When is a loan write-off, not a write-off? One of the oddest Income Tax appeals so far this year concerned a director's claim that his loan has never been written off. The First Tier Tribunal (FTT) found a muddled trail and concluded that company records and minutes were falsified and no write-off had ever occurred.
In David Kingsmill Plumpton v HMRC [2024] TC09156, a director had built up a sizeable Director's loan account of over £700k due to his employing company. This was due to a prohibition in its management agreement which denied him the ability to draw a conventional salary.
- The loan balance was a concern for all connected. As the loan was a Loan to a Participtor, s455 CTA2010 tax had been paid by the company.
- A potential purchaser for the company was introduced, Daniel O’Doherty (‘DOD’), an accountant and tax specialist.
- DOD agreed a plan was to write off the loan by buying the director’s shares for £1m and the sales proceeds could be used to repay the loan. This seemed to be the solution.
- The company reclaimed its s.455 Tax via its Corporation Tax return in anticipation of the repayment.
- The director’s Self Assessment return showed an income of £700k.
The share sale did not take place.
Subsequently, the director amended his SA return to remove the income and no mention was made of the loan write-off.
HMRC enquired into the return and issued a Closure Notice with an assessment for £201,177 in Income Tax with Penalties for Error or Mistake in a Return of £30,176.
The taxpayer appealed to the FTT who then considered whether the loan had been written off or not.
The FTT found:
- Mr Plumpton had placed a lot of trust DOD who was supposed to be taking over the company.
- He had left the company thinking that his share sale would go ahead and that DOD had arranged for an accountant to complete his Self Assessment tax return.
- There was a paper trail of board minutes for meetings that had not taken place, there was no £1m share sale, the company ended up in liquidation, there were a lot of communications with auditors and the intended new owners, but no evidence to confirm that the loan had ever been written off.
Finding that there was no write-off, the appeal was allowed and the Income Tax amendment was reduced to £0. The penalty also fell away because of the successful appeal on the amendment to the ITSA.
Comment
It does seem quite a waste of resources to have to go to appeal for something like this. Yet another case that (with the benefit of hindsight, naturally!) could have been resolved outside of a tribunal, had the relevant paperwork been made available at that time.
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