HMRC Taking Control of Goods: Distraint and Insolvency Rules Vary Across GB

• HMRC recovers debts by seizing and selling goods, a process known as "taking control of goods" in England and Wales (under TCEA 2007) and "distraint" in Northern Ireland.
• If an insolvency event occurs while HMRC's enforcement action is incomplete, the trustee or liquidator's authority is required for HMRC to proceed, or they may demand the goods' release.
• Proceeds from sales completed within three months of a bankruptcy or winding-up order may be surrendered to the insolvency practitioner if preferential creditors cannot otherwise be paid in full.
• HMRC's enforcement actions are typically suspended during voluntary arrangement proposals or moratoriums, but pre-existing Controlled Goods Agreements can establish priority claims.
• Following an administrator's appointment, new enforcement actions are generally prohibited without consent, though HMRC often seeks direct financial settlements.

The onset of formal insolvency proceedings introduces complexities for HMRC's enforcement actions, particularly when HMRC taking control of goods or distraint has already commenced.

HMRC possesses specific powers for HMRC debt recovery that allow it to seize and sell a debtor's assets to satisfy outstanding tax liabilities, including associated costs. Historically, this method was known as "distraint," a process that did not necessitate a court order for its execution. However, the legal framework governing these powers varies significantly across the United Kingdom's jurisdictions, a crucial point for any insolvency practitioner to understand.

In England and Wales, the distraint legislation was repealed on April 6, 2014. It was subsequently replaced by Part 3 of the Tribunals, Courts and Enforcement Act 2007 (TCEA 2007), which introduced the concept of enforcement by taking control of goods. Consequently, HMRC taking control of goods in England and Wales now operates under Ministry of Justice legislation, rather than HMRC's own specific powers. Conversely, in Northern Ireland, the original HMRC distraint Northern Ireland legislation remains valid. For Scotland, HMRC employs a different mechanism known as HMRC attachment Scotland, which is a form of diligence typically authorized by a summary warrant. This jurisdictional divergence means that while the underlying principle of asset seizure is consistent, the procedural specifics and legal basis differ considerably.

The onset of formal insolvency proceedings introduces complexities for HMRC's enforcement actions, particularly when HMRC taking control of goods or distraint has already commenced. If a bankruptcy order or compulsory winding-up order is made while a taking control of goods action in England and Wales, or a distraint action in Northern Ireland, remains incomplete – meaning goods have been seized but not yet sold – HMRC may still proceed to complete the sale. This requires the explicit authority of the trustee in bankruptcy or liquidator. Alternatively, the insolvency practitioner may demand the release of the seized goods to them for sale, provided HMRC receives an undertaking.

The timing of a completed sale relative to the insolvency event is also critical. Should the sale of goods through taking control of goods or distraint have concluded within the three months immediately preceding the date of a bankruptcy or winding-up order, the proceeds might be surrendered to the trustee or liquidator. This surrender is contingent upon the insolvency practitioner demonstrating to HMRC that there is an insufficient amount from other asset realisations to fully pay preferential creditors. However, if the sale was completed more than three months before the bankruptcy or winding-up order, HMRC is legally entitled to retain the full sale proceeds. In Scotland, attachment actions are specifically prohibited against a sequestrated trader for the entire duration of the sequestration.

When HMRC taking control of goods or distraint has been completed, meaning the goods are in HMRC's possession—either physically or through a Controlled Goods Agreement HMRC in England and Wales, or a "walking possession" agreement in Northern Ireland—prior to the appointment of a liquidator, administrative receiver, or administrator, the enforcement action generally remains valid. In such scenarios, HMRC will maintain its position and may proceed to complete the sale. However, HMRC's enforcement actions are typically suspended once an interim order is made, a moratorium is granted, or proposals for a voluntary arrangement are received and a creditors' meeting is scheduled. Exceptions to this suspension arise only in extraordinary circumstances, such as evidence of fraud or a lack of probity.

In cases where a Controlled Goods Agreement HMRC or walking possession has been established, HMRC's support for a voluntary arrangement proposal is usually conditional. The terms will likely stipulate that the portion of HMRC's claim equivalent to the lower of either the total claim value or the agreed valuation of the controlled goods will be treated as a priority claim within the arrangement. Should these proposals be rejected by creditors, HMRC will then proceed to finalize the seizure by selling the goods. Following the appointment of an administrator, taking control of goods or distraint cannot be initiated or continued against the company or its assets without either the administrator's consent or a court direction. Despite this, HMRC often seeks to achieve a financial settlement directly with the administrator, leveraging the special rights it holds over the seized goods, thereby often circumventing the need for court intervention. The process of "binding goods" under the TCEA 2007 enforcement by taking control of goods significantly strengthens HMRC's leverage in these negotiations.

Insolvency practitioners must understand HMRC's specific rights and procedures for taking control of goods or distraint in bankruptcy, winding-up, or administration, particularly regarding the validity of pre-insolvency enforcement actions and the distribution of proceeds to ensure compliance and proper asset management.

Source: Original reporting via HMRC guidance