Director’s loan write-off can trigger tax despite possible future recovery

A director’s loan can be written off for income-tax purposes even where it remains legally recoverable, the Upper Tribunal has held in HMRC v Gary Quillan. The tribunal allowed HMRC’s appeal, overturned the First-tier TribunalNationalarchives and dismissed Mr Quillan’s challenge to the closure notice for 2018/19.

The dispute concerned BOH Investments Ltd, a close company wholly owned by Mr Quillan, who was its sole director. His loan account was overdrawn by £439,954 when the company entered creditors’ voluntary liquidation. He subsequently paid £57,498, leaving £382,456 outstandingNationalarchives. The liquidator’s final account, dated 18 March 2019, recorded that no further funds were expected from the loan.

For a creditors’ voluntary liquidation, the tribunal required both a conclusion that the debt was wholly or partly irrecoverable and a record of that conclusion in the liquidator’s final report. The amount written off follows the extent of that irrecoverability. The account communicates the conclusion to members and creditors. A write-off is a matter of substance, without a prescribed formal process, and does not itself extinguish the legal debt.

Later correspondence describing the balance as unresolved or not formally written off did not determine the tax treatment. Nor did the possibility of restoring the company and pursuing repayment if the director’s finances improved prevent a write-off. The tribunal also explained that its conclusion concerned statutory interpretation; the debt’s accounting treatment was not material to deciding the issue.

Timing followed the final account of 18 March 2019, within 2018/19Nationalarchives. The earlier progress report had said enquiries into the director’s finances were continuing, so the position was not finalised then. The tribunal also rejected the argument that the write-off occurred only when the company was dissolved on 15 April 2020Nationalarchives.

The judges highlighted a possible anomaly: the director could face tax on the write-off and later be pursued for repayment, with apparently no relief from that income-tax charge. They suggested that legislative change or an extra-statutory concession might merit consideration, but did not let that possibility alter their interpretation.

The decision applies section 415(1) of the Income Tax (Trading and Other Income) Act 2005Nationalarchives, concerning release or write-off of a loan for which the company is or was chargeable under section 455 of the Corporation Tax Act 2010Nationalarchives, alongside the final-account provisions of section 106 of the Insolvency Act 1986.