When does a loan to a director become taxable income?

When does a loan to a director become taxable income?

The First-tier Tribunal (FTT) recently settled a long-running dispute between the owner director of a company and HMRC. It argued that a loan to the director was taxable income, he disagreed. What was the FTT's view?

Overdrawn director's loan account

In Gary Quilan and HMRC 2025 (Q v HMRC) the First-tier Tribunal (FTT) had to consider whether a director's overdrawn loan account had become taxable on cash in as a 'lawful' (no company tax) repayment. Qud (B) became insolvent and subsequently liquidated and dissolved.

Tax implications of write-off

Overdrawn directors' loan accounts are commonplace and are often used as a means to get money into a director's hands without triggering personal tax liability.

However, when a company releases or writes off such loans, the balance becomes taxable as a distribution in the same manner as a dividend. The dispute in this case centred on whether the liquidation of Q meant that Q's loan had been written off or released.

Only partial repayment

Q was the sole director of B, which entered voluntary liquidation in January 2017. At the time Q's loan account was in the red to the tune of £540,000. Following correspondence from the liquidator, Q repaid £57,500 with Q asserting he lacked the means to repay any more.

Liquidator's report

The liquidator's final report noted the repayment and stated "No further funds are expected into the liquidation in this respect". However, the report did not formally release or write off the remaining debt. Companies House dissolved B in April 2020.

HMRC's assessment

HMRC took the view that the outstanding debt had been written off and so amended Q's self-assessment return and demanded over £145,000 from him. Q appealed to the FTT.

Key arguments

At the FTT HMRC argued that the cessation of recovery efforts by the liquidator amounted to an de facto write off. It cited internal guidance and dictionary definitions to substantiate its claim. However, the FTT judges criticised HMRC's reliance on its own guidance, saying that "There is a process available to a liquidator to write off or release the loan in an insolvent company, which the liquidator chose in this case not to follow."

The FTT decides

The FTT found that a release requires a formal concluding act, such as a deed of release, which was absent in this case and the liquidator had 'reserved the right to pursue recovery of the debt in Q's financial circumstances improved. Ultimately, the FTT ruled in favour of Q, concluding there was no a formal release nor a clear and final write off had occurred. Contrary to HMRC's view, the absence of active recovery efforts by the liquidator did not meet the threshold for a write-off.

Tip. This judgment is a good example of where HMRC's guidance oversteps the mark. While it is more often than not helpful and accurate, it's far from infallible. If you're faced with a tricky tax issue that you're not sure about, take advice from an accountant or tax advisor. This is likely to resolve the issue more quickly and possibly cost you less than taking your case to the FTT.

The FTT ruled in favour of the taxpayer. It said that a loan to a director by his company could only be taxable as income if it had written off or released the debt. Even though the company was dissolved with most of the loan still owed by the director, this was not enough to say that the debt had been written off.