The release of loan to a participator who was also a director was, in the absence of any evidence to dicate otherwise, treated as earnings for NICs purposes.

In Stewart Fraser Limited [2011] UKFTT 46 (TC) a director’s loan account was allowed to go overdrawn. This practice reoccured over several years with the balance written off annually by the company. It was claimed that this practice was necessary because a dispute with a minority shareholder prevented the company from voting dividends. 

  • HMRC claimed that the waiver of the loans was profits derived from the director's employment and therefore Class 1 NICs were due.
  • The company contended that the loan waivers were made to the director in his capacity as a participator - the majority shareholder and so were not earnings.

The company's evidence was thin. Despite the fact that HMRC's representative placed what might be seen as over reliance on HMRC's own manuals, the First Tier Tax tribunal turned down the company's appeal and decided that HMRC's analysis was correct; in this instance, the write off should be treated as earnings from employment. 





Amount written off




Salary (also paid to the director)




The tax and social security legislation

  • Section 3(1) SSCBA states that earnings include any remuneration or profit derived from an employment.
  • Section 188 ITEPA 2003 treated the release of an employment-related loan as earnings. For the relevant years under appeal section 421 ICTA prevailed over section 62 ITEPA 2003. The meaning of this being that for tax purposes, the loan write-off was incapable of being taxed twice and so could only be taxed as a distribution and not also as employment income.
  • Note that this position should hold good under present analysis of s415 ITTOIA 2005 and s188 ITEPA 2003. A written off loan will be taxed in priority under ITTOIA and subject to NICs under the SSCBA.

Key findings

  • The loan write-offs were approved by the directors.
  • There was no mention or approval of the write off at any shareholders’ meeting involving all the shareholders.
  • The normal route of voting dividends was not followed by the company.
  • The director was paid a substantial salary, however, when the loan account balances started to be waived the director’s salary decreased.
  • There was a regular pattern of transactions debiting the loan account (the payment of a private mortgage).


The Tribunal found that the company was unable to produce any evidence to support the contention that the waivers of the loans were payments to the director in his capacity as a majority shareholder.

Our comments

There was some unusual circumstances in this case and it is difficult to tell what was really going on. A shareholder’s dispute it not unheard of but it is less usual to be in a position where a dispute has lasted four years and still not to be able to produce any evidence of it. Perhaps, with hindsight, evidence could have been better presented with more input from the accountants advising the director in his capacity as shareholder? That might have tipped the balance in the company's favour.