HMRC Distraint threat

[Silent Mule]

I've been running a small business since 1990. Essentially it is me providing advice on IT strategy to large financial and insurance companies. All went well (some years better than others but overall I would say things were good) until 2005, when I became ill.

I had to spend a year going into hospital every 6 weeks for an operation. Between operations I had to go daily to the district nurse to have wounds dressed and cleaned. I won't go into too much detail but suffice to say I couldn't get to the wounds to do it myself.

The practical upshot was that I was unable to work for a year because clients would say something along the lines of "we'd love to have you come in and help us but we really need someone who can turn up when we need them, not someone whose schedule we have to accomodate". Not an unreasonable thing for them to say, though it didn't help me at all.

So it was that over the course of a year most of my contacts dried up as clients employed other people.

I was lucky in that the doctors predicted I would be in that state for two years, however, in the event, I was declareed "cured" (for want of a better word) after only a year! Trouble was, I had to start building a client base up from scratch.

I managed, over the course of a couple of years (2007 & 2008), to get two clients: one a very big American insurance firm, the other a small software company specialising in high performance financial messaging software. Both shall remain annonymous.

Then September 2008 happened and the big insurance company nearly went bankrupt. As for the software house, well times were tough but they had a good outlook, knocking the trend. It became apparent that the big guys - the insurance company; the banks that I had had the fortune to have as clients previously, etc - were simply not going to spend money on the services that I provided. Reading the tea leafs, the situation looked dire.

Then the software company came to me and said "we can't afford to keep you on as a consultant but we would like to take you on on a permanent basis". I had to think but eventually decided it would be many years before the economy recovered to a level capable of sustaining my consultancy again. So, I accepted the job.

It was a fulltime job which meant that I didn't have time to also run the consultancy company so I set about trying to wind it up. I did calculations with my accountant and we looked at how much corporate liability there was versus how much money was available and the bottom line was, I had ~£10K cash at bank and owed ~£34K, all of it to HMRC (no other creditors).

I haven't got the ~£24K difference so I went to see an insolvency practitioner. Their advice was that I should offer the Revenue the full amount of the cash-at-bank in settlement of the debts and then, provided they accepted, move to have the comany struck off.

The alternative was to put the company in the hand of the receiver but that, I was advised, would deprive HMRC of the receiver's cut (they can, apparently, take their fees from any money available before settling debt). Thus it was likely that HMRC would only get ~£4K, instead of the full ~£10K available.

I duly wrote to the revenue and made the offer, and explained how the company had, sadly, arrived at the position it was in.

Six months later I got a letter back saying that the offer was rejected as the Inspector was of the opinion that some dividend money had been paid "ultra-vires" (a very small amount, only about £300). I took advice on this from insolvency lawyers (not same as the insolvency practitioner), which was that
a) HMRC do not have the power to make such a decision; and
b) the money was not paid ultra-vires because there was a realistic expectation at the time it was paid that the company would trade it's way back to profit.

The HMRC letter informed me that the debt would be placed with the Debt Management department.

Rather than wait for the rain, I decided the best thing would be to write and explain the whole situation to the Debt Management Department, anew. My thinking here was that it might expedite matters (some times communications aren't fluid between government departments), plus it might be that the Debt Management Department were empowered to make a decision that, perhaps, the Inspector was not.

Yesterday (25 Sept), I got a letter (dated 16 Sept) saying that "...after giving careful consideration to your proposal, the composition offer you have made cannot be accepted and the HMRC board expects payment in full by 30 September 2009...” and then continues “... [if] the payment is not received then recovery of this debt may be pursued by an enforcement action of distraint".

I admit here that I had to go to the dictionary as "distraint" is not a word I had previously heard. It basically means they can impose a seizure order on assets.

This letter made no mention of the previous ultra-vires claim.


All of this gives rise to several questions in my head, some of which I am hoping readers here can help answer:
Does the distraint apply only to company assets, or can it be extended to personal assets? (The company is a UK Limited Company.)
Is there a way to engage for some other way of settlement?
How long does a distraint action take? Can I expect to lose my house next week? I read that it's 5 days from when they visit and they don't even have to knock on the door - they can knock it down and seize goods.
What happens if they come round and I'm not in? Can they take my girlfirend's goods? My stepchildren's goods? My son's?
Is this normal HMRC practice?

All of this seems daft as the company has no assets, other than the cash in the bank.


Yours, with thanks,


SM

[Lambs]

Hi S,

So far as I am aware, the letter will have been addressed to you as director/company secretary of the company, and will relate to the assets of the company, and not to anyone or anything else's.

I am in no way expert in this aspect of law, as it's not really tax law but commercial law. (Although there are some tax practitioners who have a good deal of experience in this area). However, I think that your personal assets (and any other person's) are safe.

Furthermore, I think that there are special rules relating to attending residential premises for the debts of a company or business, which would make it hard for such action to be taken at your home.

Perhaps other contributors who are more experienced in this area will also be able to add more. The reason for my posting is so you can sleep more soundly over the weekend!

HMRC has become more aggressive when it comes to pursuing debts but they must still follow the law. The debts are the company's not yours. Ironically, the people best placed to answer your queries are the insolvency practitioners but of course that would only end up with HMRC receiving less, as you have already observed. Alternatively, you could always telephone the Debt Management Unit and ask them your questions. They have to tell you the truth.

Regards,

Lambs

[Silent Mule]

Thanks Lambs,

I will try them first thing in the morning to see what they say.

I'm not a tax pratcitioner or a solicitor so it is a bit of a mine field. It occurs to me that, as the only assets of the company are the cash-at-bank, the distraint order could amount to the same thing as them accepting the offer in the first place but, I guess without being seen to be "weak".

Cheers

SM

[robbob]

Hello Silent Mule.


Providing you have done everything in the correct manner then you should not really be liable for any of the company debts.

1. Can you prove that for all dividends taken that there were sufficient retained reserves of the company at that time.
If the records are looked at more closely and it was proven you had not kept proof then the revenue may contend that some dividends may be repayable.
If the revenue are only arguing about £300 then this is a bit pathetic but you should agree to pay this much back to the company.

Note there appears to be a bit of a discrepancy somewhere as the company has large liabilities and no funds - unless large losses were made after the date you last took dividends then there may be more of an issue than it appears at first glance.
Also it is not ok to take dividends in anticipation of future profits.

2. Salaries / PAYE - in rare cases if you have paid yourself salary as a director and the PAYE has not been paid then again the revenue may chase you personally for this PAYE.


3. Ensure your personal tax affairs are fully up to date - If the revenue are chasing you for personal tax returns or tax payable on your persoanl tax return then you will not be able to walk away from this debt as you could do the debt of the company .

Note if the estimated corporation tax liability was 34k this would suggest your company has made decent profits overall and i could see why the revenue may be taking a tough stance in this case.

[Silent Mule]

Thanks Robob,

I should clarify slightly. In preparing to wind the company up, I have presented them with two years worth of financial accounts - the official accounts for 2007/8, and a financial statement for the year 2008/9 for which official accounts are not yet due.

In their pursuit, they are only looking, it seems, at the 2007/8 accounts.

I did take money out in anticipation of future profit and decided at the time of preparing the accounts to classify this as dividend, though it could equally be classed a bonus, or salary or whatever. In the 15 years previously I had never had a problem returning the company to profit, though I had never had the double whammy of personal illness followed by my industry collapsing (my industry being freelance IT consulting to finanical / credit insurance companies).

All of my personal taxation is up to date, in fact more than as I am unable to issue a P45 for myself and so my new employer is taxing me on an "emergency" basis. Plus, due to being a director, I have had to pay on an "on account" basis as if I would earn the same amount next year on a self-employed basis as I did last year, yet all of my actual income has been taxed on a PAYE basis. Of course, I can't get at that "adavanced" paid tax, due to it being with HMRC.

I called HMRC this morning and their view was that they would issue a ditraint order against me personally and would be seizing personaal assets, including my house, if I don't pay up within 5 days (thereby making a family homeless).

I think the moral of this is, never get an unexpected life threatening illness, that hospitalises you for any length of time, just ahead of a major recession! Don't get me wrong, I don't want sympathy, I just think it's very sad that they wont entertain the idea of coming to an agreement even.

I was told by HMRC on the phone today that they NEVER come to an agreement with ANYONE that owes ANY tax and that they expect ALL tax to be paid in full and that as a director of the company I was personally liable for ALL company debt. I am not sure that this is true... doesn't that negate the point of a limited company?

Also, are HMRC able to decide that a payment is Ultra Vires? I thought that was out with their remit and could only be decided by either an insolvency practitioner or a court of law?

[robbob]

Hello Silent

The tax office are talking pure rubbish if they are saying you are liable for all limited company debt do not be bullied by them on this issue and do not be afraid to complain about any individual who gives factually incorrect advise.

There is no simple answer to the dividends situation - it would be up to the appropriate person to decide how this is all treated - however an insolvency practioner would possibly take the same route as the revenue - if the company should not have paid a dividend then you may be chased for repayment of this money.
If you had taken salary then you may have also been personally liable to some extent for paye due - although again this is not always the case.

The rules are as they are for a good reason.
It is impossible to know what will happen in the future so you should not go down the route of building up debt in the company for your own personal gain for this exact reason. This may seem harsh for someone who has had genuine hardship like you but other individuals would and do go down this route for financial gain.

If you cannot come to agreement with the tax office then take some legal advise and or insolvency advise on how to proceed and what your rights are.

[Silent Mule]

Thanks Robob,

Appreciate the feedback. I do understand that rules are there so that they don't get gamed by people. I just hope that sense (as I see it) prevails as I have no personal assets worth going after either (I sold them all to help get me through my illness, apart from the property that I live in which is currently in negative equity). Thus, it is my honest conviction that all continued rejection would amount to is less money for HMRC ('cos the insolvency practitioner get's their fees first).

I will submit another request for HMRC to reconsider the offer today and see what they say. Otherwise I think I will need to put the matter in the hands of an insolvency specialist and see what comes out of the wringer.

Although HMRC are being agressive in stance, I feel honour bound to note that they are being very personable in manner and that they do listen and let me speak, so not the "closed ears" attitudeI had expected. It kind of feels more like the experience of talking to someone who isn't empowered to either use discretion or route you to someone who can listen to an offer.

Thanks again, I really appreciated the feedback / advice from folk.

[bhatotia]

The debt continues to pile up as they borrow money to pay off the interest or arrange for the repayments for their previous borrowings, eventually leading them to bankruptcy.

[mullet]

This thread has been resurrected by a spammer, and because it contains some incorrect information which was not corrected in 2009 I must comment.

Apart from some exceptions (notably PAYE deductions on a director's salary in certain situations) a company's liability stays with the company and cannot be transferred to a director. In the case of personal debt, only the debtor's own assets can be seized ... not anything jointly owned and certainly not the assets of a spouse/partner or children. And any such asset must be unencumbered - i.e. not leased or on secured finance. And a house can never be seized under distraint, as only chattels (tangible, moveable property) can be so seized.

So the sentence I called HMRC this morning and their view was that they would issue a ditraint order against me personally and would be seizing personaal assets, including my house, if I don't pay up within 5 days (thereby making a family homeless). is simply wrong. If genuinely from HMRC, then the "advisor" didn't have a clue.