England v HMRC – when should tax be payable on a director’s loan write-off?
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
31 July 2023
We summarise a recent tax case, which tested the rules on the write-off of loans to participators in close companies.
The tax case of S England and another v HMRC [2023] UKFTT 313 (TC) places the spotlight on the interaction of the section 455 tax rules on loans to participators with section 415 ITTOIA 2005.
The technical legislation at point
Under section 455 CTA 2010, unless exempt, tax is payable by a close company which makes a loan or advance to a participator, an associate of a participator, or a partnership or limited liability partnership where at least one of the partners is a participator or an associate of a participator in the company. Section 455 tax can also apply to trustees of a settlement where a trustee or actual or potential beneficiary is a participator or an associate of a participator in the company.
Section 455 tax was initially charged at 25% of the loan balance not repaid within nine months and one day of the end of the corporation tax accounting period. But section 50 Finance Act 2016 changed this to the upper dividend income tax rate in section 8(2) ITA 2007. This means that as the upper dividend income tax rate changes, the rate of section 455 tax also changes automatically.
Where section 455 tax is paid and the loan is subsequently repaid or written off, the section 455 tax is then repaid by HMRC to the company nine months and one day after the end of the accounting period in which the loan is repaid or written off.
In cases where the loan is written off, section 415 ITTOIA 2005 applies and income tax charge on the participator on the debt released or written off in the tax year.
The England v HMRC case
Simon and Debra England were directors and shareholders of Alexander Lauren Associates Limited, a company that dealt in car financing to the motor trade. In September 2012, the company entered creditors’ voluntary liquidation at which point there was a directors’ loan account balance totalling £1,009,063 owed to the company.
Mr and Mrs England entered into a settlement agreement with the liquidator on 28 October 2013, where they were required to settle £100,000 over the following two years and the balance of £909,063 would be written off. However, if the terms of the repayment were not met, the full balance would be immediately payable.
During the legal proceedings, it was agreed by both the directors and HMRC that the release of the loan would be taxable under section 415 ITTOIA 2005. However, Mr and Mrs England were of the view that the write-off was taxable over two years. Therefore, they did not include any entries in their 2013/14 self-assessment tax returns.
HMRC disagreed and raised a discovery assessment on the basis that the full amount of the release was taxable under section 415 ITTOIA 2005 in the 2013/14 tax year, being the tax year the settlement agreement was signed.
Mr and Mrs England appealed the decision of the First Tier Tribunal, which agreed with HMRC’s view that the release should be taxable in the 2013/14 tax year. However, the appeal was dismissed and the decision of the First Tier Tribunal is binding.
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