HMRC Lose An Overdrawn Director’s Loan Account Write Off Case

In the matter of Quillan v Revenue and Customs (whether director’s loan was released) [2025] UKFTT 421 (TC) (“Quillan”) HMRC lose an overdrawn director’s loan account write off case.

The case raises an interesting issue concerning the effect of an unpaid overdrawn director’s loan account. Can a director hoover up company money and the end result be that no tax is paid on it, either by the company or the director?

At the moment, according to the Tax Tribunal in a first instance decision, it appears possible in some instances. 

The anti avoidance provisions both in the company tax legislation and the income tax legislation it seems can do little about an unreleased overdrawn director’s loan account for a company that has gone into liquidation and then into dissolution. Perhaps this is a lacuna in the tax avoidance law.

An overdrawn director’s loan account is not treated as earnings; it is treated as a loan. If the loan is not repaid by the director to the company within 9 months of the year end then tax is triggered on the company. That tax is another loan, only it is in HMRC’s favour until the overdrawn director’s loan account (“ODLA”) is repaid or it is formally written off. 

Consider the potential for abuse. Director receives company money but the company goes into liquidation before making any payment of its liability under Section 455 of the Corporation Tax Act 2010. It is possible that a period of two or more years could pass and a director could have enjoyed the fruits of such monies and no material tax has been paid by anyone with the loan still outstanding.

The duty of a liquidator is to realise the assets of a company. Liquidator duties encompass the need to get in, realise and distribute the company’s assets. It is not, however, it seems the duty of the liquidator to maximise the ability of HMRC to realise tax revenues.

So what happens when an overdrawn director’s loan account is not realised in full?

There are two possibilities. Either it is settled or it is errr not settled.

When it is settled, then any unpaid element can be open sesame for HMRC to invoke the effects of Section 415 of the Income Tax (Trading and Other Income) Act 2005. This means the director personally, on their tax return, has to declare the receipt of the written off element as income and HMRC will hold out its hands anticipating an income tax payment to scrape up.

In the Quillan case, the company went into liquidation. The director had an ODLA of £439,954. He then paid back £57,498.00, leaving £382,456 outstanding.

HMRC’s case was that the effect of the liquidator not recovering further sums meant it had been written off and thereby enabled Section 415 income tax to be triggered. Not so said the Tax Tribunal, as it was still a company asset and the company could be reinstated at a future date for the debt to be pursued potentially. 

The case leaves open an interesting question of what is the appropriate way to leave matters when closing a liquidation. Should the liquidator formally finalise the ODLA position so that HMRC is not fettered from sorting out the tax position? Or should the liquidator leave matters as they are without any formal finalisation so that the matter is still open to maximise realisations for the company and its creditors?