Director’s loan accounts: Not an overall write-off!
Lets looks at a potential tax implication on the release or write-off of an overdrawn director’s loan account balance.
A lot of proprietors of family or owner-managed companies remove profits from business as a salary (and perhaps bonus) or dividends.
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Director's money box?
Nevertheless, some director-shareholders deal with the company like their private ‘money box’ and withdraw funds for private purposes when required, which stand for neither reimbursement neither dividends.
These withdrawals are typically treated as loans from the company to the director, which are debited to a ‘director’s loan account’ (DLA). The company is typically liable to tax (at 33.75%) on such loans, which is refundable if the financial obligation is repaid (e.g., by offsetting salary or dividends against it), or until the equilibrium is launched or crossed out.
However, if the company launches or writes off the debt, the individual is typically liable to income tax on the quantity launched or crossed out, as though they had received a dividend, i.e., taxed at 8.75%, 33.75% or 39.35% (for 2025/26), depending upon the individual’s income (ITTOIA 2005, s 415).
Has it truly gone?
What occurs if the company goes into liquidation while the DLA is overdrawn? The liquidator is likely to go after the individual for repayment of the debt, to enable any type of company lenders (e.g., HM Revenue and Customs (HMRC)) to be paid, etc. If the liquidator does not accumulate the full DLA balance, HMRC might look for to deal with the equilibrium as having been released or written off, and tax the individual accordingly. Yet is this tax treatment correct? In Quillan v Revenue and Customs [2025] UKFTT 421 (TC), the applicant was the sole director of a company (BOH). In January 2017, a liquidator was assigned to voluntarily wind up the company. The DLA was overdrawn by ₤ 439,954. The liquidator’s final record in March 2019 specified: ‘Enquiries were made with the director with a view to getting to a negotiation to release his overdrawn [DLA] … Following drawn-out correspondence and the threat of legal action, the director made a deal of ₤ 57,500 to settle the insurance claim. To date, ₤ 57,498 has actually been received in regard of the overdrawn [DLA]’ The report also kept in mind: ‘No further funds are anticipated right into the Liquidation in this regard.’ The exceptional balance of the DLA adhering to the applicant’s payments was ₤ 382,456. BOH was later on dissolved. HMRC took into consideration that as the loan balance had actually not been settled and was no more being gone after by the liquidator, it had actually been written off and the appropriate amount should be taxed.
Nevertheless, the First-tier Tribunal (FTT) held there was no proof that any kind of official launch arrangement was reached, or that the liquidator took into consideration the financial debt released, or that the taxpayer’s obligations pertaining to the DLA equilibrium had been launched. Moreover, the FTT did not agree that the liquidator’s actions amounted to an acceptance that the money had actually been shed or that a financial obligation would certainly not be paid. The liquidator had actually mentioned plainly in writing that there was no official write-off of the DLA equilibrium. The prospect of a reinstatement of BOH in order that the applicant need to be sought at some future factor was not likely, however possible. It was within the liquidator’s power to either launch or cross out the loan, however he selected to do neither. The taxpayer’s allure was enabled.
Practical tip
HMRC may argue that Quillan was chosen its particular facts and paperwork, so seek professional advice if a DLA is being crossed out in similar circumstances.
Article Written by Salford Tax Specialists Ltd
All rights Reserved
05.03.2026
