Stephen Relf explains the lessons to be learnt from recent decisions of the First-tier Tribunal, including where a loan to participator is transferred intra-group, a debt is left uncollected post liquidation and cash takings go missing.
Advising on the tax implications of a loan made by a company to a participator can be challenging. To begin with, several separate and distinct areas of legislation may apply. Additionally, you are likely to find out about key events, including that a loan was made, some time after the event. Finally, these scenarios tend to be highly specific and unique; for example family-owned businesses rarely face identical situations.
With that in mind, it isn’t surprising that loans to participators can give rise to disputes between taxpayers and HMRC, and that those disputes often end up before the courts. In this article, I’ll look at what three recent cases, as well as an update on a case heard by the First-Tier Tribunal (FTT) in 2024, have to tell us about the circumstances in which a company may face a tax bill under s455, Corporation Tax Act 2010 (CTA 2010), or tax may be charged under s415, Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) on a participator.
A quick recap of the rules
A close company may incur a tax liability under s455, CTA 2010 where it makes a loan or advance to a participator or to an associate of a participator during an accounting period. The tax is equal to 33.75% of the amount outstanding nine months after the end of the accounting period. Some exceptions do apply, including for low-value loans made to employees/directors who don’t have a material interest in the company. The term “participator” is defined by s454, CTA 2010 and includes a shareholder in the company.
Where a company has paid tax under s455, CTA 2010 and the loan is later repaid, released or written off, the company may claim a repayment of the tax paid from HMRC. Provisions apply to prevent “bed and breakfasting”, (ie, taking a second loan from the company to repay the first loan (s464ZA, CTA 2010)).
In the case of a release or write off, s415, ITTOIA 2005 applies a charge to income tax on the individual, treating the amount written off or released as dividend income. The charge to tax under s415, ITTOIA 2005 takes priority over the charge to tax under s188, Income Tax (Earnings and Pensions) Act 2003 where the participator is an employee of the company. The amount written/off released may also be subject to class 1 national insurance contributions (see HMRC’s guidance at CTM61660).
Corporation tax relief for the amount written off/released is denied by s321A, Corporation Tax Act 2009.
Novation of a debt was a taxable release
In Nicholas Powell v HMRC [2025] UKFTT 528 (TC), Mr Powell had built up a large overdrawn loan account with Thermoline Ltd (the Loan), totalling £512,713.89 at 31 December 2020, in respect of which Thermoline had paid tax under s455, CTA 2010.
On 2 July 2020, Property Holding SW Limited (PHSW) acquired Thermoline Ltd from Mr Powell by way of a share for share exchange and on 16 March 2021, Thermoline Ltd and PHSW entered into a deed of novation that was deemed to take effect on 31 December 2020. Under the deed, PHSW was “substituted” for Thermoline Ltd “as a party to and bound by the terms of the Loan”. In return, PHSW owed an amount of £512,713.89 (the Debt) to Thermoline Ltd “on intercompany loan account”. It is made clear in the deed that Thermoline Ltd “irrevocably and unconditionally releases” Mr Powell from all obligations under the Loan.
Thermoline Ltd applied for and received repayment of the tax paid under s455, CTA 2010. The point in dispute was whether Mr Powell had been released from his obligations to Thermoline Ltd within the scope of s415, ITTOIA 2025. Before the FTT, counsel for Mr Powell argued that s415, ITTOIA 2005, as interpreted through Collins v Addies (Inspector of Taxes) [1992] STC 746, imposed a tax charge where the debt was not repaid or otherwise satisfied. In this instance, the release was made for consideration (the creation of the intercompany loan account), and so s415, ITTOIA 2005 did not apply.
The FTT rejected this argument, dismissing Mr Powell’s appeal. Having considered the case of Collins, the FTT concluded that, for a release where there is consideration to be outside the scope of s415, ITTOIA 2005, the party making the release must have “been made whole”. This was not the case here as Thermoline Ltd was still owed the money: “cash or physical assets may satisfy the indebtedness but not a right to call on another in connection with the debt”.
This does leave Mr Powell in the unfortunate position of being taxed on the release of a debt while still being in debt. He has appealed against the decision of the FTT to the Upper Tribunal.
Loan was not written off by liquidator
In Gary Quillan v HMRC [2025] UKFTT 421 (TC), Mr Quillan had an overdrawn loan account with BOH Investments Limited (BOH) of £439,954 at the point a resolution was passed for the voluntary winding up of the company and a liquidator appointed. An initial demand for payment was made by the liquidator. However, Mr Quillan claimed he was unable to repay the loan and provided a statement of means showing that he had no assets and insufficient income to make an offer of settlement.
In the months that followed, Mr Quillan did repay £57,498, leaving a debt due to BOH of £382,456. In his notice of final account, the liquidator described the funds received of £57,498 as having been paid to “settle the claim” against Mr Quillan in respect of his overdrawn loan account, and said that “no further funds” were expected from Mr Quillan. This turned out to be the case as no further payments were received from Mr Quillan before the company was dissolved.
HMRC opened an enquiry into Mr Quillan’s tax return, arguing that the loan from BOH to Mr Quillan had been written off such that a tax charge arose for Mr Quillan under s415, ITTOIA 2025. During the enquiry, HMRC had written to the liquidator for confirmation that the loan had been written off or released. The liquidator had replied that the overdrawn loan account “remained unresolved and was not formally written off”. Asked to explain his answer, the liquidator replied that:
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. Failing that, if the case then closes it allows the Company to be restored if I was made aware of any windfall being received by the Director(s).
HMRC’s guidance at CTM61560 states that s415, ITTOIA 2005 is capable of applying where a loan is not written off or released during liquidation “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”. Applying this guidance and taking into account the evidence provided by the liquidator, HMRC issued a closure notice amending Mr Quillan’s tax return to include a charge to tax under s415, ITTOIA 2005 in respect of the debt of £382,456.
The FTT allowed Mr Quillan’s appeal against the closure notice, finding “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”. Further, although it was unlikely that BOH would be reinstated in order for the debt to be pursued in the future, it was not impossible.
The FTT questioned whether HMRC’s guidance at CTM61560 (summarised above) was helpful given that “there is a process available to the liquidator to write off or release the loan of an insolvent company”. HMRC has not made any changes to its guidance in response to the decision of the FTT and there is likely to be more to come in this case as HMRC has appealed to the Upper Tribunal.
Appropriation of takings as a loan
The recent case of 3KH Ltd & Ors v HMRC [2025] UKFTT 748 (TC) is a timely reminder that underdeclared profits may give rise to a loan for the purposes of s455, CTA 2010. 3KH Ltd operates a restaurant. Following an investigation, HMRC considered that the company’s cash sales had been suppressed by Mr Mauheed Johngir and Mr Muhammed Waqas Baber, both of whom were shareholders in and directors of the company.
Rejecting the company’s appeal against the s455, CTA 2010 charge, the FTT said that HMRC had shown that substantial sums of cash had not been included in the company’s declared turnover and, “in the absence of evidence to indicate that the business retained that cash the logical, or only, inference to draw was that the cash was extracted by or for the benefit of the participators”. HMRC had “established a prima face case of extraction” and the onus was on the company to prove this was not the case, which it failed to do.
A case of mistaken identity?
If further clarification is needed as to HMRC’s approach in such circumstances, see the FTT’s comments in Cheon Fat Ltd v R & C Commrs [2024] UKFTT 180 (TC):
We were told, and accept, that it is HMRC’s practice to assume that where the takings of a limited company are suppressed they have been extracted by the participants (be that the shareholders or the directors). HMRC do not undertake any tracing activity or look to establish which participants have benefitted on the basis that it is a reasonable assumption to have made.
HMRC may have jumped to one conclusion too many in this instance though, as it was later revealed that the person identified as being a participator may not actually have met the statutory definition of a participator. The quote above may hold the key to the confusion as a person is not a participator of a company solely by being a director of it. The company has been given permission to appeal to the Upper Tribunal (Cheon Fat Ltd v R & C Commrs [2025] UKUT 287 (TCC)).
A warning, if one were needed, that care should be taken to consider all relevant facts and circumstances where the loans to participators rules may be in point.
Stephen Relf, Technical Manager – Tax, ICAEW
