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UT Allows HMRC’s Appeal in Director’s Loan Account Case
Wednesday 26th August 2026
The Upper Tribunal has recently heard HMRC’s appeal in a case involving whether a director’s loan account balance had been written off given where a close company writes off a debt owed to it by a participator, a charge to income tax arises on the participator under s415(1).
In HMRC v Quillan [2026 UKUT 00300], the appeal concerned whether an amount outstanding on a director’s loan account was written off, for the purposes of s415(1) ITTOA 2005, in the course of a creditors’ voluntary liquidation of BOH Investments Ltd, [BOH] which was wholly owned by the respondent and of which he was the sole director. If the loan was found to be written off, the issue of the timing of that write-off needed to be decided.
The second issue in the case was whether the alleged write off occurred in the year of assessment for which the closure notice was issued by HMRC, being 2018/19 rather than before or after that year as argued by the respondent. The FTT held that the loan had not been written off [see 2025 UK FTT 00421] for the purposes of s415(1) and, consequently, it did not have to decide the second issue.
In January 2017, BOH passed a resolution for the voluntary winding up of the company and a liquidator was appointed. The director’s loan account was overdrawn in the amount of £439,954.
The liquidator’s annual progress report of January 2018 noted that the statement of affairs included the overdrawn director’s loan account in the sum of £439,954. An initial demand for payment was made although the director advised that he had no means to pay. Initial enquiries were made with the director with a view to reaching a settlement to discharge his overdrawn director’s loan account. A statement of means was received which suggested the director has no assets and insufficient income to make an offer of settlement. Following protracted correspondence and the threating of legal action, the respondent made an offer of £57,500 to settle the claim and the outstanding balance was reduced to £382,456. No further sums were received and BOH was dissolved in April 2020.
In September 2020, HMRC opened an enquiry into the respondent’s self-assessment tax return for 2018-19 and whether the amount of the director’s loan account had been released or written off by the liquidator, the date of the agreement to do this, and for full details of payments made in relation to the overdrawn loan account. In response to HMRC’s enquiries, the liquidator wrote to HMRC and confirmed the original balance of the loan account, that repayments had been received but the outstanding balance remained unresolved and was not formally written off. HMRC replied in November 2020 asking further questions, in particular, whether the outstanding balance had been written-off, released, or was the liquidator seeking repayment.
The liquidator confirmed that the loan balance remained unresolved prior to his release as liquidator. HMRC asked why the unpaid loan amount had not been released or written off and whether he would be willing to release or write off the unpaid amount if HMRC restored BOH. The liquidator replied “unless a director insists on a compromise, any payments we receive are on account of an overdrawn directors loan account repayment. As liquidator, I then report this to creditors to establish whether they wish to fund or acquire the right of action. Failing that, if the case then closes it allows the company to be restored if I was made aware of any windfall being received by the director.”
HMRC subsequently informed the respondent that an inaccuracy had been found in his tax return and, after further correspondence, advised “that where a liquidator does not write off or release the loan balance, but, on a balanced view of the facts, it is clear that the company and/or liquidator are not intending to pursue the outstanding loan, e.g. where they are not making any attempts to collect it or have given up any attempts to do so, then we should argue that the loan has been written off and s.415 should apply to the relevant amount”.
HMRC concluded that the loan balance had been omitted from the respondent’s 2018-19 tax return and should have been declared. Their closure notice in August 2020 referred to the overdrawn loan account had not been repaid in full. Per their guidance in CTM61560, any loan balance which is not repaid and is no longer being pursued by the insolvency practitioner is considered to have been written off and that s.415 should apply to the relevant amount. The respondent appealed against the conclusion of the closure notice, HMRC provided their view of the matter and offered a review of that decision which was subsequently upheld.
On appeal, the FTT noted that that there was no statutory definition of the words “written off” in s.415(1), that the respondent did not need to prove that the outstanding balance was being pursued but simply that it had not been written off and consequently held that it had not been written off.
At the Upper Tribunal, the operative moment at which the outstanding balance was written off was held to be the issue of the liquidator’s final report in March 2019, and rejected the respondent’s submission that the outstanding balance was only finally written off on the dissolution of the company in April 2020. The UT held that a debt was written off in a CVL when the liquidator finally reports to the members and creditors that, in his view, a debt cannot be recovered. That report was contained in the final account made by the liquidator on 18 March 2019 and formed the basis on which the company was finally wound up and dissolved. That date fell in the tax year 2018/19. Accordingly, the UT’s conclusion was that the outstanding balance was written off in the tax year 2018/19.
The UT concluded that the FTT had made material errors of law in relation to the question whether BOH, acting through the liquidator, had written off the outstanding balance owed by the respondent to BOH but held that the outstanding balance was written off in the tax year 2018/2019.
In final remarks, the UT noted that there appeared to be no relief for the tax charge where the previously written off debt was later recovered from the participator and considered that this was an anomaly which might be addressed by way of legislative amendment or at least an extra statutory concession.
If you would like more information on the above decision, please contact Keith Rushen on 0044 (0) 207 486 2378.
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