When is a loan write-off, not a write-off? One of the oddest Income Tax appeals so far this year concerned a director's claim that his loan has never been written off. The First Tier Tribunal (FTT) found a muddled trail and concluded that company records and minutes were falsified and no write-off had ever occurred.

Masked figure shaking hands fraud

In David Kingsmill Plumpton v HMRC [2024] TC09156, a director had built up a sizeable Director's loan account of over £700k due to his employing company. This was due to a prohibition in its management agreement which denied him the ability to draw a conventional salary. 

  • The loan balance was a concern for all connected. As the loan was a Loan to a Participtor, s455 CTA2010 tax had been paid by the company.
  • A potential purchaser for the company was introduced, Daniel O’Doherty (‘DOD’), an accountant and tax specialist.
  • DOD agreed a plan was to write off the loan by buying the director’s shares for £1m and the sales proceeds could be used to repay the loan. This seemed to be the solution.
  • The company reclaimed its s.455 Tax via its Corporation Tax return in anticipation of the repayment.
  • The director’s Self Assessment return showed an income of £700k.

The share sale did not take place. 

Subsequently, the director amended his SA return to remove the income and no mention was made of the loan write-off.

HMRC enquired into the return and issued a Closure Notice with an assessment for £201,177 in Income Tax with Penalties for Error or Mistake in a Return of £30,176.

The taxpayer appealed to the FTT who then considered whether the loan had been written off or not.

The FTT found:

  • Mr Plumpton had placed a lot of trust DOD who was supposed to be taking over the company.
  • He had left the company thinking that his share sale would go ahead and that DOD had arranged for an accountant to complete his Self Assessment tax return.
  • There was a paper trail of board minutes for meetings that had not taken place, there was no £1m share sale, the company ended up in liquidation, there were a lot of communications with auditors and the intended new owners, but no evidence to confirm that the loan had ever been written off. 

Finding that there was no write-off,  the appeal was allowed and the Income Tax amendment was reduced to £0. The penalty also fell away because of the successful appeal on the amendment to the ITSA.

It does seem quite a waste of resources to have to go to appeal for something like this. Yet another case that (with the benefit of hindsight, naturally!) could have been resolved outside of a tribunal, had the relevant paperwork been made available at that time.

Useful guides on this topic

Director's Tax Planning Toolkit 2024/25
Subscribe now! What tax planning opportunities and strategies are available to directors? What's the optimum way to extract profits in 2024/254? What tax reliefs and tax deductions are handy to consider? This planner looks at a range of director tax issues.

Loans to Participators
What is the Corporation Tax treatment when a close company makes a loan to a participator (director-shareholder)? How do the 'bed and breakfasting' rules work?

Director's Loan Account Toolkit
What do you do with a growing loan account from your company?

How to appeal an HMRC decision
Disagree with an HMRC decision? How do you 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?

Penalties: Errors in Returns and Documents (subscriber version)
What penalties apply if you make an error or mistake? Is there a penalty if you fail to tell HMRC about an under-assessment? How are penalties calculated? How do you check penalties? What can you do if you receive a penalty?

Closure Notices
What is a closure notice? What can you do with one?

External links

David Kingsmill Plumpton v HMRC [2024] TC09156