Background

HMRC has designed a new voluntary process to allow a more data driven and targeted approach to the issue of director’s loan accounts.

This specifically applies in situations where director’s loan accounts are written off as part of a corporate insolvency procedure because the debtor cannot afford to repay the loan to the company.

The process is entirely voluntary, and insolvency practitioners do not need to use it if they do not wish to.

When is a directors’ loan account written off

For information about repayment, read the Company taxation manual CTM61600: close companies: loans to participators and arrangements conferring benefit on participators: repayment of — general.

For information about writing off a loan, read the Company taxation manual CTM61655: close companies: loans to participators: release or writing-off of loan or advance.

HMRC’s Customer Strategy & Tax Design (CS&TD) are the product owners for section 455 of the Corporation Tax Act 2010, and administer this part of the tax legislation.

They have confirmed that there is no prescribed form of words or process for writing off a loan.

The main issue is that the company both:

• accepts that the loan will not be repaid
• gives up attempts to collect the debt

Each case will be judged on its own facts, and the decision as to whether to write a loan off or not is solely a decision for the insolvency practitioner to make.

If you are in any doubt about the tax consequences of writing off a loan, then please contact to discuss the case.

What are the tax consequences of a directors’ loan account being written off

If the company has paid section 455 tax to HMRC, to claim a repayment of the tax under section 458 of the Corporation Tax Act 2010 the loan must be one of the following:

• released
• repaid
• written off

Once one of those events has happened, the company becomes entitled to a repayment of any section 455 tax that has paid on the loan in question.

If only a proportion of the loan has been released, repaid, or written off then the company will only be able to claim for a repayment for that proportion.

For example, if 25% of the loan has been released, repaid, or written off, then the company can claim for 25% of the section 455 tax back.

A claim must be made within 4 years of the end of the financial year in which the repayment, release, or writing off occurs.

The repayment is due 9 months and 1 day after the end of the accounting period in which the loan was released, repaid, or written off.

In other words, if the loan was written off in accounting period ending 31 December 2021, then repayment would be due on 1 October 2022.

Repayment of section 455 tax out of contract settlements

Read HMRC’s guidance on contract settlements in the Enquiry manual EM6000: contract settlements: contents.

Put simply, a customer or customers will pay HMRC a sum of money in return for HMRC not formally issuing assessments for tax and penalties.

This sum could be in one lump or over instalments, and a contract can have joint and several liability between different entities.

The contract itself is a binding agreement and HMRC’s Debt Management will enforce the payment terms in the same way that they would with any other charge.

Where section 455 tax has been paid to HMRC as a part of a contract, then the process for providing repayments in line with section 458 is different.

Payments for contract offers are kept on a separate accounting system (Strategic Accounting Framework Environment or SAFE) and when a request for repayment under section 458 is received we amend the charge on this system.

Repayments must be approved by a compliance officer, read the Enquiry manual EM6415 — Contract Settlement: Post Settlement Issues — Reopening a Settlement: Method of Giving Relief for more information.

If you have a case involving a contract settlement that is proving difficult, then the national lead for such cases across Individual and Small Business Compliance (ISBC) would be very happy to help.

New write off process

Where an insolvency practitioner wishes to use the new process, copies of all final reports that contain directors’ loan accounts should be sent to the new mailbox ISBC S455, Write Off Mailbox (ISBC).

Insolvency practitioners can contact prior to the submission if they would like to talk through the details of the case before sending the report.

Earlier dialogue should mean early handling of any issues or opportunities.

A forwarding rule will be created to ensure that the final reports still get sent on to the mailbox that they get sent to now.

The details of each company will be added to a secure spreadsheet and subject to an initial triage to establish any:

• tax compliance risks
• assets that might facilitate recovery

If there are assets identified that might have been missed, the insolvency practitioner will be contacted to discuss potential recovery routes.

If there are no assets and if an element of a loan is not going to be fully recovered, then the customer prompt part of the process is enabled.

A ‘nudge’ letter will be sent to each individual customer who has benefited from a loan being written off.

This letter will advise them of the need to return the income on their next Self Assessment tax return, in line with section 415 of the Income Tax (Trading and Other Income) Act 2005.

HMRC’s Savings and investments manual SAM5200: amounts written off provides more detail.

Customer returns will be monitored to check whether this income has been returned as advised, if it has not then a formal enquiry under section 9A of the Taxes Management Act 1970 will be opened.

All information relating to the process will be kept on the secure spreadsheet, which will allow HMRC to both:

• build up a picture of the volume and quantum of directors’ loan accounts being written off
• establish an evidence base on which to develop future compliance work into this customer population

We also aim to support insolvency practitioners in generating better returns for creditors.