Write off of director’s loan: Upper Tribunal’s decision in The Commissioners for His Majesty’s Revenue & Customs and Gary Quillian

The Upper Tribunal has recently published its decision in The Commissioners for His Majesty’s Revenue & Customs and Gary Quillian [2026] UKUT 00300 (TCC) regarding what constitutes the ‘write off’ of a director’s loan account for the purposes of section 415(1) the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) in the course of a creditor’s voluntary liquidation of a company.

Facts

The Respondent was the sole director and sole shareholder of BOH Investments Ltd (“BOH”), a company in voluntary liquidation. The outstanding balance on the director’s loan account was £382,456 (after the Respondent had repaid £57,500 in order to settle the claim by the liquidators for repayment of the full outstanding balance of £439,954).

On 15 April 2020, BOH was dissolved and the sum of £382,456 remained outstanding and unpaid (“Outstanding Balance”). There was no deed of release or declaration that the loan was written off.

The liquidator’s notice of final account dated 18 March 2019 included the following statement “Enquiries were made with the Director with a view to reaching a settlement to discharge his overdrawn director’s loan account … Following protracted correspondence and the threat of legal action, the Director made an offer of £57,500 to settle the claim. To date, £57,498.00 has been received in respect of the overdrawn Director’s Loan Account” and “no further funds are expected into the Liquidation in this respect”.

HMRC concluded that the Outstanding Balance had effectively been written off and this has been omitted from the Respondent’s 2018-19 tax return. In HMRC’s view, per HMRC’s guidance at CTM61560, any loan balance which is not repaid and is no longer being pursued by the insolvency practitioner is considered to have been written off and that S415, ITTOIA05 should apply to the relevant amount.”

Section 415(1) of ITTOIA provides, broadly speaking, if a close company writes off a debt owed to it by a participator, a charge to income tax arises on the participator in respect of the loan written off. Section 416 of ITTOIA further states that the tax is charged on the amount of debt released or written off in the tax year.

The issue

The issue which arose was where the liquidator does not formally write off or release an outstanding balance (by deed or otherwise), 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, whether the outstanding loan should be regarded as being ‘written off’ and if so, in which tax year is the outstanding balance being written off.

Decisions in the lower courts

The First-Tier Tribunal held that there is no statutory definition of the words “writes off” in section 415(1) ITTOIA and a formal process was necessary for the writing off of a loan.  It was within the power of the liquidator to either release or write off the loan, yet the liquidator chose to do neither and this left the director’s loan balance open to be pursued at some point in the future. Accordingly, the Outstanding Balance was not written off.

Upper Tribunal’s decision

The Upper Tribunal held that as section 415(1) of ITTOIA is an anti-avoidance provision, in the absence of a statutory definition of “writes off”, a purposive approach should be taken to construe the meaning of the term.

In the context of a creditors’ voluntary liquidation, a debt is written off by a liquidator when and to the extent that the liquidator reaches the view that there is no recoverable value in the whole or part of an asset. Accordingly, the court held that it was clear from the liquidator’s final report that the Outstanding Balance was not recoverable.

The court further held that the Outstanding Balance was written off in the tax year 2018/2019, when the liquidator’s final report was issued on 18 March 2019, and further observed that unlike a release of a debt (which is formally done under a deed), the write-off of a debt (construed purposively based on the facts) does not preclude a future recovery of the debt, for example, if there is a change in the financial circumstances of the debtor.

The court observed that if there is a recovery of the debt in the future, the legislation does not provide any relief for a debtor who had incurred tax liability earlier on the write off. To deal with this anomaly, the court observed that this may require a legislative change or at least an extra-statutory concession.

Our comments

This is yet another example of the courts consistent willingness to take a purposive approach when giving meaning to terms not defined in anti-avoidance legislation.

Based on the facts of this case, especially where there is an outstanding loan balance when the liquidators have published their final report and the company has been liquidated and the debtor had tried to settle the debt earlier by repaying a small part of the debt, there is little difficulty in concluding that the outstanding balance will never be repaid.

However, it appears that the case also gives HMRC a ‘free hand’ to seek the writing off of debts, viewed purposively, even in circumstances where the debt is likely to be repaid in the future. Further guidance from HMRC would indeed be helpful to understand the situation where HMRC applies the purposive test and the availability of relief for tax paid if the loan is repaid in the future.

For further information please contact JD Ghosh (jd.ghosh@mm-k.com) Stuart James (stuart.james@mm-k.com) or Paul Norris (paul.norris@mm-k.com)in the first instance.

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