Mark McLaughlin looks at a potential tax implication on the release or write-off of an overdrawn director’s loan account balance.
Most owners of family or owner-managed companies extract profits from the business as a salary (and possibly bonus) or dividends.
Director’s money box?
However, some director-shareholders treat the company like their private ‘money box’ and withdraw funds for private purposes when needed, which represent neither remuneration nor dividends.
These withdrawals are generally treated as loans from the company to the director, which are debited to a ‘director’s loan account’ (DLA). The company is generally liable to tax (at 33.75%) on such loans, which is refundable if the debt is repaid (e.g., by offsetting salary or dividends against it), or until the balance is released or written off.
However, if the company releases or writes off the debt, the individual is normally liable to income tax on the amount released or written off, as though they had received a dividend, i.e., taxable at 8.75%, 33.75% or 39.35% (for 2025/26), depending on the individual’s income (ITTOIA 2005, s 415).
Has it really gone?
What happens if the company goes into liquidation while the DLA is overdrawn? The liquidator is likely to pursue the individual for repayment of the debt, to enable any company creditors (e.g., HM Revenue and Customs (HMRC)) to be paid, etc. If the liquidator does not collect the full DLA balance, HMRC may seek to treat the balance as having been released or written off, and tax the individual accordingly. But is this tax treatment correct?
In Quillan v Revenue and Customs [2025] UKFTT 421 (TC), the appellant was the sole director of a company (BOH). In January 2017, a liquidator was appointed to voluntarily wind up the company. The DLA was overdrawn by £439,954. The liquidator’s final report in March 2019 stated: ‘Enquiries were made with the director with a view to reaching a settlement to discharge his overdrawn [DLA]…Following protracted correspondence and the threat of legal action, the director made an offer of £57,500 to settle the claim. To date, £57,498 has been received in respect of the overdrawn [DLA].’ The report also noted: ‘No further funds are expected into the Liquidation in this respect.’ The outstanding balance of the DLA following the appellant’s payments was £382,456. BOH was later dissolved. HMRC considered that as the loan balance had not been repaid and was no longer being pursued by the liquidator, it had been written off and the relevant amount should be taxed.
However, the First-tier Tribunal (FTT) held there was no evidence that any formal release agreement was reached, or that the liquidator considered the debt released, or that the taxpayer’s obligations regarding the DLA balance had been released.
Furthermore, the FTT did not agree that the liquidator’s actions amounted to an acceptance that the money had been lost or that a debt would not be paid. The liquidator had stated clearly in writing that there was no formal write-off of the DLA balance. The prospect of a reinstatement of BOH in order that the appellant should be pursued at some future point was unlikely, but not impossible. It was within the liquidator’s power to either release or write off the loan, but he chose to do neither. The taxpayer’s appeal was allowed.
Practical tip
HMRC might argue that Quillan was decided on its particular facts and documentation, so seek expert advice if a DLA is being written off in similar circumstances.
