Figures show that HMRC has doubled its use of its powers of distraint - which entitle it to seize a debtor's assets - over the last year.
Information obtained by Syscap, an independent UK finance provider, shows that HMRC used its powers of distraint against businesses 10,577 times in the year ending March 2012, an increase of 92 per cent on the 5,520 uses of distraint against businesses in the year to the end of March 2011.
HMRC's power of distraint enables their staff to visit a company's premises without warning in order to collect unpaid taxes. If the company does not then pay its tax bill within five days, HMRC is entitled to remove and sell its assets, which can include computers, vehicles and other key equipment, without a court order.
Historically, HMRC used distraint mainly to meet unpaid payroll-related tax bills, but has recently been using its powers more extensively to recover a broader range of business taxes.
Syscap points out that smaller businesses are most likely to face difficulties meeting tax bills, even if performing well, because their cash flow is more affected by late payment from an individual customer. Many businesses are also significantly project-based with variable working capital profiles which may or may not deliver cash to coincide with tax deadlines. They also have fewer alternative funding options available.
Philip White, Chief Executive of Syscap, said: "Distraint is every bit as medieval as it sounds. If a business's assets are seized and it can no longer fulfil customer orders, then that could easily and quickly spell disaster.
"HMRC is unlikely to be able to auction off the assets at anything like their real value to the business, and the proceeds of the sale may not even cover the outstanding tax bill. In those circumstances the business would still face court action to recover the balance."
Phillip White added that the use of distraint seems to be part of a tougher stance taken by HMRC against late-paying businesses. He said: "At the start of the recession HMRC was showing leniency towards businesses struggling to pay their tax bills through its 'Time to Pay Scheme' but we are hearing that it is becoming far harder for businesses to negotiate a grace period through the scheme.
"All the evidence now points to a much harder line from HMRC, at the same time that businesses are still unable to rely on the availability of bank loans and overdrafts.
"While HMRC treats removing a business's essential 'tools of the trade' as a last resort, if the business does not have any other liquid assets to its name then it will have no alternative but to do so."
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Susie Hughes © Shout99 2013