will respond with the money there and then. If it cannot be obtained then further steps are to be taken.

Can any creditor distrain?

Unfortunately for other creditors, only HMRC and landlords have the right to distrain and have goods removed from the business premises. Whatever is removed can then be sold at auction, with the money made from doing this used to pay off the debts.  Tools of the trade cannot be taken as these curtail the businesses ability to generate revenue. Any money left-over has to be given back to the business. 

In the case of landlords, they must follow a Commercial Rent Arrears Recovery procedure instead.

As stressed above, HMRC still have to stick to strict regulations despite them not having to obtain a court order to be able to carry out distraint.  For example, the HMRC agent must present a certificate of identification, showing the debtor who they are and who they represent. Also, agents are not to force entry but may enter the premises via an open window. No violence or force is allowed, only passive force can be used (once they have entered).

It is a seven-day process from the receipt of the notice:

  1. A visit from a HMRC field officer; notice must be given in advance of this visit.
  2. The request for payment; if payment cannot be made then the officer will make an inventory of the companies’ assets on a Controlled Goods Agreement (CGA)/C204 form.
  3. The signing of the CGA (previously known as a walking possession) by the person owning the debt; following this they have seven days to pay before the items listed are collected and sold at auction. If the agreement is not signed, an enforcement officer can arrange for the items listed to be immediately removed.
  4. Once the agreement has been signed, assets can remain at the business premises and be used for daily trading. But under no circumstances can any items from the inventory list be sold, moved or given away. Be aware that when signing a CGA, you are agreeing for the officer to revisit at anytime to inspect of remove the goods.
  5. Five days is given as the deadline to arrange payment; note it may be feasible to arrange a Time To Pay Arrangement but the company must act quickly if they intend on renegotiating payment terms – it can be hard to secure a new arrangement is one has failed in the past.
  6. The total amount payable should be listed on the C204 form; this includes a list of the costs (the distraint cost and officers’ time included) and a breakdown of the amount owed. Note: small debts can easily add up as creditors will charge for the time taken to employ debt collectors on top of what is already owed.
  7. Following a non-agreed TTP or lack of full payment being received, the HMRC officer returns to the premises. They will seize control of assets in the inventory list and sell these at auction – they have the rights to do so.

The Inventory list

For limited companies, only items belonging to the company are included. This differs to Sole traders of which can have personal items included on the list being that the owner is personally liable.

Example of items on the inventory; company stock, office furniture & equipment, machinery, company vehicles.

What if there is disagreement to the amount claimed to be owed?

If this is the case, be sure to discuss with the creditors. Be aware that once the officer has entered the business premises, negotiation will not be possible. Therefore, take every chance to speak your point at the initial letter sent.

What are your options?

It is important to act fast. If the business is not viable and the debts are too great then a creditors voluntary liquidation should be looked at. Doing this can lower the risk of wrongful trading and can reduce the director’s personal liability. On the other hand, if the company still seems viable but is just unable to afford the all of the the debt, then an informal time to pay can be negotiated where all the debt is paid off over 6-12 months.  If this is not feasible then formal repayment plans are available such as a company voluntary arrangement.

Note that a notice of liquidation or a notice of intention to appoint can halt proceedings and stop goods from being removed.

HMRC has a lot of control as a creditor, more so than a normal creditor. Distraint defines the power HMRC get in addition to typical creditors, not forgetting that they must still abide regulations and try first to get the funds through a county court judgment.

Contact us at KSA Group if you have received a notice from HMRC, are looking to make a deal to repay the tax or if you would just like general advice on distraints and enforcement notices – our experts can help you. Remember, the faster you act the better and the greater the chance of unwanted actions being prevented.

Category: HMRC Time to Pay Arrangement for VAT and PAYE

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