Tax Tremors: Liable To Repay Director’s Loan Account And Still Suffer Section 415 Income Tax?

The principle behind Section 415 of the Income Tax (Trading and Other Income) Act 2005 (“Section 415”) is to address tax avoidance. If a director has an overdrawn director’s loan account in a close company, which is released or written off without payment, then they will typically be personally liable to pay income tax on that sum.

Ordinarily, the result is that either the company is taxed on the overdrawn director’s loan account or the director is taxed when the company does not require repayment. What is uncommon is for the director to pay the tax personally and still have a debt that is not exclusive to HMRC. 

However, double trouble can potentially arise, as we shall see.

Interaction Between Section 455 And Section 415

When an overdrawn director’s loan account (“ODLA”) arises and is not repaid within 9 months and one day of the year end, tax under Section 455 of the Corporation Tax Act 2010 sprouts as a liability for the limited company. It is presently 33.75% at the time of writing this article.

However, if the ODLA is subsequently repaid, then under Section 458 of the Corporation Tax Act 2010, the company can, subject to time limits, get the Section 455 tax back.

However, if instead of repayment of the ODLA, it is written off or released, Section 415 income tax is triggered on the director personally and at that point the company can reclaim the Section 458 repayment. This avoids a double taxation issue arising.

Powell v HMRC

The case of Powell v Revenue and Customs [2025] UKFTT 528 (TC) (09 May 2025)  (“Powell”) highlights a potential double trouble problem. In Powell, a Section 415 income tax charge was upheld notwithstanding that the appellant still had a liability to pay a debt.

Collins v Addies

The key authority was the case of Collins v Addies (Inspector of Taxes) [1992] STC 746 (“Collins”). This case said inter alia that non-gratuitous release was not a bar to the application of Section 415 income tax. In other words, directors cannot receive money from a company tax free. It is largely as simple as that.

In the Collins case, the ODLAs of Mr Collins and Mr Greenfield (“Collins and Greenfield”) were novated to another shareholder, Mr Brent. The terms of the novation released Collins and Greenfield from having to repay their ODLAs up to the amount of £68,000. However, Section 415 tax still applied.

In Powell, the similarity to Collins was that instead of the ODLA being novated to another shareholder, it was to another connected company.

The novation involved the release by Thermoline of the ODLA debt to Property Holding SW Limited (“PHSW”). The appellant taxpayer was a director of PHSW at the relevant time. The agreement led to the appellant having a liability to PHSW, and PHSW then had an inter-group loan account with Thermoline, which included the effect of the ODLA debt.

Judgment Highlights

The result was Section 415 income tax applied:

We have not found the Novation Deed has been easy to construe. However, having carefully considered its terms, we are prepared to accept the contractual effect of the Novation Deed is as set out in paragraph 39 above i.e. under contract valuable consideration was provided both for the acquisition of the rights and obligations under the Loan and relating to the Debt by PHSW from Thermoline and for the release of the Appellant from its indebtedness to Thermoline such that PHSW was substituted as lender to the Appellant. During the hearing we had explored with the Appellant whether its contractual analysis essentially required the £512,713.89 to do double service as consideration. In the end from a contractual perspective we are satisfied that PHSW’s obligation to pay (as reflected by the inter-company loan account) represented valuable consideration for the creditor to creditor novation and PHSW’s acceptance of all rights and obligations under the Loan as valuable consideration acceptable to Thermoline for the release of the Appellant.

However, in light of Collins accepting that contractual analysis does not determine the taxing outcome, Millett J and thereby Nourse LJ accepted that the novation in that case was valid with each party accepting the value of the various releases and assumptions of rights and obligations connected with the debt. We must therefore determine how section 415 ITTOA applies here despite the conclusion that there is valuable consideration for a creditor to creditor novation and consequent release of the Appellant from his loan relationship with Thermoline.

Having carefully considered Collins we determine that the release provided for under clause 3.1(a) is a taxable release. We readily acknowledge that the factual matrix in the present appeal differs from that in Collins. In Collins Mr Brent simply stepped into the shoes of Mr Collins and Mr Greenside in respect of £68,000 of their joint indebtedness. In the present case PHSW acquired a liability and, in consequence of the liability being outstanding on an inter-company loan account, PHSW became independently indebted to Thermoline. However, such indebtedness was, in our view, plainly, associated to the indebtedness from which the Appellant was released.

Applying the analysis provided by Nourse LJ, including the analysis adopted from Millett it is, in our view, clear that a release will be taxable even where there is valuable consideration in a contractual sense, unless that consideration results in there being “no outstanding obligation on any party in respect of the debt or any similar sum” thereby enabling the party making the release “to recover its money”. Only where there is no debt owed by any party can it be said that there has been no distribution by the close company. The close company has not been made whole, as in Collins it has the means by which it may recover the money but has not recovered it. In this regard we see no relevant distinction between substitution of a debtor (as was the case in Collins) and the substitution of the creditor where that substituted creditor does not enable the original creditor to recover its money. In the latter case there remains an outstanding obligation to the original creditor of a similar sum i.e. the value of the novated debt. We do not consider that for the purposes of the “limitation” applied to section 415 ITTOIA a debt can be “satisfied” where the sum remains outstanding. Cash or physical assets may satisfy the indebtedness but not a right to call on another in connection with the debt.

We accept that the contractual analysis demonstrates that the parties provided valuable consideration as between PHSW and Thermoline for the novation, substituting PHSW as creditor in the loan relationship with the Appellant. However, in financial terms Thermoline had not recovered its money and there remained an outstanding obligation from PHSW of the precise amount from which the Appellant had been released by Thermoline. In that sense there was substitution of one debtor for another. Further, we do not consider that the PHSW’s liability to Thermoline could be said to satisfy the debt owed by the Appellant. It arose in consequence of an associated transaction (the transfer of a bundle of rights and obligations to PHSW). The fact that having sold its interest in the Loan to PHSW, Thermoline had no right to pursue the Appellant does not mean that the debt was satisfied. As in Collins it had been substituted for equivalent value by way of an alternative debtor. Thus, on both 31 December 2020 and 16 March 2021 the amount of £512,713.89 remained outstanding to Thermoline with the consequence that Thermoline did not recover its money,thereby squarely meeting the conclusion in Collins.

Although outside the scope of this article, there is the question of whether an overdrawn director’s loan account that is assigned by a liquidator to a third party amounts to a release and can lead to the director having to repay it, whilst additionally suffering Section 415 income tax.

Following the logic deployed in Collins v Addies, it seems that such an assignment could potentially lead to the double trouble tax tremors this article highlights.