When is a director’s loan written off for tax purposes?
The Quillan decision at the Upper Tribunal addresses an important issue concerning the taxation of loans, particularly the meaning of a loan being written off, explains Matt Greene, partner, tax disputes at Stewarts Law
The decision at the First Tier Tribunal (FTT) in the case of Tanglewood Care Services Limited, the operator of a residential care home, is a classic warning for companies aiming to claim research and development (R&D) tax relief.
HMRC had rejected an R&D tax relief claim by the care home, disallowing the spending of £880,286 on the grounds that no valid R&D work was conducted.
The appellant, Tanglewood believed that attempts to minimise the spread of disease during the pandemic were novel and while the tribunal praised the work conducted by the care home, it concluded that managing operational challenges was not the same as advancing scientific knowledge.
Due to the implementation of external guidance and scientific discoveries only constituting a system uncertainty, the FTT confirmed that no valid R&D work had been completed and many of the vital components for an R&D tax relief claim were absent – including a competent professional in the relevant field of science or technology.
The key points discussed in the tribunal apply more broadly to the sector and should not be ignored.
Tanglewood operated in a sector that is ineligible for R&D and lacked a competent professional, so HMRC’s rejection of the claim was understandable and reasonable. However, other businesses may fall into a similar trap of thinking the work they do is innovative and dismiss the findings of this tribunal by not going beyond the headline.
Businesses must consult the guidance before attempting to compile an R&D tax relief claim. Where confusion may persist around the validity of the work undertaken, using the advanced assurance scheme or engaging with an R&D tax consultant is better than submitting an erroneous claim.
The guidance clearly delineates between routine activities that are ineligible and those that are genuine advances and can be part of a valid claim.
A simple way of telling the difference is by questioning whether the issue extends beyond what is thought to be possible within the current understanding of science and technology – if the work goes beyond that, it is likely to qualify.
Inspiration can strike different businesses as new challenges arise, so even those not traditionally invested in science and technology should not necessarily view the tribunal ruling as a barrier.
While Tanglewood is part of the social science sector and the work is generally ineligible, there are instances where advances occur outside of the traditional sectors.
For example, randd recently worked with a college which was able to innovate in the field of audio-visual technology, and another client that mainly did social science work but developed a novel piece of software and as a result psychologists were able to achieve an advance in data processing.
The commonality between these, and the thing lacking in the Tanglewood case, is a genuine advance in the field of science or technology overseen by a competent professional. Each of these claims either had a competent professional in-house or brought one in for the duration of the project.
The absence of a competent professional was noted by the tribunal as one of the critical flaws in the Tanglewood case. However, many businesses are unclear about who counts as a competent professional.
A competent professional is someone who is an expert due to qualifications, experience or both. While HMRC favours qualifications as evidence, there is no denying that an engineer who has been innovating for decades should be viewed as an expert.
If Tanglewood had brought in an expert virologist to seek a novel way of containing the spread of disease then there is a possibility it could have qualified – though the project would have looked very different.
The tribunal ruling is the latest example of the more compliance-focused HMRC that has been able to root out much of the error and fraud within the R&D space. Enquiries have been the main catalyst for this improvement and have led to the value of R&D claims increasing while the amount submitted declines.
More R&D takes place than people realise, but there is a limit to what can be accepted by HMRC. It is essential to conduct thorough health checks throughout the process and support accountants as well as innovative businesses.
Knowing ahead of time whether something is valid R&D can save time and money, while ensuring all qualifying costs are captured in the R&D ta‘Written off’ is one of those terms that can mean subtly different things to different people. That poses a challenge when there are tax consequences that hinge on whether and when a director’s loan account (DLA) balance is written off.
This is the question the Upper Tribunal recently had to grapple with in HMRC v Quillan [2026] UKUT 300 (TCC), which concerned the income tax charge payable by the director of a company in voluntary liquidation on an outstanding DLA balance.
Background
A close company is one controlled by five or fewer participators (typically, but not exclusively, shareholders) or by any number of participators who are directors.
Where the company makes a loan to a director, this gives rise to a charge to corporation tax on the company under section 455 Corporation Tax Act 2010 (CTA 2010). For these purposes loan includes any indebtedness to the company incurred by the participator, not just formal loans.
The company can typically recover the s455 CTA 2010 tax charge under s458 CTA 2010 when the loan is repaid, released, or written off. HMRC does not require a company to account for the s455 tax and make a separate s458 claim if the loan is no longer outstanding at the end of the accounting period (unless the so-called bed and breakfasting anti-avoidance rules apply).
To the extent the loan is released or written off, rather than repaid, a personal income tax charge under s415 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2025) is incurred by the participator in the year of the release or write-off.
In the Quillan case, BOH Investments Limited (BOH) was a close company and the sole director, Gary Quillan, was a participator. BOH was placed into voluntary liquidation in 2017, at which point Quillan’s DLA was overdrawn by £439,954.
The liquidator made various attempts to recover this amount from Quillan, including threatening legal action, and he subsequently repaid £57,498 in instalments.
In the notice of final account on 18 March 2019, the liquidator stated: ‘To date, £57,498 has been received in respect of the overdrawn [DLA]. No further funds are expected into the liquidation in this respect.’
BOH was subsequently dissolved on 15 April 2020.
Was the DLA balance written off?
BOH never formally extinguished its legal claim to recover the remaining DLA balance. Even after dissolution, it was still, in principle, possible for the company to be restored to the register so that it could pursue a claim (for example, if Quillan suddenly received a financial windfall such that recovery action by the company would have better prospects of success).
Quillan argued that this meant the balance was not written off and therefore no income tax charge under s415 arose. The First Tier Tribunal (FTT) agreed, but HMRC appealed to the Upper Tribunal.
The Upper Tribunal disagreed with Quillan. In its view, giving up a legal claim was akin to a debt being released, and this is not necessary for s415 to apply. Section 415 says ‘releases or writes off’, so release and write off are not the same thing. It decided that ‘a “write off” is essentially an informal and (usually) unilateral act which does not alter the legal relationship between the creditor and the debtor’.
In other words, the fact that the company might still be able to pursue the debt in future does not preclude it from having been written off.
The Upper Tribunal ruled that the notice of final account contained a record of that write-off. It was at this point that the liquidator formed the view that the debt could not be recovered. The judges rejected an earlier date for the write-off on the basis that the liquidator had indicated that discussions with the debtor were ongoing. Similarly, the judges rejected a later date, being the date the company was dissolved, since the notice of final account contained a clear record that the liquidator considered the debt was irrecoverable before then.
Implications
The Upper Tribunal has taken a common sense approach in this case, but it does raise questions of wider application. If a write-off is inherently informal (as opposed to a release) and typically unilateral, there are likely to be many cases where it is not clear whether a debt has been written off and when.
Quillan concerned a liquidation, so the tribunal was able to point to the liquidation reports for a clear answer. But what about other scenarios? Is it necessary for there to be an accounting entry recognising the write-off? The judgment casts doubt on the relevance of the accounting treatment. Could mere non-collection be sufficient to amount to a write-off? What if the company changes its mind about recovery?
Once a sum is written off, the s415 charge crystallises and so does the company’s right to reclaim the s455 tax. The tribunal noted the difficult scenario where a director is liable for a s415 charge, and then just before the expiry of the six-year civil limitation period, the company brings a claim against the director. The director could ultimately be left paying tax on an amount they ultimately repaid to the company.
What is clear is that any decisions on recoverability of DLA balances or other debts where s455 was engaged should be recorded at the time in order to limit future uncertainty and protracted disputes with HMRC, the director, or both.x relief claim.
