"Distraint" is where a landlord or HMRC can recover debt by auctioning off a company's assets. An official visits the company's premises and issues the director(s) or "responsible person" with a distraint notice and records all valuable assets.
Once these have been recorded, there will be an option to agree to "walking possession", which is where the HMRC official "walks away", but holds possession of the goods. If the debt has not been paid after five days, HMRC can auction off the assets. If you don't agree to a walking possession, HMRC can take away the assets immediately.
Those issuing the notice cannot force entry into the premises, but they can enter via an open window, for example. Some businesses, such as shops and restaurants, are open for customers all day every day, making it easy for an HMRC officer to gain entry. Always check who is trying to gain entry by asking for their official ID.
What to do if you're issued with a distraint notice
First, don't panic. There is still time to turn things around. If you can pay the debt straight away, do so. This will ensure your company will stay intact and no goods will be taken. If you can't pay the debt or you need more time to put together a repayment plan, there are other options.
A company voluntary arrangement (CVA) can let you pay off debt over three to five years, while protecting your company from aggressive creditors. It also prevents damaging your company's reputation, because it is not advertised publically.
You can also enter administration, which again protects the company during the process. If the company is sold to directors or a third party, the business itself can still continue.
How to avoid distraint
A company can owe money to HMRC for various reasons, including falling behind with VAT or PAYE payments. If you are struggling to keep up, contact HMRC as soon as possible to explain the situation and try to negotiate a time to pay (TTP) deal.
The sooner you can negotiate payments, the better chance you have of avoiding distraint proceedings.
If you are issued a distraint notice, you need to act quickly and seek advice before any further action is taken.
Blog supplied by Keith Steven of KSA Group Ltd, who has been turning around companies since 1994. He has worked for insolvency firms, turnaround funds and venture capital investors and is the author of the www.companyrescue.co.uk website.