Quillan: Upper Tribunal clarifies when director’s loans are written off
The tax treatment of loans made by close companies to their participators continues to be an area of close attention for HMRC, with recent cases focusing on when an overdrawn director’s loan account has been “released” or “written off” so as to trigger an income tax charge under s.415 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005).
The Upper Tribunal (UT) has now released its decision on HMRC’s appeal in HMRC v Gary Quillan [2026] UKUT 300 (TCC), allowing HMRC’s appeal against the earlier First-tier Tribunal (FTT) decision and finding that the unpaid balance on Mr Quillan’s director’s loan account had been “written off” for the purposes of s.415 ITTOIA 2005.
Importantly, the decision confirms that, in a liquidation, a loan may be written off for s.415 purposes even where there has been no formal release and there remains a theoretical possibility of future recovery.
Background to Quillan
Mr Quillan was the sole director and shareholder of BOH Investments Ltd (BOH), a close company which entered creditors’ voluntary liquidation in January 2017. At that point, his director’s loan account was overdrawn by £439,954.
Following correspondence and the threat of legal action, Mr Quillan made six payments totalling £57,498, leaving an unpaid balance of £382,456. In the liquidator’s final account dated 18 March 2019, the liquidator stated that “no further funds are expected into the liquidation in this respect”. BOH was later dissolved in April 2020.
Upper Tribunal overturns the FTT decision
The FTT originally found in favour of Mr Quillan, concluding that the outstanding balance had not been written off for the purposes of s.415 ITTOIA 2005 and therefore that no income tax charge arose.
In reaching that decision, the FTT placed weight on the fact that there had been no formal release of the debt, the liquidator had later confirmed that the matter remained unresolved and had not been formally written off, and there remained at least a theoretical possibility that BOH could be restored to the register and the debt pursued in the future. We previously commented on the FTT decision and highlighted that this appeared to be an unusual result where, practically speaking, future recovery was highly unlikely.
HMRC appealed on the basis that the FTT had erred in law in its interpretation of “written off”.
The UT allowed HMRC’s appeal, set aside the FTT decision and held that the unpaid balance had been written off in 2018/19. It confirmed that s.415 ITTOIA 2005 should be construed purposively and in its statutory context, as part of the wider regime for taxing value extracted from close companies by participators.
What amounts to a write-off?
The appeal therefore turned on the meaning of “written off”. It was common ground before the UT that there had been no release of the debt. The key question was whether the liquidator’s actions and final reporting were sufficient, as a matter of substance, to amount to a write-off for s.415 purposes, notwithstanding that the debt might theoretically be pursued in future if BOH were restored to the register.
Relying on Collins v Addies, the UT noted that a debt which has been written off may yet be recovered by the company. The theoretical possibility that BOH could be restored to the register and the debt pursued in future was therefore not inconsistent with a write-off.
In the context of a creditors’ voluntary liquidation, the UT held that a debt is written off when, and to the extent that, the liquidator concludes that there is no recoverable value in the whole or part of the asset and reports that fact in the final account. On the facts, the statement that “no further funds are expected” was sufficient.
The FTT’s errors of law
The UT identified two errors in the FTT’s reasoning: first, the FTT had placed too much weight on the liquidator’s later description of the position; and secondly, it had proceeded on the basis that there was some formal process for writing off a debt in an insolvency context. The UT made clear that a write-off is a matter of substance, not form.
The UT also rejected the suggestion that there was a third category of debt which was neither released nor written off but simply left unresolved. The fact that future recovery remained theoretically possible did not prevent a write-off having occurred.
Timing of the write-off
Timing was important because HMRC’s closure notice related to 2018/19. The UT held that the write-off occurred on 18 March 2019, when the liquidator issued the final account stating that no further funds were expected.
The UT rejected Mr Quillan’s argument that any write-off had occurred earlier, when the settlement arrangements were first agreed, because the liquidator’s annual progress report at that point indicated that enquiries were continuing. It also rejected the alternative argument that the write-off only occurred on BOH’s dissolution in April 2020. The operative date was the final account, not the later dissolution.
Key takeaways
We considered the original FTT decision in Quillan to be an unusual result, particularly where the relevant debt was, in practical terms, unlikely to be recovered following the liquidation process. We previously commented on the different outcome reached by the FTT in Boulton on broadly similar facts, with the FTT, in that case, focusing on whether, as a matter of substance, the debt had been written off.
The UT decision in Quillan is now a binding authority for the FTT and confirms the approach taken in Boulton. In our view, it represents a sensible and pragmatic reading of the legislation where, realistically, a director’s loan balance is not going to be recovered following the company’s liquidation and dissolution.
The practical focus will now be on the substance of the liquidator’s actions and reporting. Where an insolvency practitioner has concluded that no further recovery is expected in respect of an overdrawn director’s loan account, and records that position in the final account or other liquidation reporting, HMRC is likely to argue that the debt has been written off for s.415 purposes.
From a practical perspective:
- participators of close companies entering liquidation should consider the potential personal tax consequences where overdrawn loan accounts are not repaid in full;
- liquidators’ reports and communications should be reviewed carefully, as statements that no further recovery is expected may be sufficient to trigger a s.415 charge at the time such statements are made; and
- the timing of any write-off will be important, particularly where the relevant liquidation reporting and company dissolution fall in different tax years.
The tax treatment of overdrawn director’s loan accounts will depend on the specific facts of each case, including the timing and circumstances of any write-off. The Quillan decision highlights the importance of considering the potential tax consequences where such balances are not repaid in full. If you would like to discuss how the decision could affect you or your clients, please get in touch with our tax specialists.
