Distraints up fourfold in two years as HMRC gets tough

The number of companies whose assets have been seized for late payment of tax has risen fourfold in the last two years. The number of times when Her Majesty's Revenue and Customs used its powers of "distraint" was 7,004 in the 12 months to April 2011, up from 1,675 in the year to April 2009.

The figures were unearthed by the commercial tax law firm, McGrigors. HMRC is one of the few bodies in the UK that can legally seize assets without a court order. In 2003 HMRC lost its preferred creditor status, which had ensured the tax office would be paid in full ahead of other companies when firms went into administration or liquidation. McGrigors says this might have prompted HMRC to use its distraint powers more aggressively.

Stuart McNeill, a partner at McGrigors, said: "HMRC, having lost preferred creditor status, may be using its sheer size and muscle to jump to the front of the queue, damaging other creditors' chances recovering debts in the process." Mr McNeill also argued that the increased use of distraint by HMRC could be counter productive. He said: "By barging in and selling the assets of a late paying company without making a proper commercial assessment of the firm's medium term viability, HMRC risk sacrificing full payment in a few months' time."

In November 2008, at the height of the recession, HMRC extended its 'time to pay scheme', to ease pressure on cash-strapped businesses.

But in August, HMRC ceased to publish figures indicating the level of demand for the scheme, which prompted tax professionals to speculate it was being wound down. Figures released by HMRC in July showed that a total of 15,490 time-to-pay arrangements were agreed in the second quarter of 2011 compared to 30,160 in the second quarter 2010, a year-on-year reduction of 49 per cent.

HMRC denied that it was exercising its distraint powers too aggressively. A spokesman said: "HMRC purely uses its powers to seize assets of businesses who owe us tax when all other avenues have been entirely exhausted. Only a very small number of businesses who have long term outstanding tax debts are collected in this way.

The vast majority pay in full and on time, so it is only fair that for those businesses who choose not to pay that we take appropriate action to collect any tax owed."

A report by the Treasury Select Committee in July into the administration and effectiveness of HMRC found considerable dissatisfaction among the public and tax professionals with the service provided by the department. The committee warned that this was in danger of undermining respect for the tax system.

Last month, HMRC revealed that 6 million people are set to receive tax rebates averaging £400, while another million will learn they have underpaid their tax by about £600.

This is the second year in a row that tax and National Insurance discrepancies have been identified by a new HMRC computer system.