HMRC v Quillan: What Directors Need to Know About Overdrawn Loan Accounts
Published 7 October 2026
A director’s loan does not need to be formally cancelled before it creates an income tax problem.
That is the central warning from HMRC v Quillan [2026] UKUT 300 (TCC). The Upper Tribunal confirmed that a loan can be treated as written off for tax purposes even if, in strict legal terms, the debt still exists and could theoretically be pursued.
For directors of close companies, especially where liquidation is on the horizon, the case matters because it shifts attention away from formal paperwork and towards practical reality. If a liquidator records that no further recovery is expected, that may be enough to trigger a tax charge.
This article is for general information only. It is not legal or tax advice.
What happened in HMRC v Quillan
Mr Quillan was the sole director and shareholder of BOH Investments Ltd, a close company. A close company is broadly a UK company controlled by five or fewer participators, or by its directors. Many owner-managed companies fall within this category.
When BOH entered creditors’ voluntary liquidation in January 2017, Mr Quillan’s loan account was heavily overdrawn. The amount outstanding was £439,954.
He later paid £57,498 to the liquidator in instalments. That left an unpaid balance of £382,456.
The critical document was the liquidator’s final account, dated 18 March 2019. It stated that no further funds were expected from the remaining balance.
HMRC said that this amounted to a write-off of the debt in the 2018/19 tax year. On that basis, the unpaid amount was taxable on Mr Quillan under section 415 of the Income Tax (Trading and Other Income) Act 2005, usually referred to as ITTOIA 2005.
Mr Quillan disagreed. The First-tier Tribunal found in his favour. HMRC appealed to the Upper Tribunal.
The Upper Tribunal allowed HMRC’s appeal.
Why the loan account mattered
An overdrawn loan account arises where a director or shareholder has taken more money out of the company than they have put in or are entitled to receive as salary, dividends, or expenses.
In simple terms, the company has lent money to the individual.
That can happen for many reasons:
drawings are posted to the loan account during the year
dividends later turn out to be unlawful or unsupported by profits
personal expenses are paid by the company
accounting entries are not reviewed until after the year end
the company enters financial difficulty before the balance is cleared
An overdrawn directors loan account is not just an accounting entry. It is usually an asset of the company, because the director owes money back to the company.
Where the company is solvent, the balance might be repaid, declared as salary, cleared by a lawful dividend, or dealt with in some other agreed way. Where the company enters liquidation, the loan account attracts closer scrutiny because the liquidator has a duty to realise company assets for creditors.
That is what made Quillan so sensitive. The outstanding balance was not small, and the company was in creditors’ voluntary liquidation.
What section 415 is designed to catch
Section 415 ITTOIA 2005 applies where a loan or advance made by a close company to a participator is released or written off.
A participator usually includes a shareholder. In many owner-managed businesses, the director and shareholder are the same person.
Where the rule applies, the amount released or written off is treated as income of the recipient. That can create a personal income tax charge.
The key question in Quillan was not whether there had once been a loan. There clearly had been. The question was whether the unpaid balance had been written off for the purposes of section 415.
Mr Quillan’s argument was helped by the fact that the debt had not been formally cancelled in the obvious sense. The company had not executed a deed of release. There was no neat document saying, in plain terms, “this debt is forgiven”.
HMRC’s argument was more practical. It said the liquidator’s final account showed that the loan would not be pursued further and that no more recovery was expected. That, HMRC said, was enough.
The Upper Tribunal agreed with HMRC.
What the Upper Tribunal decided
The Upper Tribunal’s decision is best understood through five findings.
Issue | What the Upper Tribunal found |
Whether a formal statutory process was needed | A write-off is a substantive act. It does not need a specific statutory procedure. |
Whether the debt had to be legally irrecoverable | No. A debt can be written off even if it remains legally recoverable in theory. |
What mattered in liquidation | The liquidator’s practical conclusion that no realistic recovery was expected was central. |
When the write-off happened | The relevant point was the liquidator’s final account dated 18 March 2019. |
Whether later possibilities changed the result | The theoretical chance of restoring the company and pursuing the debt did not prevent a write-off. |
The decision draws a clear distinction between legal existence and tax treatment.
A debt may still exist as a matter of law. But for section 415, the tax question is whether the company has, in substance, written it off.
That is a significant point. It means directors cannot assume there is no tax charge simply because no formal release document has been signed.
Why the final account carried so much weight
In a creditors’ voluntary liquidation, the liquidator prepares reports and accounts showing what has been realised, what remains, and what distributions can be made.
In Quillan, the final account said that no further funds were expected from the unpaid loan balance. The Upper Tribunal treated that as more than an administrative statement. It showed that the liquidator had reached a settled view that no realistic recovery would be made.
That was enough to amount to a write-off.
The tribunal did not require the liquidator to use a particular phrase. Nor did it require a formal deed of release. What mattered was the substance of the act.
For directors, this is the practical sting in the case. The tax charge may arise from liquidation paperwork that is not drafted as a tax document at all.
The absence of a formal cancellation does not mean the absence of a write-off.
That makes timing critical. In Quillan, the liquidator’s final account was dated 18 March 2019. The Upper Tribunal found that the section 415 charge applied in the 2018/19 tax year.
The practical risk for directors
The case is a warning for directors who have borrowed from their companies and have not fully repaid the balance before liquidation.
The risk is not limited to cases where the company or liquidator signs a release. It can arise where the liquidator decides, and records, that no further recovery is expected.
That can leave the director with two connected problems:
the company may have been insolvent or unable to repay creditors
the unpaid loan balance may become taxable income personally
This can feel counterintuitive. A director may think, “I have not received new money. I simply cannot repay the old balance.” The tax rule looks at the release or write-off of the debt. If the liability to repay is treated as removed in substance, that can be taxed as income.
The amounts can also be large. In Quillan, the disputed unpaid balance was £382,456. A tax charge on that kind of sum can be severe.
The lesson is not that every unpaid director’s loan in liquidation will automatically be taxed in the same way. Facts still matter. The documents matter. The liquidator’s actions matter. But the case shows that HMRC can rely on practical evidence of non-recovery, not only formal debt release documents.
What directors should do before liquidation becomes likely
The best time to deal with an overdrawn loan account is before the company reaches crisis point.
Once liquidation begins, control shifts. The liquidator must consider the interests of creditors. A friendly or informal approach to the loan account may no longer be possible.
Directors should take early advice where there is a material overdrawn balance and the company is under financial pressure.
Useful steps may include:
checking the loan account balance before the year end
separating salary, dividends, expenses, and loan drawings
confirming whether dividends were lawful when declared
keeping evidence of repayments and agreements
avoiding informal assumptions about future write-offs
speaking to an accountant and insolvency adviser before entering liquidation
The key is to understand the tax and insolvency position before documents are finalised.
If repayment is possible, timing and evidence matter. If repayment is not possible, advice is still needed because the tax position may depend on what happens next and how the liquidator records it.
What liquidators and advisers should take from the case
Quillan is also relevant for liquidators, accountants, and tax advisers.
A liquidator’s final account can have tax consequences for the director. That does not mean the liquidator should avoid clear reporting. It does mean the wording and timing of reports should be understood in context.
Advisers should look closely at:
whether the company is a close company
whether the borrower is a participator
the amount still outstanding
what recovery steps have been taken
what the liquidator has recorded about future recovery
the tax year in which any write-off may occur
The decision also shows why it is risky to focus only on company law recoverability. A debt might remain theoretically enforceable, but that will not always prevent a tax charge.
HMRC can argue that a write-off has taken place where the practical position is clear enough.
What this does not mean
The case should not be read too broadly.
It does not mean every unpaid loan balance is automatically written off when a company enters liquidation. A liquidator may still pursue recovery. The director may agree a repayment plan. There may be assets, income, or other evidence showing that recovery remains realistic.
It also does not mean that legal form is irrelevant. Formal documents still matter. A deed of release, board minutes, accounting entries, correspondence, and liquidation reports can all be relevant evidence.
What Quillan confirms is narrower, but still powerful:
A formal cancellation is not essential. A practical decision not to recover can be enough.
That is why the case is likely to be cited in future disputes about timing and whether a write-off has occurred.
The key takeaway
HMRC v Quillan makes one point very clear. Directors cannot rely on the absence of a formal loan cancellation as protection from a tax charge.
Where a close company enters creditors’ voluntary liquidation and the liquidator records that no further recovery is expected from an overdrawn loan account, HMRC may argue that the debt has been written off for section 415 purposes.
For directors, the safest approach is early action. Know the loan account balance. Get advice before liquidation documents are finalised. Do not assume that a debt must be legally extinguished before tax becomes due.
The real warning from Quillan is practical rather than technical. If the records show that no one expects the money to be recovered, the tax system may treat that as a write-off, even while the debt still exists on paper.
