Taxman changes tack on distressed companies

The tax authority’s willingness to seize a businesses's assets to recoup unpaid taxes has increased so much - just as its other approaches have receded - that it is now its “preferred method of enforcement” when tackling distressed traders.

Sounding this alert, a legal adviser said figures it obtained show that while the number of company wind-up petitions and orders issued by the taxman has dropped, his use of ‘distraint’ is rising.

In fact, the number of petitions from HM Revenue & Customs to wind up companies fell from 6,440 (in 2011-12) to just 3,773 (in 2012-13), representing the lowest figure for five years, said Pinsent Masons.

Similarly, the number of company winding-up orders successfully obtained has fallen by 25% in the past year, dropping from 3,399 to 2,541, said the advisor reflecting on HMRC data obtained under freedom of information rules.

In contrast, but over the same period, there has been a rise in HMRC’s use of distraint – the taxman’s statutory right to visit a business premises and seize goods to recover unpaid taxes. Earlier this month, a lender calculated HMRC's use of distraint to have effectively doubled.

Serena McAllister, on the restructuring team at Pinsent Masons, reflected: “The drop in petitions to wind up companies and place them into liquidation, combined with evidence that suggests HMRC is increasingly using its powers to seize business assets, show that HMRC is now using distraint as its preferred method of enforcement.

“Interestingly, this tactic appears to be paying off as HMRC's recovery rate has increased significantly, which is good news for the taxpayer although not so good news for businesses.”

Having lost is preferential creditor status in 2003, distraint allows HMRC to “effectively jump to the front of the queue” of creditors and obtain priority in respect of those seized assets.

“For some companies,” added McAllister, “particularly [smaller ones] the seizure of its assets could be the final blow and may even force the business into insolvency".

 

21st July 2013

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