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 (ITTOIA05), 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 trigger an income tax charge for the relevant director.
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 concluded in his report that the debt was irrecoverable although he did not write off the loan and when questioned by HMRC about it, he confirmed that he had 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. 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.”
Mr Quillan disagreed with HMRC as did the First-tier Tribunal who did not consider HMRCs guidance helpful. The First-tier Tribunal confirmed that the debt would only have been considered 'written off' had the liquidator formally written it off or released it.
HMRC appealed and the Upper Tribunal has now allowed HMRC's appeal.
There is no statutory definition of the term 'writes off' and therefore these words should, according to the Upper Tribunal, be construed purposively and in their statutory context. The Upper Tribunal did not consider the fact that the liquidator regarded the position concerning the debt as 'unresolved', in the sense that the future recovery of it remained theoretically possible, to preclude the outstanding balance as having been written off within the meaning of section 415. The fact that the liquidator had made it plain in his report that the outstanding balance would not be recovered was sufficient for it to have been 'written off' and it was not the case that recovery of the debt needed to be impossible, or that it would never be recovered before it was considered to have been written off.
Given the Upper Tribunal's ruling on the write off of the loan, the second issue it had to consider was the timing of the write off. This was important to determine whether the write off occurred in the year for which the closure notice was issued, which was HMRCs position. The taxpayer argued that the loan was written off either before or after the year of assessment. The Upper Tribunal indicated that a debt is written off in a creditors’ voluntary liquidation when the liquidator finally reports to the members and creditors that, in their view, a debt cannot be recovered. That report was contained in the final account made by the liquidator on 18 March 2019 and formed the basis on which BOH was finally wound up and dissolved. That date fell within the tax year 2018/19 and accordingly, the Upper Tribunal concluded that the outstanding loan was written off in the tax year 2018/19, which was the year of assessment for which the closure notice was issued.
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