Section 455 Tax Penalties On A Director’s Loan Account Written Off In Liquidation – A Cautionary Tale 

Section 455 Tax Penalties On A Director’s Loan Account Written Off In Liquidation – A Cautionary Tale involved the case of TSS Fire Ltd & Anor v Revenue and Customs[2024] UKFTT 717 (TC) (“TSS”) involved section 455 tax penalties on an overdrawn director’s loan account written off.

The writer has been highlighting the problem of directors who go into creditors voluntary liquidation and reach an agreement with the liquidator over its repayment but then overlook including this in their personal tax return. 

Written Off Director Loan Account Following Liquidation

The case of TSS involved a Mr Porter whose company Trojan Safety Systems Limited (“the Company”) went into liquidation. Investigations by the liquidator in his progress report dated 6 May 2016 highlighted expenditures which did not seem to relate to the company:

My investigations revealed that the Director drew funds form the Company’s bank account which did not appar to relate to Company expenditure. Having considered the Director’s circumstances and an Affidavit sworn by him detailing his personal financial status, a settlement of £15,000 was agreed and has been paid by the Director since the year end”

However, the position contrasted with the Statement of Affairs dated 11 April 2013 in which Mr Porter was listed as a creditor for £0.00. The Tax Tribunal noted a debt owed by him to the Company of £100,324 which was written off. 

The comments by the liquidator appear to be a paradigm case when a director cannot pay the director’s loan account and the approach to resolution of the matter.

COP9 And Section 455 HMRC Tax Investigation

At some point, HMRC’s compliance activities culminated in an HMRC tax COP9 investigation. This is a serious HMRC enquiry which can be tempered somewhat if the taxpayer makes full and frank voluntary disclosure.

On 2 February 2022, HMRC wrote to the taxpayer about the overdrawn director’s loan account with the consequently Section 455 tax liabilities. Then on 27 April 2022 penalties duly followed.

The problem for Mr Porter was although he had repaid £15,000 of his overdrawn director’s loan account that still left him owing £100,324 which was written off by virtue of his agreement with the liquidator. 

One of the dangers of an overdrawn director’s loan account (there are plenty) is any amount written off sparks income tax consequences personally for the relevant director under Section 415 Income Tax (Trading and Other Income) Act 2005.

Unsurprisingly HMRC then assessed Mr Porter on a further £100,324 of income tax for his 2017 tax return in respect of the written off element of his overdrawn director’s loan account.

To top it all off he also landed a penalty for £21,401.68 on 19 October 2022, reduced to £13,376.05 on review. This amounted to a reduction of 35%.

It is not hard to see Mr Porter faced an uphill struggle with his penalty appeal given in his COP9 outline disclosure he said:

In relation to TSS Fire Limited, I drew funds without operating any form of appropriate PAYE or dividend allocation procedure. I benefited by paying insufficient tax.

And, it seems Mr Porter sought to resile from this at the subsequent meeting with HMRC on 7 September 2018.

Perhaps adding fuel to the fire the HMRC Officer investigating was concerned inter alia that the outline disclosure did not include a calculation for any section 455 liability for the Company.

The Tribunal rejected the appeal against the penalty.