When is a Director’s Loan truly written off or released? Lessons from Quillan v HMRC

A close examination of debt, liquidation, and tax consequences

The recent case of Gary Quillan v HMRC [2025] TC09487 offers valuable insights into the complexities of determining when a debt is considered “written off” or “released” for tax purposes. The decision is significant in that it serves as a crucial reminder for company directors, liquidators, and accountants regarding the importance of documentation and communication during liquidation proceedings.

The Facts

Mr Quillan, as sole director of BOH Investments Limited, owed the company £439,954 at the time it entered liquidation in 2017. In early 2018, the liquidator reported that Mr Quillan lacked the means to repay the debt. Following legal pressure, Mr Quillan verbally agreed to pay £57,500, which was settled over six payments. By early 2019, the liquidator indicated that no further recoveries were expected, leaving an outstanding balance of £382,456. The company was dissolved in April 2020.

HMRC subsequently investigated Mr Quillan’s 2018–19 tax return, focusing on the director’s loan. The liquidator confirmed to HMRC that the debt remained unresolved and had not been formally written off. HMRC nonetheless concluded that the liquidator’s decision not to pursue the debt amounted to a write-off, thus triggering a tax charge under section 415 Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”). A closure notice was issued, assessing additional tax of £145,058.66 on the deemed income of £382,456.

Mr Quillan appealed the closure notice to the First-tier Tribunal.

The Tribunal’s Reasoning

The Tribunal’s decision centred on whether the outstanding director’s loan owed by Mr Quillan to BOH Investments Limited had been formally released or written off, and whether this did in fact trigger a tax charge under s. 415 ITTOIA 2005.

Distinction Between Release and Write-Off

The Tribunal made a clear distinction between a formal “release” of a debt and a “write-off.” A release requires a formal process, typically involving a deed executed by a legal professional. A write-off, on the other hand, must be evidenced by company records and the actions of the liquidator. In this case, neither a formal deed nor clear documentation of a write-off was present.  Furthermore, even if the debt had been written off informally, the write-off could not have occurred prior to the company’s dissolution in April 2020 which was after the 2018-2019 year of assessment in question.

Assessment of the Liquidator’s Actions

The Tribunal examined the liquidator’s correspondence and reports. While the liquidator indicated that no further funds were expected from Mr Quillan, they also stated that the debt “remained unresolved and was not formally written off.” The liquidator’s intention to keep open the possibility of restoring the company to pursue further recovery suggested that the debt had not been definitively written off.

Rejection of HMRC’s Interpretation

HMRC argued that the liquidator’s decision not to pursue the debt was equivalent to a write-off, and thus a tax charge should arise. This position was documented in guidance previously published by HMRC. The Tribunal disagreed. In the absence of a statutory definition of “write-off” it was forced to reference the standard definition found within the Cambridge English Dictionary. That definition stated that to write off a debt requires a person “to accept…a debt will not be paid”. In Mr Quillan’s case the actions of the liquidator fell short of any such acceptance.  Therefore, in the absence of a formal release or write-off the statutory requirements for a tax charge under s.415 were not met.

The Tribunal was critical of HMRC’s guidance, which treats any decision not to pursue a debt as a write-off, as being unhelpful and not determinative.  The Tribunal held that each case must be assessed on its specific facts. It clarified that while HMRC’s suggested approach might be appropriate in some situations, it is not an absolute rule.

Burden of Proof and Documentation

The Tribunal emphasised the importance of proper documentation and formalities. Without clear evidence of a formal release or write-off, the debt remained outstanding for tax purposes.

Outcome

As a result, the Tribunal allowed Mr Quillan’s appeal, concluding that no tax charge arose because the debt had not been formally released or written off during the relevant tax year.

The Legal Implications

The Quillan v HMRC case highlights several important legal implications for directors’ loans in the context of company liquidation.The case underscores the necessity for clear, formal procedures when releasing or writing off a director’s loan. Although the liquidator ceased to pursue the debt, there was no formal release or write-off. For tax purposes, informal arrangements or a mere decision not to pursue a debt are insufficient to trigger a tax charge under s. 415 ITTOIA 2005. There must be evidence of a formal release or write-off process. In holding that the absence of a formal write-off or release meant no tax charge arose, the Tribunal set a clear precedent that tax consequences are closely tied to the legal formalities observed, not simply the practical outcome.

Liquidators should be cautious and particular in their communications and reports, as the wording can have significant tax implications for directors. Directors and accountants should be aware that unless a debt is formally released or written off, the obligation technically remains, although HMRC will not be able to impose a tax charge based solely on the liquidator’s decision not to pursue the debt.The decision emphasises the importance of documentation. Directors and liquidators must ensure that any release or write-off of debt is properly documented and executed in accordance with statutory requirements. Failure to do so may result in protracted disputes with HMRC and potential tax exposure.

Conclusion
The case demonstrates that even slight variations in wording during liquidation can have significant tax consequences. Directors must scrutinise all correspondence and reports to ensure that any debt release or write-off is clearly and appropriately documented to avoid unintended liabilities. This is particularly important given a debtor is unlikely to have significant influence over the words used by a liquidator in writing their report and thus poses significant risk.  As demonstrated here successful outcomes in one case do not guarantee safety in similar future scenarios.

The case sets an important precedent for distinguishing between the two concepts of release and write-off.  This clarification provides greater certainty for practitioners and company officers dealing with directors’ loans, particularly in insolvency or winding-up scenarios.

If you have any queries about this topic, please contact Ali Zaidi or any member of the Restructuring & Insolvency team.