In Gary Quillan v HMRC [2025] TC09487, the First Tier Tribunal (FTT) found that no Income Tax charge arose on an overdrawn director's loan from a company in insolvency, as the loan had not been formally released or written off.
Mr Quillan was the sole director of a Close company, BOH Investments Limited (BOH). BOH appointed a liquidator in January 2017, when the Director's loan account was overdrawn by £439,954.
- In his annual progress report in January 2018, the liquidator noted he had issued a demand for payment. The director advised that he had no means to pay.
- After protracted correspondence and the threat of legal action, the director offered £57,500 to settle the claim, payable in instalments over six months.
- £57,498 was paid, and the liquidator's final account noted no further funds were expected: £382,456 of the loan remained outstanding when BOH was dissolved in April 2020.
- In September 2020, HMRC opened an enquiry into Mr Quillan's 2018-19 tax return.
- He was asked to confirm the amount of the director's loan account released or written off by the liquidator, the date of the agreement to do this, and details of any payments made.
- The liquidator replied with the amount and advised that the matter remained unresolved; the loan was not formally written off.
- The liquidator added that in the absence of a compromise agreement, amounts received by the liquidator are payments on account of the debt, which is reported to the creditors.
- Unless they exercise a right of action, this allows BOH to be restored if the liquidator is made aware of any subsequent windfall being received by the director.
- In March 2023, HMRC wrote to the director confirming their view that a tax charge under s.415 ITTOIA 2005 relating to the loan account should be accounted for.
- HMRC relied on their Corporation Tax Manual which stated that where a liquidator does not write off or release a loan balance, but on a balanced view of the facts, it is clear the liquidator does not intend to pursue the outstanding loan, HMRC should argue that the loan has been written off, and apply the s.415 Income Tax charge.
- A Closure notice relating to 2018-19 was issued in August 2023 for £145,057.
- Following a Statutory review, which upheld HMRC's decision, Mr Quillan Appealed to the First Tier Tribunal (FTT) on the basis that the liquidator had reserved the right to reopen the company and thus the loan was never written off and tax could not therefore be payable.
The FTT found that:
- The parties agreed that releasing a debt involved a more formal process than writing it off.
- Mr Quillan's offer to pay £57,500 was made verbally.
- There was no formal release agreement, and the requirement of s.415(1) was not met.
- Although Mr Quillan argued any release must have happened in 2017-18 as reflected in the liquidator's report; this point was not decided as there had been no release on the facts.
- There was no need for Mr Quillan to show the balance was being actively pursued, simply that it had not been written off. This was demonstrated by the liquidator deliberately not following a formal writing-off process.
- Even if the debt had been written off, without a formal process, that could not have been before the company was dissolved in April 2020, which was outside the 2018-19 year of assessment.
The appeal was allowed.
Editor's comments
This decision is interesting because the FTT commented that HMRC's guidance was not helpful. Although there is no statutory definition of 'written off', there was a process available to the liquidator which was the definition of 'written off' for this case. HMRC's view could not be substituted.
In practice, the writing off or releasing of directors' loans is not uncommon. The case distinguishes between releasing a debt and writing it off. It makes clear that a more formal process is needed for a release, which should be executed by a deed prepared by a lawyer and suitably witnessed.
Useful guides on this topic
Directors' loan accounts: Toolkit (subscribers)
What is the tax treatment for an overdrawn director's loan account? What are the consequences of an outstanding loan to a participator?
Close companies, definitions & control
What is a Close company? What are the tax consequences? What is a Participator? What is meant by Control of company? What are the tests for Control?
Statutory Review (by HMRC)
What is a Statutory Review? When does HMRC offer a Statutory Review? Is it automatic? What happens in a Statutory Review? Can you challenge a Statutory Review's findings? Can you influence a Statutory Review? When does HMRC offer a Statutory Review?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?
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