Tax On Writing Off An Overdrawn Director’s Loan Account

What Is The Tax On Writing Off An Overdrawn Director’s Loan Account?

In the case of England & Anor v Revenue and Customs (Debt Release) [2023] UKFTT 313 (TC) (“the England Case”) the Tax Tribunal considered the tax on writing off an overdrawn Director’s loan account.

If an overdrawn Director’s loan account is not repaid to the company within 9 months of the year end the company is charged corporation tax pursuant to Section 455 of the Corporation Tax Act 2010.

The release or writing off of the Director’s debt will enable the company to recover the tax it has incurred on the overdrawn Director’s loan pursuant to Section 458 of the Corporation Tax Act 2010.

The writing off of a Director’s loan account however also triggers an income tax charge under Section 415 of the Income Tax (Trading and Other Income) Act 2005.

The tax burden is in effect flipped from the company to the Directors personally.

Debt Release Date

The appeal in the England Case considered whether this applied in the 2013-2014 tax year. It was found that it did.

The Directors who appealed the matter had placed Alexander Lauren Associates Limited into Creditors Voluntary Liquidation.

The Directors had an Overdrawn Directors’ Loan Account of £1,009,063 of which they paid £100,000 leaving £909,063 released following a settlement agreement dated 28 October 2013.

The settlement agreement required the Directors to pay the £100,000 over two years from 1 November 2013 to 1 November 2015.

The Tax Tribunal said the settlement agreement amounted to a release or writing off of the unpaid £909,063 at the point the agreement was entered into. It was held not to be repayment of the overdrawn position. The payment dates did not impact the release date for the purpose of triggering the income tax charge but what was relevant was the execution date when contractually the debt had been released.

Oliver Elliot Comment

The England Case is evidence that if you cannot pay a Director’s loan account then you can still negotiate with a Liquidator.

As evidenced by this case, a commercial compromise can be done. Here more than 90% of the debt was released and written off.