Directors' loan written off at date of repayment agreement not date of repayment

In Simon and Debra England v HMRC [2023] TC8770, two directors made an agreement to repay their outstanding directors' loans following the insolvency of their company over two years. They claimed that the write off was over two years for Income Tax purposes. The First Tier Tribunal (FTT) agreed with HMRC: the effective date of write off was the date of the settlement agreement.

• The directors had incurred debt to Alexander Lauren Associated Limited (ALA), their Close Company, by way of a Directors' Loan Account totalling some £1m.
• On 26 September 2012, the company was placed in creditors' voluntary liquidation.
• A settlement agreement was agreed between the directors and ALA in October 2013 under which they were to repay £100,000 of the loan and the other £900k would be released.
• The £100,000 was to be paid over two years, and if the repayment terms were not adhered to, the full balance would become immediately due.
• No entries were included on the 2013-14 individual tax returns in respect of the settlement agreement or the loan release.
• HMRC raised Discovery Assessments contending the settlement agreements lead to an Income Tax charge in 2013-14.
• The taxpayers Appealed to the FTT.

The FTT found that:

• The parties agreed that the write-off of the loan was chargeable to Income Tax, the question was the date on which the loan was written off.
• The release of the debt, the tax point for the income tax charge, was in October 2013 as:
  • The £100k was to be in full and final settlement of the total liability.
  • The substance of the transaction was the release and write-off of the remaining £900k of debt.
  • The settlement agreement was consistent with the balance of the debt being written off.
  • The settlement agreement was fully and effectively binding at that date.

The appeal was dismissed.

Useful guides on this topic

Directors’ loan accounts: Toolkit (subscriber)
HM Revenue & Customs (HMRC) have a director's loan accounts toolkit for advisers. This is our enhanced version with planning points. 

Director’s loan accounts: Toolkit (freeview)
HM Revenue & Customs (HMRC) have a director's loan accounts toolkit for advisers. This is our enhanced (freeview) version with planning points. 

What is a Close Company?
What is a close company? What is a participator? Why does it matter? If you are not sure, start here for a basic guide and signposts to more detailed guidance elsewhere on our site.

Close companies: Definitions & control
This guide goes over basic definitions. When is a company deemed 'close' and what constitutes control?

Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?

Discovery Assessments: At a glance (freeview)
What is a Discovery Assessment? When can HMRC make a Discovery? What are the time limits for Discovery Assessment?

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External links

Simon and Debra England v HMRC [2023] TC8770