Can you write off a directors' loan?

A solvent company can release a directors’ loan, but the director pays tax on it as if it were a dividend, so it saves very little. An insolvent company cannot release it at all without the liquidator later reversing it.

What a write-off actually is

A directors’ loan is a debt you owe the company. Writing it off means the company gives up its right to collect. Legally that is a release of a debt, and it needs to be done properly: a board resolution, a deed of release or at minimum clear board minutes, and the right entries in the accounts. An accountant quietly journaling the balance to nil at year end is not a write-off, it is an error waiting to be found.

The tax when a solvent company writes it off

Two charges follow, and together they mean the write-off is seldom the cheap route people expect.

On the director. The amount released is treated as income taxed at dividend rates (8.75%, 33.75% or 39.35% depending on your band) under section 415 of the Income Tax (Trading and Other Income) Act 2005. It is reported on your self-assessment return.

On the company. HMRC’s position is that a loan written off to a director who is also an employee is earnings for National Insurance purposes, so Class 1 NIC is due, employer’s and employee’s, through payroll. The company gets no corporation tax deduction for the amount written off.

The s455 charge the company has already paid is refunded nine months and a day after the end of the accounting period in which the release happens, in the same way as for a repayment.

Set against a dividend of the same amount, which attracts the same dividend tax and no NIC, a write-off is usually the more expensive option. The only time it is clearly better is when the company has no distributable reserves and therefore cannot lawfully declare a dividend, which brings us to the second half of the question.

Why an insolvent company cannot do it

A company with no reserves is often a company that cannot pay its debts. If that is the position, the loan is one of the company’s few assets, and giving it away to a director is a transaction at undervalue under section 238 of the Insolvency Act 1986 and very probably a preference under section 239. A liquidator can look back two years for transactions with connected parties, which includes you, and apply to reverse it. The loan is reinstated and the liquidator pursues it in the ordinary way.

It also goes in the liquidator’s report on your conduct to the Insolvency Service. Releasing your own debt to a failing company is the kind of thing that leads to disqualification proceedings.

So the sequence directors sometimes attempt, writing off the loan and then liquidating, does not work. It simply adds a conduct problem to a debt that is still owed.

What works instead

If the company is solvent and has reserves: declare a dividend to clear the loan. Same tax on you, no NIC, no release needed. Make sure the reserves are real on the day the dividend is declared and that it is minuted and vouchered.

If the company is solvent but has no reserves: repay from personal funds, take a salary or bonus through payroll, or leave the loan in place and accept the s455 cost until reserves rebuild. A write-off is possible but costs more than it looks.

If the company is or may be insolvent: do not touch it. The loan will be dealt with in the insolvency process, and a licensed practitioner can agree a settlement that reflects what you can pay. That is the only route that produces a clean outcome.

What to do today

1. Ask your accountant whether the company has distributable reserves today, not at the last year end.
2. If it has, clear the loan by dividend, properly declared.
3. If it has not, do not write the loan off. Run the two insolvency tests and act on the result.
4. If the company is in difficulty, speak to a licensed insolvency practitioner before any entry is made against the loan.