Tribunal allows taxpayer's appeal in respect of overdrawn director's loan account

In Quillan v HMRC [2025] UKFTT 421 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's appeal against a closure notice issued under section 28A, Taxes Management Act 1970 (TMA), for the 2018/19 tax year, assessing income tax under section 415(1), Income Tax (Trading and Other Income) Act 2005 (ITTOIA), in respect of an overdrawn director's loan account, as the director's loan was neither written off nor released, in the absence of a formal acknowledgment from the company's liquidator.

Background

Gary Quillan was the sole director of BOH Investments Ltd (BOH). On 16 January 2017, BOH passed a resolution for the voluntary winding up of the company and a liquidator was appointed. At that time, Mr Quillan had an outstanding director's loan account balance of £439,954.

The liquidator demanded payment of the outstanding balance. Mr Quillan provided a statement of means to show that he had insufficient assets and income to meet the demand. He offered to pay £57,500 to settle the claim and the liquidator accepted this offer but, importantly, reserved the right to continue making enquiries into Mr Quillan's financial position so that the outstanding balance could be recovered if Mr Quillan received a windfall.

The liquidator's final report noted "no further funds are expected into the Liquidation in this respect" but they confirmed in a letter to HMRC that the matter remained unresolved and the loan was not formally written off.

Despite this confirmation, HMRC considered that the loan should be treated as written off for the purposes of section 415, ITTOIA. That section provides for income tax to be charged on an outstanding loan to a participator when "the company releases or writes off the whole or part of the debt in respect of the loan". HMRC issued a closure notice on that basis, pursuant to section 28A, TMA.

Mr Quillan appealed the closure notice to the FTT, arguing that the loan had not been written off or released. 

FTT's decision

The appeal was allowed.

HMRC sought to convince the FTT that since "written off" is not given a statutory meaning, it should be interpreted in accordance with the Cambridge English dictionary definition of the phrase: "to accept that an amount of money has been lost or that a debt will not be paid". 

HMRC also relied on Collins v Addies (HM Inspector of Taxes) [1991] BTC 244, in which it was contemplated that "a debt which is written off may yet be recovered by a company if it discovers that the debtor’s circumstances have changed so that it is no longer unable to repay the creditor company".

The FTT was not persuaded by these arguments, primarily because there was a formal process available to the liquidator to write off or release the loan and they deliberately chose not to follow that process. The liquidator had expressly stated that the loan had not been written off and that Mr Quillan could be pursued at a later date. 

Comment

This decision confirms that a loan to a participator that is unlikely to be repaid at the time of liquidation is not necessarily written off, and attention must be paid to the formal processes available to the liquidator. 

The decision runs contrary to HMRC's guidance (CTM61560), which currently states:

"Equally, where the liquidator does not write off or release the loan balance, but, on a balanced view of the facts, it is clear that the company and/or liquidator are not intending to pursue the outstanding loan, e.g. where they are not making any attempts to collect it or have given up any attempts to do so, then we should argue that the loan has been written off and that S415 ITTOIA05 should apply to the relevant amount..

It will be interesting to see whether HMRC will revise its guidance, or perhaps more likely seek to appeal the FTT's decision to the Upper Tribunal. 

The decision can be viewed here.