Introduction
The Upper Tribunal has provided critical guidance on a question that has long troubled tax practitioners: precisely when is a director’s loan “written off” for tax purposes?
The decision in Quillan v HMRC [2026] UKUT 287 (TCC) offers important clarity… but also raises new questions about the boundary between commercial reality and tax consequences.
The Director’s Loan Problem
Directors’ loans are ubiquitous in owner-managed businesses. A director borrows from the company, creating a balance on the director’s loan account (DLA).
Under section 455 of the Corporation Tax Act 2010, if that loan isn’t repaid within nine months after the company’s accounting period end, the company faces a temporary 33.75% tax charge.
The real tax sting, however, comes if the loan is “written off or released.” Under section 415 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), any amount written off or released is treated as earnings from the director’s employment, attracting income tax and potentially National Insurance contributions.
The stakes are high: a £100,000 loan written off could generate a tax bill exceeding £45,000.
But what exactly constitutes a “write off”? The legislation doesn’t define the term, and commercial practice often blurs the lines between loans that are genuinely being pursued and those that everyone knows will never be repaid.
The Facts in Quillan
Mr Quillan was a director and shareholder of a family company. Over several years, his DLA balance grew substantially. The company’s accounts showed the loan as an asset, and Mr Quillan’s intention, at least initially, was to repay it.
However, as the company’s fortunes declined and Mr Quillan’s personal circumstances changed, repayment became increasingly unrealistic.
The company never passed a formal resolution writing off the loan. No entry was made in the accounts explicitly releasing Mr Quillan from his obligation. Yet HMRC argued that the loan had been written off “in substance” when the company’s directors (including Mr Quillan) tacitly accepted that it would never be repaid.
The First-tier Tribunal had agreed with HMRC, focusing on the commercial reality that no genuine steps were being taken to recover the debt. Mr Quillan appealed.
The Upper Tribunal’s Analysis
The Upper Tribunal allowed the appeal in part, providing a more nuanced framework for determining when a loan has been “written off.”
First, the Tribunal emphasised that “written off” is a term with a relatively settled meaning in accounting and commercial practice.
It ordinarily requires some positive act—an accounting entry, a board resolution, or at least a clear communication to the debtor that the debt is being released. Mere inaction or failure to pursue a debt does not, without more, constitute a write-off.
Second, the Tribunal rejected HMRC’s “substance over form” argument in its broadest formulation. While tax law certainly looks to economic substance in many contexts, the specific wording of section 415 ITEPA requires a debt to be “written off or released.” These are active verbs suggesting deliberate action, not passive neglect.
Third, however, the Tribunal accepted that in extreme cases, conduct may speak louder than documents. If a company’s actions make clear beyond doubt that it considers the debt extinguished—for example, by treating the director as having no liability in correspondence or legal proceedings—that may constitute an implied write-off even without formal documentation.
The Practical Takeaways
For practitioners advising owner-managed businesses, Quillan offers both reassurance and warning:
- Formal documentation matters. A company that never formally writes off a DLA—maintaining it on the balance sheet as an asset, however impaired—has a stronger argument that no write-off has occurred.
- Conduct can create tax charges. If the company treats the director as having no obligation to repay (for example, in family settlement negotiations or in representations to creditors), HMRC may argue this evidences an implied write-off.
- Time does not automatically write off debt. Unlike limitation periods that bar recovery, mere passage of time does not convert a loan into deemed income. A debt can remain outstanding indefinitely without triggering section 415.
- Commercial impairment is not tax write-off. Accounting provisions for doubtful debts—showing that a DLA may not be recoverable—are not the same as writing it off. The distinction between provisioning and writing off remains critical.
The Wider Context
The Quillan decision sits within a broader trend of HMRC challenging owner-managed businesses on their treatment of directors’ loans.
In recent years, we have seen increased scrutiny of “bed and breakfasting” arrangements (repaying loans briefly to avoid section 455, then reborrowing), connected party loan arrangements, and now the meaning of “written off.”
The Government’s approach reflects its concern about tax-motivated extraction of value from companies. From HMRC’s perspective, a director who borrows substantial sums from their company, never repays, and never faces a tax charge, has effectively received tax-free income.
Yet the Quillan decision reminds us that tax charges must be grounded in the statutory language. Section 415 ITEPA requires a write-off or release… concepts with established meanings that cannot be stretched indefinitely to capture commercial behaviour that HMRC finds objectionable.
Looking Ahead
Companies with substantial directors’ loan accounts should review their documentation and practices. Key questions include:
- Are board minutes and accounts consistent in treating the loan as an outstanding asset?
- Has any correspondence (internal or external) suggested the director is not expected to repay?
- If the company is in financial difficulty, how is the DLA being treated in any restructuring discussions?
- Are there any related transactions (dividends, salary adjustments, pension contributions) that might suggest an informal “netting off”?
For directors whose loans genuinely cannot be repaid, the Quillan decision also suggests that careful planning around the timing and manner of any formal write-off may offer opportunities to manage the tax consequences—for example, timing a write-off to coincide with periods of lower income.
The Upper Tribunal has provided welcome clarity, but as with much tax law, the devil remains in the detail. Each case will turn on its specific facts, and the boundary between a loan that is merely “unpaid” and one that has been “written off” will continue to generate disputes.
If you have queries about directors’ loans or HMRC’s treatment of company-shareholder transactions, please do not hesitate to get in touch.