Lessons from Quillan v HMRC [2025] UKFTT 421 (TC)
Introduction
If you are a director of a close company, or advise one, the tax treatment of an overdrawn director’s loan account (“DLA”) when the company enters liquidation is an issue that can have significant and sometimes unexpected financial consequences. A recent decision of the First-tier Tribunal — Gary Quillan v HMRC [2025] UKFTT 421 (TC) — has provided important clarification on when an outstanding director’s loan is to be treated as “written off” for income tax purposes, and in doing so, has expressly criticised HMRC’s published guidance on the point.
HMRC have appealed the decision to the Upper Tribunal and the matter is to be heard shortly.
The Legal Framework
Where a close company writes off or releases a loan made to a participator (typically a director-shareholder), the amount written off or released is treated as a distribution under section 415 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”). The practical consequence is that the director becomes liable to income tax on the sum as though it were a dividend, at rates up to 39.35% (for additional rate taxpayers in the current tax year).
The legislation does not, however, define what it means for a debt to be “written off”, nor does it define what constitutes a “release”. These questions — which have significant practical importance in the context of insolvent liquidations — fell squarely before the tribunal in Quillan.
The Facts of Quillan v HMRC
Mr Quillan was the sole director of BOH Investments Limited (“BOH”), a close company. When BOH entered creditors’ voluntary liquidation in early 2017, Mr Quillan’s DLA was overdrawn by £439,954.
In January 2018, the liquidator’s annual progress report noted that Mr Quillan had “very little funds and insufficient income” to repay the debt. Following a legal demand and the threat of litigation, Mr Quillan offered to pay £57,500 in full and final settlement. Over the following six months, six payments totalling £57,498 were made. In early 2019, the liquidator’s report stated that “no further funds are expected in this respect,” leaving £382,456 outstanding. BOH was dissolved in April 2020.
In September 2020, HMRC opened an enquiry into Mr Quillan’s 2018–19 tax return. HMRC’s position was that the liquidator’s effective decision to cease pursuing the debt was equivalent to a write-off, thereby triggering an income tax charge of £145,058.66 under section 415 ITTOIA 2005. Mr Quillan appealed to the First-tier Tribunal.
The Tribunal’s Decision
Release
The tribunal confirmed that a “release” is a more formal concept than a write-off and requires execution by deed, properly prepared and witnessed. On the facts, there was clearly no such deed and so there was no release. This aspect of HMRC’s case was essentially conceded.
Write-Off — The Central Issue
The tribunal had to determine whether the remaining £382,456 had been “written off”. In the absence of any statutory definition, the tribunal turned to the Cambridge English Dictionary, which defines writing off a debt as requiring one to “accept… a debt will not be paid.”
On the evidence, the tribunal found that the liquidator’s actions fell materially short of any such acceptance. Three factors were decisive:
- The liquidator had told HMRC directly that the debt “remained unresolved” and had “not been formally written off.”
- The liquidator had expressly reserved the right to restore the company if Mr Quillan subsequently received a windfall — a step entirely inconsistent with having accepted that the debt would never be paid.
- Payments received were treated by the liquidator as payments on account of the debt, not as a compromise or final settlement of it.
HMRC’s Guidance Criticised
HMRC’s published guidance states that any decision by a liquidator not to pursue an outstanding debt amounts to a write-off for section 415 purposes. The tribunal expressly disagreed, holding that HMRC’s approach was “unhelpful and not determinative.” Each case must be assessed on its own facts. The absence of formal action to pursue a debt is not, without more, sufficient to constitute a write-off. The tribunal’s decision therefore represents a departure from HMRC’s longstanding position on this issue.
Timing
The tribunal also noted that, even if there had been an informal write-off, it could not have occurred before the company’s dissolution in April 2020 — which fell outside the 2018–19 tax year in question. This provided an additional, independent basis for allowing the appeal.
Mr Quillan’s appeal was allowed in full.
Practical Implications
The decision has important implications for directors, insolvency practitioners, and their advisers alike.
For Directors with Outstanding Loan Accounts
If your company is in or approaching insolvency and your DLA is overdrawn, you should not assume that the practical cessation of recovery action by a liquidator will automatically give rise to a section 415 income tax charge. The legal position is more nuanced than HMRC’s guidance suggests. Whether a charge arises will depend on the precise circumstances and, critically, on the precise language used in the liquidator’s reports and correspondence.
You should also be aware that, as the tribunal confirmed:
- A write-off requires something more than a mere decision to stop chasing a debt — there must be actual acceptance that it will not be paid.
- A release requires a formal deed — informal arrangements will not suffice.
- The relevant tax year matters: a write-off cannot be backdated to a year before the actual decision was taken.
For Liquidators
The wording of liquidators’ reports and correspondence has real legal consequences for directors. Language that reserves the right to further recovery — for example, by flagging the possibility of restoring the company — is inconsistent with a write-off and will, on this authority, defeat a section 415 charge. Conversely, language that too readily accepts that a debt is irrecoverable may inadvertently expose a director to a significant and unexpected tax liability. Insolvency practitioners should take advice on how to characterise the position in their reports.
If You Have Already Been Assessed
If you have received a closure notice or assessment from HMRC on the basis that your outstanding DLA was written off during a liquidation, you may have grounds to appeal. The time limits for doing so are strict — generally 30 days from the date of the notice — and you should take legal advice promptly.
Conclusion
Quillan v HMRC is a significant decision that imposes important limits on HMRC’s ability to use the write-off provisions in section 415 ITTOIA 2005 as a basis for taxing directors whose loan accounts remain outstanding following a company’s insolvency. The tribunal’s rejection of HMRC’s guidance is notable and may be of considerable value to directors who find themselves in this position.
The case is also a timely reminder that the precise wording of every document produced during an insolvency process — from liquidator’s reports to creditor correspondence — can have far-reaching consequences that neither the director nor the insolvency practitioner may have anticipated at the time.
How We Can Help
Our team specialises in contentious tax disputes, including appeals before the First-tier and Upper Tribunal. If you are concerned about your exposure in the context of an ongoing or forthcoming insolvency process, please do not hesitate to contact us or contact khalil.makonnen@wlegal.co.uk to discuss your position.
