Everybody knows about the tax charge which arises when a loan is made by a close company to a participator or an associate. CTA 2010 s 455 requires the company to make a payment to HMRC equal to 33.75% of the loan. The company can recover the amount from HMRC under s 458 if the loan is repaid to the company, or if the debt is released or written off – although of course if the loan is released or written off, it becomes taxable as income on the participator under ITTOIA 2005 s 415.
The meaning of released or written off is therefore crucial in determining the tax position of the participator – and this was examined in the recent case of Quillan v HMRC.
What happened was that Mr Quillan had an overdrawn loan account of £400k and when the company was wound up the liquidator sought repayment; unfortunately, Mr Quillan had insufficient assets to repay the money.
The liquidators enquired of the creditors whether they wanted to finance an action for recovery, but they didn’t – and the company was dissolved. The loan was not released or written off by the liquidator – and it was specifically acknowledged that he would be able to restore the company and pursue the debt if Mr Quillan were to come into a substantial sum of money.
The FTT held that the loan was not written off. Although it was impractical or uneconomic for the liquidator to pursue Mr Quillan for the money at the moment, he could do so later if the possibility were to arise. Accordingly there was no charge to tax on Mr Quillan.
However, the Upper Tribunal has taken a contrary view (HMRC v Quillan [2026] UKUT 300 (TCC)).
The Upper Tribunal held that the words ‘writes off’ in s 415 should be construed purposively in their statutory context. It considered that the purpose of s 415 was to deal with the position where:
‘the assets of the company have been depleted (by the release or write off) and the participator has benefited.’
This would seem to be rather circular because it refers to a position where the loan has actually been written off – so s 415 would obviously apply. It does not help to answer the crucial question of whether the loan has been written off.
The Upper Tribunal went on to say that Mr Quillan was in a better financial position by reason of the liquidators’ decision not to pursue him. I wonder about that too. Mr Quillan had no funds; he had a debt he could not pay. He was no better off by the liquidator deciding not to pursue him; he could not pay it anyway. But he still owed the money and the liquidator would pursue him if he came into funds – so it is difficult to see how it can reasonably be said that he was in a better financial position.
Indeed, the Upper Tribunal also accepted that, on their interpretation, if Mr Quillan was charged to tax now on the amount outstanding, and in due course his circumstances improved and he had to repay the loan, there would be no relief for the tax he had paid. Apart from the grotesque unfairness, this would seem to be an acknowledgement that the loan was still outstanding.
A purposive interpretation would seem to require that Mr Quillan should be charged to tax when the loan was released or written off – in the sense that it was no longer payable.
HMRC will no doubt be pleased that the decision of the Upper Tribunal corresponds with their view of the matter as set out in the Company Taxation Manual at CTM61560:
‘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 that [ITTOIA 2005 s 415] should apply to the relevant amount.’
(I expect that the accountants would say that a company may write off a debt in its accounts as a matter of prudence if there is no reasonable prospect of the debt being paid. This would be a unilateral act in order for the accounts to show a true and fair view, but it would not release the debtor from his obligation to pay. That would be a reasonable interpretation of the term ‘writes off’. But it would not seem to be an appropriate interpretation in the context of s 415 if the debtor’s obligation to pay remains in existence. Interestingly, the Upper Tribunal said that they did not consider the accounting treatment to be material.)
However, whatever view one may take of the matter, this is now the position – subject of course to any further appeal.
Everybody knows about the tax charge which arises when a loan is made by a close company to a participator or an associate. CTA 2010 s 455 requires the company to make a payment to HMRC equal to 33.75% of the loan. The company can recover the amount from HMRC under s 458 if the loan is repaid to the company, or if the debt is released or written off – although of course if the loan is released or written off, it becomes taxable as income on the participator under ITTOIA 2005 s 415.
The meaning of released or written off is therefore crucial in determining the tax position of the participator – and this was examined in the recent case of Quillan v HMRC.
What happened was that Mr Quillan had an overdrawn loan account of £400k and when the company was wound up the liquidator sought repayment; unfortunately, Mr Quillan had insufficient assets to repay the money.
The liquidators enquired of the creditors whether they wanted to finance an action for recovery, but they didn’t – and the company was dissolved. The loan was not released or written off by the liquidator – and it was specifically acknowledged that he would be able to restore the company and pursue the debt if Mr Quillan were to come into a substantial sum of money.
The FTT held that the loan was not written off. Although it was impractical or uneconomic for the liquidator to pursue Mr Quillan for the money at the moment, he could do so later if the possibility were to arise. Accordingly there was no charge to tax on Mr Quillan.
However, the Upper Tribunal has taken a contrary view (HMRC v Quillan [2026] UKUT 300 (TCC)).
The Upper Tribunal held that the words ‘writes off’ in s 415 should be construed purposively in their statutory context. It considered that the purpose of s 415 was to deal with the position where:
‘the assets of the company have been depleted (by the release or write off) and the participator has benefited.’
This would seem to be rather circular because it refers to a position where the loan has actually been written off – so s 415 would obviously apply. It does not help to answer the crucial question of whether the loan has been written off.
The Upper Tribunal went on to say that Mr Quillan was in a better financial position by reason of the liquidators’ decision not to pursue him. I wonder about that too. Mr Quillan had no funds; he had a debt he could not pay. He was no better off by the liquidator deciding not to pursue him; he could not pay it anyway. But he still owed the money and the liquidator would pursue him if he came into funds – so it is difficult to see how it can reasonably be said that he was in a better financial position.
Indeed, the Upper Tribunal also accepted that, on their interpretation, if Mr Quillan was charged to tax now on the amount outstanding, and in due course his circumstances improved and he had to repay the loan, there would be no relief for the tax he had paid. Apart from the grotesque unfairness, this would seem to be an acknowledgement that the loan was still outstanding.
A purposive interpretation would seem to require that Mr Quillan should be charged to tax when the loan was released or written off – in the sense that it was no longer payable.
HMRC will no doubt be pleased that the decision of the Upper Tribunal corresponds with their view of the matter as set out in the Company Taxation Manual at CTM61560:
‘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 that [ITTOIA 2005 s 415] should apply to the relevant amount.’
(I expect that the accountants would say that a company may write off a debt in its accounts as a matter of prudence if there is no reasonable prospect of the debt being paid. This would be a unilateral act in order for the accounts to show a true and fair view, but it would not release the debtor from his obligation to pay. That would be a reasonable interpretation of the term ‘writes off’. But it would not seem to be an appropriate interpretation in the context of s 415 if the debtor’s obligation to pay remains in existence. Interestingly, the Upper Tribunal said that they did not consider the accounting treatment to be material.)
However, whatever view one may take of the matter, this is now the position – subject of course to any further appeal.
