Gary Quillan v The Commissioners for HMRC [2025] UKFTT 421 (TC)

[2025] UKFTT 00421 (TC)Case No TC09487
FIRST-TIER TRIBUNAL
TAX CHAMBER
Hearing Heard on: 21 January 2025Date Judgment date: 10 April 2025
[By remote video/telephone hearing]
Appeal reference: TC/2024/00147
Section 415 Income Tax (Trading and Other Income) Act 2005 – whether director’s loan was released – no – whether director’s loan was written off – no – appeal allowed.
Before
TRIBUNAL JUDGE SUSAN TURNERGILL HUNTER
Between
GARY QUILLANAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentGary Quillan in person for AppellantAlexander Barrett, litigator of HM Revenue and Customs’ Solicitor’s Office for RespondentsDECISION

Introduction

[1]This is an appeal against the conclusion of a closure notice dated 9 August 2023 (the Closure Notice) issued under s 28A Taxes Management Act 1970 (TMA 1970) in respect of the 2018-19 tax year. The Closure Notice is in an amount of £145,058.66 assessed under s 415(1) Income Tax (Trading and Other Income) Act 2005 (ITTOIA) in respect of an overdrawn director’s loan account with BOH Investments Limited (BOH) with an outstanding balance of £382,456 (the Director’s Loan Balance).[2]The form of the hearing was V (video) and all parties attended remotely using Microsoft Teams. We referred to a document bundle of 136 pages; a bundle of legislation and authorities of 68 pages; and skeleton arguments prepared by both the Respondents and the Appellant.[3]At the hearing, Mr Quillan applied for the admission of a LIQ03 Companies House form dated 29 January 2018 attaching an annual progress report dated 25 January 2018 (the Annual Progress Report). There was no objection, and this document was therefore admitted into evidence.[4]Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such, the hearing was held in public.

The Law

[5]This appeal concerns the basis for an assessment of tax for the 2018-19 tax year made under s 415(1) ITTOIA.[6]Section 415(1) ITTOIA provides:
“Income tax is charged if– (a) a company is or was chargeable to tax under section 455 of CTA 2010 (loans to participators in close companies etc.) in respect of a loan or advance, and (b) the company releases or writes off the whole or part of the debt in respect of the loan or advance.”

The Issue

[7]The issue before the Tribunal is whether s 415(1) ITTOIA applies to the Director’s Loan Balance.[8]The burden of proof is on Mr Quillan to show that s 415(1) ITTOIA does not apply on the balance of probabilities.[9]There is no dispute between the parties that s 415(1)(a) ITTOIA applies in this case.[10]The Tribunal must decide whether the Director’s Loan Balance was either written off or released in order to determine whether s 415(1)(b) ITTOIA applies.[11]If the Director’s Loan Balance was either written off or released and s 415(1) ITTOIA does apply, the timing of the write-off or release becomes relevant in determining whether it fell during the 2018-19 year of assessment.

Background and Facts

[12]The facts of this appeal are not in dispute and are set out below, together with details of relevant correspondence referred to later in this decision.[13]Mr Quillan was the sole director of BOH.[14]On 16 January 2017, BOH passed a resolution for the voluntary winding up of the company and Andrew Rosler of Ideal Corporate Solutions Limited was appointed as liquidator.[15]The director’s loan account (the Director’s Loan Account) was overdrawn in the amount of £439,954.[16]The liquidator’s Annual Progress Report of 25 January 2018 noted that:
“The Statement of Affairs included the overdrawn director’s loan account in the sum of £439,954.00. An initial demand for payment was made although the director advised that he had no means to pay. Initial enquires were made with the Director with a view to reaching a settlement to discharge his overdrawn director’s loan account. A statement of means was received which suggested the Director has no assets and insufficient income to make an offer of settlement. Following protracted correspondence and the threating of legal action, the Director has made an offer of £57,500 to settle the claim. The payments are due in instalments over a six month period and although I am still continuing my enquiries into the Directors current financial position.”
[17]Between February 2018 and July 2018, Mr Quillan made six payments of £9,583 towards the outstanding balance of the Director’s Loan Account, a total of £57,498.[18]The liquidator’s notice of final account dated 18 March 2019 (the Report) included the following statement:
“Enquiries were made with the Director with a view to reaching a settlement to discharge his overdrawn director’s loan account … Following protracted correspondence and the threat of legal action, the Director made an offer of £57,500 to settle the claim. To date, £57,498.00 has been received in respect of the overdrawn Director’s Loan Account.”
[19]The Report goes on to note that “no further funds are expected into the Liquidation in this respect.”[20]The outstanding balance of the Director’s Loan Account following Mr Quillan’s six payments stands at £382,456.[21]On 15 April 2020, BOH was dissolved.[22]On 10 September 2020, HMRC wrote to Mr Quillan to let him know that an enquiry had been opened into his self-assessment tax return for 2018-19. In particular, Mr Quillan was asked to confirm the amount of the Director’s Loan Account released or written off by the liquidator, the date of the agreement to do this, and for full details of payments made in relation to the overdrawn Director’s Loan Account.[23]In response to HMRC’s enquiries, Mr Rosler wrote to HMRC by letter dated 24 September 2020 (Liquidator Letter 1) as follows:
“I can confirm that the original balance of the Directors Loan Account was £439,954.00. The Director made payments towards the Directors Loan Account as stated in my final report although the matter remained unresolved and was not formally written off.”
[24]By letter dated 27 November 2020, HMRC wrote to Mr Rosler asking for further information about the Director’s Loan Balance. The following questions were asked: “1. If the outstanding balance was not written-off, could you tell me what happened to this debt? 2. Was the outstanding balance released? 3. If it was not released,a. Are the Liquidators still seeking repayment?b. Does the matter remain unresolved? What happened to the outstanding balance upon dissolution of the company?

What happened to the outstanding balance upon dissolution of the company?

[25]Mr Rosler replied by letter dated 4 December 2020 to confirm that the Director’s Loan Balance remained unresolved prior to his release as liquidator.[26]When asked by HMRC in a follow-up letter why the unpaid loan amount had not been released or written off and whether he would be willing to release or write off the unpaid amount if HMRC restored BOH, Mr Rosler replied by letter dated 8 February 2021 (Liquidator Letter 2):
“Unless a Director insists on a compromise, any payments we receive are on account of an Overdrawn Directors Loan Account repayment. As Liquidator, I then report this to creditors to establish whether they wish to fund/acquire the right of action.

(s) ”

[27]By letter dated 4 March 2021, HMRC informed Mr Quillan that an inaccuracy had been found in his tax return and there was some further correspondence between HMRC and Mr Quillan between March and June 2021.[28]On 22 March 2023, HMRC wrote to Mr Quillan (the 22 March 2023 Letter) to confirm their view that a tax charge relating to the Director’s Loan Balance should be included. This letter included paragraphs taken from HMRC’s Corporation Tax Manual 61560 [CTM61560] (the Guidance). The following paragraph, setting out an example of the application of s 415(1) ITTOIA, was highlighted by the reviewing officer as relevant to Mr Quillan’s circumstances:
“Equally, where the liquidator does not write off or release the loan balance, but, on a balanced view of the facts, it is clear that the company and / or liquidator are not intending to pursue the outstanding loan, e.g. where they are not making any attempts to collect it or have given up any attempts to do so, then we should argue that the loan has been written off and the S415 ITTOIA05 should apply to the relevant amount.”
[29]Following their enquiries, HMRC concluded that the Director’s Loan Balance had been omitted from Mr Quillan’s 2018-19 tax return and should have been declared. In the Closure Notice dated 9 August 2023, HMRC stated:
“Your overdrawn loan account with BOH Investments Ltd was not repaid in full during the Insolvency Proceedings. The evidence from the Insolvency Practitioner in their report dated 18 March 2019, states the overdrawn loan account was £439,954. You made an offer to settle the claim and repaid £57,498, leaving an outstanding balance of £382,456. Their report states that no further funds were expected into the Liquidation in this respect. Per HMRC's guidance at CTM61560, any loan balance which is not repaid and is no longer being pursued by the Insolvency Practitioner is considered to have been written off and that S415, ITTOIA05 should apply to the relevant amount.”
[30]Mr Quillan appealed against the conclusion of the Closure Notice on 5 September 2023 and HMRC provided their view of the matter on 22 September 2023 and offered Mr Quillan a review of that decision.[31]Mr Quillan accepted a review of HMRC’s decision, and, by letter dated 23 November 2023 (the Review Conclusion Letter), HMRC upheld the conclusion of the Closure Notice. The Review Conclusion Letter sets out the following explanation for the assessment:
“But also, in the scenario where the liquidator does not write off or release the loan balance, but, on a balanced view of the facts, it is clear that the company and/or the liquidator are not intending to pursue the outstanding loan then HMRC takes the view that the loan has been written off and that Section 415 ITTOIA 2005 should apply to the relevant amount. If the view taken is that the debt has not been written off as part of any settlement agreement, and as in your case as there is no evidence to show that a formal agreement was in place, then the point of issue revolves around the key matter as to whether, based on a balanced consideration of the facts, that the IP is not intending to pursue the outstanding balance on the loan. Based on the information seen and the lack of evidence to the contrary, then it appears that there is no active pursuit of the debt and given the guidance update, then the loan write-off occurred at the time of the IP’s Final Report of 18 March 2019. Their report states that as you made a payment of £57,498, with a view to reaching a settlement to discharge your overdrawn director’s loan account and following protracted correspondence and the threat of legal action, you made an offer of £57,500 to settle the claim. It went on to state that to date, £57,498.00 has been received in respect of the overdrawn DLA, leaving a remaining balance of £382,456 and that no further funds were expected into the liquidation in respect of the loan.”
[32]Mr Quillan appealed to this Tribunal against the conclusion of the Closure Notice on 10 January 2024, raising the following grounds of appeal:
“The dispute is regarding a director's loan, in respect of a company that went into liquidation. I agreed a payment with the liquidator who agreed not to pursue any further funds at the time. However, he reserved the right to reopen the company and chase me for the shortfall, if I were to come into a substantial sum of money. The loan was never written off, and therefore I do not believe I have to pay tax on this sum of money. HMRC disagree and believe the loan has effectively been written off, but I do not believe there is any legislation to support their opinion.”

Submissions and Discussion

[33]HMRC submitted that the assessment issued under the Closure Notice for tax year 2018-19 should be upheld. Section 415(1)(b) ITTOIA applies because:(a) the Director’s Loan Balance was written off; or, in the alternative,(b) the Director’s Loan Balance was released.[34]Mr Quillan contended that s 415(1)(b) ITTOIA does not apply because the Director’s Loan Balance was neither released nor written off and therefore there is no basis for the tax assessment.[35]Mr Quillan also submitted that, if the Director’s Loan Balance was released or written off, it was not released or written off during the 2018-19 tax year, the year of the tax assessment in respect of which the Closure Notice was issued.[36]We consider first whether the Director’s Loan Balance was released and then consider whether the Director’s Loan Balance was written off.

Was the Director’s Loan Balance released?

[37]It was common ground between the parties that releasing a debt would involve a more formal process than writing it off.[38]In this case, the parties agreed that a payment of £57,498 was made following an offer made by Mr Quillan to pay £57,500 to settle the liquidator’s claim relating to the overdrawn Director’s Loan Account. We heard, and we accept, that this offer was made verbally and that no agreement was recorded in writing.[39]Mr Barrett submitted that the liquidator and Mr Quillan did reach a settlement agreement whereby Mr Quillan would pay £57,500 in return for the debt being released. He said that this was not included in the Report in express terms, but the liquidator stating that “no further funds are expected into the Liquidation in this respect” does not allow for an alternative interpretation. Referring to England v HMRC [2023] UKFTT 00313 (TC), Mr Barrett said that this amounted to an agreement between the parties that Mr Quillan would pay £57,500 in return for being released from the obligation to repay the debt and that the debt was thereby released.[40]Mr Quillan argued that the Director’s Loan Balance was not released because he had not entered into a formal deed of release, merely an oral agreement. Furthermore, he referred us to Liquidator Letter 1 and Liquidator Letter 2, in which the liquidator confirmed to HMRC that “the matter remained unresolved” and, subsequently, that “the balance of the overdrawn directors loan account remains unresolved …”. He said that the fact that it remains unresolved means that the Director’s Loan Balance cannot have been released.[41]We agree with Mr Quillan that any offer of settlement made to the liquidator and referred to in the Report did not constitute a formal release agreement. In the Annual Progress Report, the liquidator says that an offer was made and enquiries were continuing. The Report states that enquiries were made “with a view to reaching a settlement” and provides details of the £57,498 provided at that time. While the Report says that “no further funds are expected into the Liquidation in this respect” there is no evidence that any formal release agreement was reached, that the liquidator considered the debt released or that Mr Quillan’s obligations with respect to the Director’s Loan Balance had been released.[42]Matters relating to the Director’s Loan Balance remained unresolved and there cannot be said to have been any release of Mr Quillan’s obligations in respect of the Director’s Loan Balance to satisfy s 415(1) ITTOIA.

The timing of any release

[43]Though we find there was no release of the Director’s Loan Balance, we heard submissions from Mr Quillan relating to timing of the release.[44]Mr Quillan argued that the only time he agreed to pay any sum was during the 2017-18 tax year, when he reached the verbal settlement agreement with the liquidator. He submitted that, if that agreement amounted to a release, then the release must have taken place during that tax year. In doing so, Mr Quillan relied on England. He said that a loan can only be released once and therefore could not have been released during the 2018-19 tax year and that HMRC’s tax assessment for that year must be wrong.[45]Mr Quillan drew our attention to a statement of company affairs dated 16 January 2017, when the resolution was passed to wind up BOH, which shows an “Estimated to Realise” amount of £395,684. He compared this to the Report which showed “Anticipated Future Realisations” of £57,500. He said this demonstrates that, if the debt was released, then it must have been released between 16 January 2017 and 29 January 2018, which fell during the 2017-18 tax year and outside of the year to which the assessment relates.[46]Finally, Mr Quillan referred to HMRC’s letter dated 4 March 2021 which says:
“The agreement reached between you and the Liquidator to repay part of the overdrawn Directors Loan Account and the company’s subsequent dissolution amounts to a release of the outstanding loan …”
[47]He contended that the company was dissolved on 15 April 2020 and therefore, if HMRC’s analysis is correct, the loan was not released until that date, which falls outside the year of assessment.[48]Given that we have found that there was no release of the Director’s Loan Balance, timing does not fall to be decided. We turn instead to consider whether the Director’s Loan Balance was written off.

Was the Director’s Loan Balance written off?

[49]It is common ground that there is no statutory definition of “written off.” Both parties put forward arguments relating to the meaning of the term “written off” in the context of the Director’s Loan Balance and s 415(1) ITTOIA.[50]Mr Quillan submitted that the Director’s Loan Balance was not written off. In doing so, he relied on Liquidator Letter 1, in which the liquidator confirmed to HMRC that the Director’s Loan Balance had not been formally written off.[51]Mr Quillan also referred us to Liquidator Letter 2, in which he says the liquidator explains that, by not writing off or releasing the Director’s Loan Balance, he reserves the right to reinstate (reopen, as Mr Quillan says in his notice of appeal) BOH and chase Mr Quillan for the shortfall should Mr Quillan come into a substantial amount of money in the future. Mr Quillan says that the timing of Liquidator Letter 2 means that the liquidator considered that the Director’s Loan Balance had not been written off even after Mr Quillan had agreed to make six payments against the Director’s Loan Account, and after stating in his Report that he expected to receive no further funds into the liquidation.[52]Mr Quillan submitted that, in the absence of any statutory definition, the term “written off” should be interpreted in accordance with HMRC’s Guidance. In particular, he referred to the phrase:
“any loan balance which is not repaid and is no longer being pursued by the Insolvency Practitioner is considered to have been written off and that S415, ITTOIA05 should apply to the relevant amount.”
Mr Quillan submitted that it does not matter whether the liquidator has pursued the Director’s Loan Balance or not, but simply the possibility that the debt remains capable of being pursued is sufficient to show that the Director’s Loan Balance has not been written off in the terms of HMRC’s own Guidance.[53]Finally, Mr Quillan referred us to the 22 March 2023 Letter from HMRC, partially replicated at [28] above. He contended that the language used by HMRC that “we should argue” that the loan has been written off in circumstances where no attempts are being made to collect the Director’s Loan Balance or attempts to collect it have been given up suggests that there is, in fact, no basis in statute for the application of s 415 ITTOIA where the debt has been neither written off nor released by the liquidator.[54]For HMRC, in the absence of a statutory definition, Mr Barrett directed us to the ordinary meaning of the words “written off” from the Cambridge English dictionary:
“to accept that an amount of money has been lost or that a debt will not be paid.”
[55]He also referred us to Collins v Addies (HM Inspector of Taxes) [1991] BTC 244, in which the meaning of releasing and writing off a debt was discussed in relation to an antecedent section to s 415(1) ITTOIA as follows:
“It is common ground that releasing and writing off are different operations for a company. A release is a final and conclusive act if completed according to law whereas the act of writing off by a company may not be. A debt which is written off may yet be recovered by a company if it discovers that the debtor’s circumstances have changed so that it is no longer unable to repay the creditor company. A release is generally a transaction involving more than one person, whereas by its very nature an act of writing off by a company is unilateral.”
[56]HMRC submitted that the Director’s Loan Balance was, in fact, written off under the ordinary meaning of the term because Mr Quillan made payments further to his offer of settlement and the liquidator accepted, as evidenced in the Report, that no further funds were expected into the liquidation in respect of the Director’s Loan Balance. Mr Barrett says that this is supported by Mr Quillan’s own grounds of appeal in which he says that:
“I agreed a payment with the liquidator who agreed not to pursue any further funds at the time.”
[57]Mr Barrett said that, even if the liquidator did reserve the right to reopen the company and chase Mr Quillan for the shortfall, as put forward by Mr Quillan, this does not prevent the debt being written off. He argued that the liquidator would be unlikely to become aware of Mr Quillan’s coming into a substantial sum of money within the 6-year deadline for reinstating a company and would be unlikely to go to the expense of doing so and would have no instruction for doing so. Mr Barrett submitted that the lack of intention on behalf of the liquidator to pursue Mr Quillan for payment indicates that the Director’s Loan Balance had been written off under the normal meaning of the term and that, following Collins, a debt that has been written off may yet be recovered.[58]Finally, Mr Barrett said that the debt was, by definition, written off as the Director’s Loan Balance was outstanding at the time BOH was dissolved and argued that Mr Quillan has not discharged his burden of proof to show that s 415(1) ITTOIA does not apply to the Director’s Loan Balance because the premise that the liquidator reserved the right to reopen the company and chase him for the shortfall was demonstrably flawed.[59]In this case, Mr Quillan does not need to prove that the Director’s Loan Balance is, in fact, being pursued. He simply needs to show that it has not been written off. In our judgment, Mr Quillan has shown that it was not written off.[60]The ordinary meaning of the term “written off” from the Cambridge English dictionary: “to accept that an amount of money has been lost or that a debt will not be paid” is helpful insofar as it seeks to provide a definition where there is otherwise none. Collins, also, provides an example of what a written off debt may look likein that it may yet be recovered by a company. But neither of these interpretations need apply in circumstances where there is a formal writing off process which has deliberately not been followed.[61]Even if we take the ordinary meaning of the term, we do not agree that the actions of the liquidator in writing the Report and in dissolving BOH amount to an acceptance that the money has been lost or that a debt will not be paid. The liquidator states clearly in Liquidator Letter 1 that there was no formal write-off of the Director’s Loan Balance. The prospect of a reinstatement of BOH in order that Mr Quillan should be pursued at some future point is unlikely but not impossible. It was within the power of the liquidator to either release or write off the loan, yet he chose to do neither. This leaves the Director’s Loan Balance open to be pursued on behalf of BOH should that become appropriate at some point in the future. To suggest otherwise is to ignore the intentions of the liquidator’s actions and the plain meaning of his language when he said that the Director’s Loan Balance had not, in fact, been written off.[62]Finally, we are not persuaded that the Guidance is helpful in stating that “any loan balance which is not repaid and is no longer being pursued by the Insolvency Practitioner is considered to have been written off and that S415, ITTOIA05 should apply to the relevant amount.” While we agree that there is no statutory definition of “written off”, there is a process available to the liquidator to write off or release the loan of an insolvent company, which the liquidator chose in this case not to follow. In our view, in this case, that is the definition of “written off” which should be applied, and an alternative definition should not be substituted for the purposes of the application of s 415(1) ITTOIA.[63]Even though we have found that the loan was not written off, as we heard submissions relating to timing, we include them here for completeness.[64]Mr Quillan contended that, if the loan was written off, then it must have been written off during the 2017-18 tax year, outside of the year of assessment. He provides the following grounds for this assertion:(1) The ordinary meaning of the term “written off” is to accept that an amount of money has been lost or that a debt will not be paid.(2) It is clear from the Annual Progression Report that the liquidator did not anticipate receiving any repayment in excess of the agreed £57,500.(3) If the liquidator stating that he did not anticipate receiving any further payment amounted to an acceptance that the loan was written off, the date of the write-off would fall on or before 29 January 2018, the date of the Annual Progression Report, which is outside of the 2018-19 tax year of assessment.(4) A debt can only be written off once, therefore it cannot have been written off during the 2018-19 tax year and therefore HMRC’s assessment is wrong.[65]Mr Quillan also refers to a statement of company affairs dated 16 January 2017, when the resolution was passed to wind up BOH. He said that the “Estimated to Realise” amount is £395,684. However, in the Report, the amount stated under “Anticipated Future Realisations” is £57,500. Mr Quillan argued that, if the debt was written off, then it must have been written off between 16 January 2017 and 29 January 2018, before the 2018-19 year in respect of which the assessment was raised.[66]Finally, Mr Quillan said that HMRC have argued that the debt was written off by definition as the company was dissolved, and the debt remained outstanding. As the company was not dissolved until 15 April 2020, if HMRC are correct that the debt remained outstanding when the company was dissolved, the earliest date the loan could have been written off was on that date, outside of the 2018-19 year of assessment.[67]Mr Barrett submitted that a write-off involves less formality than the process of releasing a debt. He said that, by the date of the Report, the liquidator had accepted that no more funds were available and that the loan had effectively been written off. This is the liquidator’s final report, in which he says that no more funds are expected.[68]He said that, by contrast, the Annual Progress Report is not final: it is a progress report. For this reason, the debt had not been written off by this stage: at this time, the liquidator was still progressing with the liquidation process.[69]Given that we have found that the Director’s Loan Balance was not written off, we need make no finding in relation to timing. However, as discussed at [61-62] above, as at the date of the Report, the liquidator had made a clear choice neither to release nor to write off the Director’s Loan Balance. In our view, it would therefore be wrong to find that either a release or a write-off had taken place at that time.

Decision

[70]Having found that the Director’s Loan Balance was neither written off nor released, it follows that this appeal is ALLOWED. We find that there is no basis for the assessment to tax set forth in the Closure Notice. The matter of timing therefore falls away and does not need to be decided.

Right to apply for permission to appeal

[71]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 10th APRIL 2025

Cited in 1 later judgment