- Original Poster
- #1
The first tier tribunal (FTT) has shed light on what constitutes a release or write-off of an overdrawn director’s loan for the purpose of section 415 Income Tax (Trading and Other Income) Act 2005 (ITTOIA) (s415).
Gary Quillan, the sole director of BOH Investments Limited, faced a £145,058 income tax assessment from HMRC in relation to an overdrawn director’s loan account following the company’s liquidation in January 2017. At the time of BOH’s voluntary winding-up, the director’s loan account showed an overdrawn balance of £439,954.
Following “protracted correspondence and the threatening of legal action” from the liquidator, Quillan verbally agreed to repay a total of £57,500. He then made six payments totalling £57,498 between February and July 2018, leaving an outstanding balance of £382,456, which he claimed he did not have the means to repay.
The liquidator’s final report, issued in March 2019, acknowledged these partial repayments and noted: “No further funds are expected into the liquidation in this respect.”
However, the report did not formally release or write off the remaining debt, and subsequent correspondence from the liquidator confirmed that the matter remained “unresolved.”
BOH was formally dissolved on 15 April 2020.
Ultimately, the FTT agreed with the taxpayer’s argument that the liquidator had reserved the right to reform the company for the purpose of pursuing Quillan in future, should his financial circumstances improve. This left the door open – however narrowly – to potential enforcement and therefore negated the claim that the debt had been abandoned.
Allowing Quillan’s appeal, the FTT concluded that neither a formal release nor a clear and final write-off had taken place. The fact that the debt was no longer being actively pursued did not meet the threshold required by s415, particularly when the liquidator had made no accounting entry to write off the loan and had retained the right to pursue recovery.
This ruling underscores a disconnect between HMRC’s guidance and actual tax law, which may have broader implications for how overdrawn director’s loan accounts, a common feature of company liquidations, are treated in such scenarios.
Gary Quillan, the sole director of BOH Investments Limited, faced a £145,058 income tax assessment from HMRC in relation to an overdrawn director’s loan account following the company’s liquidation in January 2017. At the time of BOH’s voluntary winding-up, the director’s loan account showed an overdrawn balance of £439,954.
Following “protracted correspondence and the threatening of legal action” from the liquidator, Quillan verbally agreed to repay a total of £57,500. He then made six payments totalling £57,498 between February and July 2018, leaving an outstanding balance of £382,456, which he claimed he did not have the means to repay.
The liquidator’s final report, issued in March 2019, acknowledged these partial repayments and noted: “No further funds are expected into the liquidation in this respect.”
However, the report did not formally release or write off the remaining debt, and subsequent correspondence from the liquidator confirmed that the matter remained “unresolved.”
BOH was formally dissolved on 15 April 2020.
Ultimately, the FTT agreed with the taxpayer’s argument that the liquidator had reserved the right to reform the company for the purpose of pursuing Quillan in future, should his financial circumstances improve. This left the door open – however narrowly – to potential enforcement and therefore negated the claim that the debt had been abandoned.
Allowing Quillan’s appeal, the FTT concluded that neither a formal release nor a clear and final write-off had taken place. The fact that the debt was no longer being actively pursued did not meet the threshold required by s415, particularly when the liquidator had made no accounting entry to write off the loan and had retained the right to pursue recovery.
This ruling underscores a disconnect between HMRC’s guidance and actual tax law, which may have broader implications for how overdrawn director’s loan accounts, a common feature of company liquidations, are treated in such scenarios.
