First Tier Tribunal finds that director loan was not written off or released on liquidation
Introduction
The First Tier Tribunal has issued a judgment in Quillan v The Commissioners for His Majesty’s Revenue and Customs [2025] UKFTT 00421 (TC). The tribunal considered the tax implications of an overdrawn director’s loan account following the liquidation of a company.
Key Issue
The central issue was whether, for the purposes of s 415(1) of the Income Tax (Trading and Other Income) Act 2005 (‘ITTOIA’), the director’s loan balance had been either ‘released’ or ‘written off’ during the liquidation process.
Tribunal’s Decision
The Tribunal found that the director’s loan balance had neither been released nor written off. The Tribunal stated that there was no formal release agreement. Although, the liquidator had received part payment of the loan, this did not constitute a release of the entire debt.
On the issue of the loan being written off, the Tribunal also found that this had not occurred. It emphasised the importance of the liquidator’s intentions and actions. The Tribunal noted that the liquidator had not followed the formal writing off process, and the fact that the loan balance was outstanding when the company was dissolved, did not, by definition, mean the loan was written off. The Tribunal concluded that the loan remained capable of being pursued on behalf of the company if it were to be restored at some point in the future.
Implications
The Tribunal’s decision provides clarity on the treatment of director’s loans in liquidation. It highlights that:
- A partial repayment of a director’s loan does not automatically imply a release of the entire debt.
- The intentions and actions of the liquidator are crucial in determining whether a loan has been written off.
- The dissolution of a company with an outstanding director’s loan does not automatically mean that the loan has been written off.
- A loan is not written off, simply because no further attempts are being made to collect it.
- A debt can only be written off once.
Key Takeaways for Insolvency Practitioners (‘IPs’)
Whilst the decision of the First Tier Tribunal is not binding, IPs may wish to consider the following: –
- Formal Release is Essential: The Tribunal emphasised that a partial repayment of a director’s loan does not, by default, release the entire debt. IPs must ensure that there is a legally binding release agreement in place if that is the intended outcome.
- Intention and Action Matter for Write-Offs: The Tribunal highlighted that the intentions and actions of the liquidator are crucial in determining whether a loan is written off. A debt is not considered written off simply because no further attempts are being made to collect it, or because the company is dissolved with the loan still outstanding.
- Document Everything: IPs should document all steps taken in relation to director’s loans, including any decisions, agreements, and actions. This documentation will be useful in demonstrating the IP’s intentions and actions.
- Be Clear and Explicit: IPs should use clear and explicit language in their reports and correspondence regarding the status of director’s loans. Avoid ambiguous terms or statements that could be open to multiple interpretations.
- Consider Potential for Future Recovery: The Tribunal noted that a loan can potentially be pursued if the company is restored. IPs should be aware of this possibility and its implications when making decisions about director’s loans.
- Seek Professional Advice: Given the complexities of tax law and the potential for significant financial consequences, IPs should seek professional advice when dealing with director’s loans, especially in situations where there is any ambiguity about the appropriate treatment.
Appeal
The Upper Tier Tribunal has confirmed that no appeal of the decision by HMRC was received within the appropriate time limits.
R3 Recovery Magazine, Summer 2024
The Chair of the R3 Business Tax Working Group, Marcus Rea, Teneo, authored an article titled ‘HMRC tax stance complicates recoveries for close companies’, which can be found below. The article highlights the interaction of insolvency and tax laws does not work particularly smoothly as evidenced in this decision e.g. “And the IP, having neither written-off nor released the debt, may enable a director to argue that no income tax is crystallised on a deemed distribution. Whether that argument would remain sustainable for a director if the debt had not been repaid after the ultimate dissolution of the company is clearly debatable.”
Section 455 ‘Charge to tax in case of loan to participator’ of the Corporation Tax Act 2010 (‘CTA 2010’)
When a company has paid Section 455 tax on a loan to a director, the only way to reclaim it under Section 458 CTA 2010 is if the loan is formally released, repaid, or written off. IPs may wish to evaluate their approach to the possible recovery of these loans in an insolvency process following this decision.