Risks to directors on the liquidation of a company

Directors’ Loan Accounts (DLA) have been a key part of the process for many business owners and directors taking an income from their companies for years. Often business owners will draw down on a DLA during the year and later clear the overdrawn balance with a dividend or bonus payment at the company’s year-end, rather than, say, declaring dividends more frequently. This might be done for simplicity and there are potential tax consequences associated with such DLAs, but these are rarely seen as a barrier for irregular short-term loans. In particular, this is because HMRC’s official rate of interest, which is the rate which HMRC considers should be charged on such loans, is currently quite modest at 3.75% from 6 April 2025, up from 2.25% for the previous two tax years.

A recent First-tier Tribunal (FTT) case, , revolved around whether a director’s loan was released or written off during the liquidation of a company, BOH Investments Limited (BOH), which would trigger an income tax charge for the director.

The key issue the FTT was required to consider was whether the DLA had been released or written off, which would result in a tax charge for Mr Quillan. At the time that BOH entered liquidation, Mr Quillan owed the company around £440,000. Some repayments were later made, but at the time BOH was dissolved there was still an outstanding loan balance of around £382,000. Crucially, the liquidator of the company did not formally write off the loan and whilst it might have proved an unlikely scenario, the liquidator reserved the right to restore the company and pursue repayment of the outstanding DLA should the director come into a windfall later and have means of repaying this.

HMRC argued that the DLA was written off for tax purposes, citing their Company Taxation Manual (), which suggests that a loan is considered written off if the liquidator is not actively pursuing it. On the other hand, Mr Quillan contended that no formal release or write-off had occurred.

The Tribunal ultimately found in favour of Mr Quillan. Consideration was given to the definition of “written off” as it is not strictly defined in tax legislation, so reference was made to the Cambridge English dictionary meaning. However, the FTT concluded that the DLA had neither been released nor written off. Crucially, it noted that the liquidator’s reports and correspondence did not indicate any formal agreement to release the debt and there was a formal process that liquidators would pursue if a loan was to be written off. On the basis that the liquidator deliberately did not proceed with a formal write-off process, clearly stating that there was no such write-off and that they retained the right to pursue the debt if Mr Quillan ever became able to repay the DLA in the future, it was found that Mr Quillan was not subject to income tax on the unpaid loan due from him of around £382,000.  

In another recent case relating to liquidation, perhaps provides less comfort to directors. It found that the sole director and shareholder of S&M Property Maintenance Scotland Limited was personally liable for National Insurance contributions (NICs) which were declared to HMRC and due for payment by the company but had not been paid. With recent increases to employers’ NIC rates, this is something that directors should be mindful of. 

These rulings come at a time where businesses are facing significant economic uncertainty. According to the Office for National Statistics, more than a quarter (26%) of trading businesses reported a in February 2025, compared to the previous month. Additionally, the highlight the number of registered company insolvencies in England and Wales reached 2,035 in February 2025, marking a 3% increase on the prior month. Whilst company insolvencies over the past year are slightly lower than they were in 2023, that represented a 30-year high on an annual basis. With potentially challenging economic times ahead, it’s important that directors are aware of the potential traps for the unwary. In addition, tax advice should be sought ahead of any insolvency process to minimise the risk of any personal issues for directors with HMRC.