Background
Gary Quillan was BOH Investments Ltd’s sole director and shareholder. When the company entered creditors’ voluntary liquidation in January 2017, his overdrawn director’s loan account stood at £439,954. After the liquidator sought recovery, Mr Quillan paid £57,498 in six instalments during 2018.
In the liquidator’s final account, dated 18 March 2019, the liquidator recorded that no further funds were expected from the director’s loan account. The unpaid balance was £382,456. HMRC issued a closure notice for 2018/19, treating that balance as written off and therefore taxable under section 415 of the Income Tax (Trading and Other Income) Act 2005.
The First-tier Tribunal allowed Mr Quillan’s appeal, holding that the debt had not been written off because the liquidator had later said it was not “formally written off” and future recovery remained theoretically possible. HMRC appealed.
The Court’s Holding
The Upper Tribunal allowed HMRC’s appeal, set aside the First-tier Tribunal’s decision, and remade the decision by dismissing Mr Quillan’s appeal against the closure notice. It held that BOH, acting through its liquidator, had written off the £382,456 balance for the purposes of section 415(1).
A write-off is a matter of substance, not a formal insolvency procedure or a label applied later by the liquidator. In a creditors’ voluntary liquidation, a debt is written off when the liquidator concludes that it has no recoverable value and records that conclusion in the final account. The final account’s statement that no further funds were expected showed that the liquidator considered the balance irrecoverable.
The possibility that BOH could later be restored and pursue Mr Quillan if his finances improved did not prevent a write-off. Unlike a release, a write-off may be unilateral and need not extinguish the legal debt. The operative write-off occurred on 18 March 2019, within the 2018/19 tax year.
Key Takeaways
- For section 415 ITTOIA, a director’s loan can be written off without a formal statutory write-off process.
- A liquidator’s final account stating that no further recovery is expected can establish a substantive write-off.
- Future theoretical recoverability does not prevent a debt from having been written off for tax purposes.
Why It Matters
The decision confirms that the tax consequences of an unpaid participator loan turn on the practical treatment of the debt, rather than on whether the liquidator calls it a formal write-off or leaves open the possibility of later enforcement. Liquidators’ final reports may therefore be decisive evidence of the timing and existence of a write-off.
The Tribunal also identified a potential statutory anomaly: a participator may face a section 415 income-tax charge even though the written-off debt could later be enforced if the company is restored. It considered that issue one for legislative or extra-statutory action, not a reason to depart from the statutory interpretation.