When Is An Overdrawn Director’s Loan Account Released Or Written Off?

The point when is an overdrawn director’s loan account released or written off is an interesting issue raised in the case of Plumpton v Revenue and Customs [2024] UKFTT 367 (TC).

It can be rather an important issue for a director as it can determine which tax year income tax kicks in under Section 415 of the Income Tax (Trading and Other Income) Act 2005.

HMRC’s case fell apart because the taxpayer’s director’s loan account was not released or written off in the tax year ending 5 April 2014. HMRC had issued a closure notice amending the taxpayer’s personal tax return, adding to it a sizeable amount of tax in the sum of £201,177.30 plus a penalty for carelessness of £30,176.59.

What Is Section 415 Income Tax?

Section 415 income tax is an HMRC tax that is assessed personally on a taxpayer in a close company when their overdrawn director’s loan account has been written off or released.

An overdrawn director’s loan account that is not repaid within 9 months and one day of the year end for corporation tax purposes is subject to what is known as Section 455 tax on an overdrawn director’s loan account to be suffered by the relevant company.

The Section 455 tax is repaid to the company by HMRC if a director repays the overdrawn director’s loan account or if it is written off or released, at which point the Section 415 tax on writing off an overdrawn director’s loan account arises.

So when the company is no longer chargeable to tax, the tax element becomes a charge on the director.

Is Release Different To A Write Off?

The tax tribunal noted the limitations on authority on what constitutes release or write off:

There is not a wealth of authority on the meanings of the terms ‘released’ and ‘written off’ as used by section 458 (2) (b) CTA.

The difference between release and write off was however highlighted by the case of Colins v Addies [1991] STC 455:

A release is a final and conclusive act if completed according to law whereas the act of writing off by a company may not be. A debt which is written off may yet be recovered by a company if it discovers that the debtor’s circumstances have changed so that it is no longer able to repay the creditor company. A release is generally a transaction involving more than one person, whereas by its very nature an act of writing off by a company is unilateral. It does not seem to me that one’s attention is necessarily directed to the sum of money which leaves the company.

What Is Required To Release Or Write Off?

Determination of what is required to release or write off an overdrawn director’s loan account does not appear to be fixed.

In Mr Plumpton’s case, the Tribunal had this to say:

First, there are no documents at all from that tax year showing the DLA being written off at that point. The new management had been in place for over a year by that point. Had there been a meeting of the board or other effective decision to write the DLA off by APE 31 January 2014 we would expect some form of company document saying so from the time (or some confirmation from the administrators beyond the minutes and financial statements themselves). Even allowing for the fact that certain things may have been done informally, there is not even the hint of a reference. Unlike the transfer of the Butteries to Mr Plumpton, the 2013 agreement did not contemplate the DLA being written off before Mr Plumpton was paid £1 million for his shares in the company which did not happen in the relevant tax year as it should have (or at all). Although the company could have decided to unilaterally write off the DLA, the terms of the 2013 agreement and the fact that it was not communicated to Mr Plumpton at that point support, in this case, the finding that this was because that did not occur.

Notably in this case, even the signed financial accounts were not determinative:

… the financial statements for APE 31st January 2014 prepared by the auditor, and signed by DOD in 2015, were based, insofar as the writing off of the DLA being recorded is concerned, upon the minutes. Mr Smith in his enquiry at HMRC then based his conclusion upon the financial statements. We accept the minutes do not reflect the reality. The financial statements based solely upon the minutes do not therefore reflect the reality. This is supported by PP’s request to see the financial statements which he had not been told had already been signed and filed with companies’ house. HMRC also accepted in closing submission that there was inconsistency between, for example, the strategic report and note 4 in the financial statements for APE 31 January 2014 in relation to the DLA. This sensible acceptance provides further support that the financial statements did not reflect the reality that there was no writing off of the DLA in the relevant tax year.

Whilst to write off an overdrawn director’s loan account an accounting adjustment would appear to be all that is required, for release it is likely a deed would be necessary.