The case of Gary Quillan v The Commissioners for His Majesty's Revenue & Customs [2025] concerned an income tax charge of £145,058.66 in respect of a director's loan which HM Revenue & Customs (HMRC) claimed had been 'written off'.
Under section 415(1) of Income Tax (Trading and Other Income) Act 2005 (ITTOIA), where a close company which has been subject to tax in respect of a director's loan, subsequently releases or writes off the whole or part of the loan, the amount released or written off will be included in the director's income and subject to tax.
Mr Quillan was the sole director of BOH Investments Limited (BOH) which was a close company. In April 2017 BOH passed a resolution for its voluntary winding up and at this point there was an outstanding director's loan to Mr Quillan of £439,954. Following the appointment of a liquidator, Mr Quillan made several payments towards the loan totalling £57,498 and at the time the liquidator was released, £382,456 of the loan remained outstanding. The liquidator did not write off the loan and when questioned by HMRC about it, he confirmed in writing that the loan had not been formally written off. Instead, he reserved the right to re-open BOH and to pursue Mr Quillan for the outstanding amount if he was made aware of a windfall being received by Mr Quillan.
HMRC took the view that because neither BOH nor the liquidator were intending to pursue the outstanding loan, it had been written off and Mr Quillan should be subject to income tax on the amount of the write off (under section 415 ITTOIA). They took this position based on the guidance in their Company Taxation Manual which provides –
"Equally, where the liquidator does not write off or release the loan balance, but, on a balanced view of the facts, it is clear that the company and / or liquidator are not intending to pursue the outstanding loan, e.g. where they are not making any attempts to collect it or have given up any attempts to do so, then we should argue that the loan has been written off and the S415 ITTOIA05 should apply to the relevant amount.”
Unsurprisingly, Mr Quillan appealed.
There is no statutory definition of the term 'written off'. HMRC pointed to the meaning of the words from the Cambridge English dictionary which said that the term meant – 'to accept that an amount of money has been lost or that a debt will not be paid.' HMRC also argued (based on the case of Collins v Addies (HM Inspector of Taxes) [1991]), that, even if the liquidator did reserve the right to reopen the company and chase Mr Quillan for the shortfall, this did not prevent the debt from being written off.
The First-tier Tribunal (FTT) confirmed that the dictionary definition was helpful insofar as it sought to provide a definition where there otherwise was none and that Collins confirmed that a written off debt may still be recovered, however, the FTT noted that there is formal process for writing off debts and that process had deliberately not been followed. Therefore, despite the liquidator's admission in his report that no further funds were expected to be paid after the £57,498 and in spite of the dissolution of BOH, the FTT was not persuaded that Mr Quillan's outstanding director's loan had been written off.
The FTT did not consider HMRCs guidance helpful and confirmed that the debt would only have been considered 'written off' had the liquidator formally written it off or released it.
The FTT allowed Mr Quillan's appeal and set aside HMRCs claim for £145,058.66.
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