Can HMRC Tax Outstanding Directors’ Loan Accounts? A Guide for UK Company Directors.

Directors’ Loan Accounts (DLAs) are a familiar feature of UK close companies. 

A UK close company is a private company controlled by five or fewer shareholders (or participators), or by any number of participators who are also directors. A participator is anyone with a financial interest in the company, such as a shareholder, loan creditor, or someone entitled to its assets on winding up. This status matters because it triggers special tax rules, particularly around director loans and distributions.

DLAs offer flexibility: a director can temporarily draw funds for personal use, or inject cash to support the business, outside of salary and dividends. That convenience comes with rules. HMRC closely monitors DLAs because they can be used—deliberately or inadvertently—to extract company money without the correct tax treatment. If a director’s loan remains unpaid beyond a statutory deadline, HMRC can impose a significant company-level charge under Section 455 of the Corporation Tax Act 2010 (CTA 2010). In some situations there are also personal tax consequences for the director, especially where a loan is large, cheap (interest below HMRC’s official rate) or is later written off or released.

This guide explains when the Section 455 charge applies, how HMRC interest operates, and the personal tax outcomes when loans are substantial or written off. We also outline anti‑avoidance rules (including the 30‑day and ‘arrangements’ rules and the 2024 update to the Targeted Anti‑Avoidance Rule), practical compliance steps and timelines, and the position if the company enters liquidation or administration. To ground the analysis, we review recent tribunal cases—Quillan v HMRC (2025) and Powell v HMRC (2025)—which illustrate how HMRC enforces the rules and what documentation and behaviour will matter most in practice.

What is a DLA?

A DLA records transactions between a director (or close family member) and the company that are neither salary nor dividends nor reimbursed business expenses. Examples include personal withdrawals from the company bank account, personal costs paid on a company card, and cash introduced by the director to support working capital. Each director typically has a separate running balance. If the company owes the director, the DLA is in credit; if the director owes the company, the account is overdrawn.

From a compliance standpoint, accuracy matters. The Companies Act 2006 and accounting standards require proper recording and disclosure, and HMRC expects DLAs to be reflected in annual accounts and the corporation tax return (CT600), with supplementary pages (CT600A) where loans to participators are relevant. Sloppy record‑keeping increases the risk of mischaracterising drawings, missing benefit‑in‑kind charges, or overlooking Section 455 exposures, and may prompt questions in an HMRC enquiry.

The Section 455 Charge — When HMRC Taxes the Company

CTA 2010 s455 applies to a close company that makes a loan (or advances value) to a participator—commonly a director‑shareholder—and the debt remains outstanding nine months and one day after the end of the company’s accounting period. If the loan is not cleared by that date, the company must pay a temporary corporation tax‑like charge based on the outstanding amount. The rate is aligned with the dividend upper rate and is currently 33.75% for loans made on or after 6 April 2022, and 32.5% for older loans. The charge is reported on the CT600A and is due alongside corporation tax. Importantly, the s455 liability belongs to the company, not the individual director.

The s455 amount is broadly refundable when the loan is permanently repaid, replaced by a taxable dividend or salary, or is written off in a way that creates a tax charge on the director. However, HMRC will not refund interest charged on late payment of s455 itself. Practically, that means timing matters: where feasible, clear the DLA within the nine‑month window to avoid the cash cost and interest. If the deadline is missed, prioritise full and permanent repayment so that the company can claim relief in the following period.

Robert Hoad, partner at Lubbock Fine, provides further insight into s455 below. 

“The s455 regime has become increasingly complex over the years as HMRC introduce new legislation and anti-avoidance provisions to try and prevent avoidance of the charge. Alongside this HMRC are increasing their enforcement efforts and scrutinising any claimed repayments of loans.. 

 As such, it is more important than ever to ensure that loans and repayments are properly documented and professional advice is sought at the earliest possible stage”.

Personal Tax Consequences for Directors

Two common personal tax exposures arise from DLAs. First, where the overdrawn balance exceeds £10,000 at any time in the tax year and the loan is interest‑free or priced below HMRC’s official rate, the director is treated as receiving a beneficial loan. A benefit‑in‑kind charge arises on the notional interest, reported on the P11D, and the employer pays Class 1A National Insurance. HMRC’s official rate was 2.25% in 2024/25 and increased to 3.75% from 6 April 2025; charging and actually paying interest at least at the official rate can eliminate or reduce the Benefit in Kind (BiK) and the Class 1A NIC.

Second, if a director’s loan is released or written off (including in insolvency), the amount is generally taxed on the director. For a participator in a close company, the statutory route is the Income Tax (Trading and Other Income) Act 2005 ITTOIA 2005 s415, which treats the write‑off as a distribution taxed at dividend rates (currently 8.75%, 33.75%, 39.35% depending on the band). Where the loan is employment‑related, HMRC may seek to tax the amount as earnings, attracting PAYE and Class 1 NIC, but in many close‑company situations the distribution route takes precedence for income tax. The NIC position can still be contentious and often depends on whether the loan is viewed as arising in the capacity of shareholder rather than employee.

Tax Avoidance Rules you need to Know

HMRC targets ‘bed and breakfasting’—the practice of repaying just before the nine‑month deadline and immediately re‑borrowing. Under the 30‑day rule, if a repayment is followed by new borrowing within 30 days, HMRC can treat the repayment as ineffective for s455 relief. Separately, the ‘arrangements’ rule can apply where, even outside 30 days, there was an understanding that borrowing would be resumed. Both rules are designed to ensure that only genuine, permanent repayments trigger relief.

In October 2024, a targeted anti‑avoidance update tightened the Targeted Anti‑Avoidance Rule (TAAR) for loans to participators to address avoidance using associated companies or group chains—e.g., circulating loans among connected entities to prevent the s455 clock from starting or to manufacture relief. The updated TAAR can disallow relief where loans are moved to frustrate the charge; notably, if TAAR applies, no tax relief is available for return payments that would otherwise reduce or eliminate s455. Directors should avoid circular or contrived arrangements and document bona fide commercial transactions.

Compliance Timeline and Practical Steps

• At each month‑end: reconcile DLA movements; confirm whether any personal withdrawals or company‑paid personal expenses have created an overdrawn balance.
• Before year‑end: plan how any overdrawn loan will be cleared—by salary bonus, properly declared dividend from distributable reserves, cash repayment, or sale of personal assets to the company at market value.
• Within nine months and one day of year‑end: clear the loan to avoid s455. Where cash flow is tight, consider staged dividends (subject to reserves and board approval) or formal loan agreements charging interest at the official rate with scheduled repayments.
• If s455 is unavoidable: pay the charge on time to minimise HMRC interest; record the date when the loan is permanently repaid so relief can be claimed in the subsequent return.
• Governance: minute decisions, set formal interest terms where appropriate, and ensure interest is actually paid in‑year—HMRC will not accept ‘rolled‑up’ interest entries as payment for BiK purposes.

Worked Examples

Example 1 — Standard s455 timeline: A close company with year‑end 31 March 2025 shows an overdrawn DLA of £40,000. The director does not clear the balance by 1 January 2026 (nine months and one day). The company must pay s455 of £13,500 (33.75%). On 30 June 2026 the director permanently repays the loan. The company then claims relief for the £13,500 in its next corporation tax cycle. Any HMRC interest on the late s455 is not refunded.

Example 2 — Beneficial loan: During 2025/26 a director’s loan peaks at £15,000, interest free. HMRC’s official rate is 3.75%. The taxable BiK equals 3.75% of the average outstanding balance (subject to HMRC’s averaging rules), and the company pays Class 1A NIC on the benefit. If the company instead charges interest at 3.75% and the director actually pays it during the year, the BiK and Class 1A NIC can be avoided.

Example 3 — Write‑off in insolvency: The company goes into liquidation with an overdrawn DLA of £60,000. The liquidator determines the debt is irrecoverable and formally releases it. The director is taxed on £60,000 as a distribution at dividend rates (band‑dependent). The company can reclaim prior s455 paid on the loan, but any interest HMRC charged on the s455 remains an irrecoverable cost.

Liquidation and Administration — What Changes?

In formal insolvency, the overdrawn DLA is an asset of the company’s estate. The office‑holder will seek recovery based on the director’s means, including settlement agreements or payment plans where appropriate. If the debt is formally released or written off—whether because recovery is impractical or because the company is dissolved—ITTOIA 2005 s415 can tax the director on the amount released as a deemed dividend. Administration follows the same logic if a release occurs; a mere pause in pursuit does not by itself create a tax charge, but formal release or clear evidence of write‑off can do so.

HMRC has actively reviewed cases where loans were released or written off between 2019 and 2023, issuing ‘nudge’ letters to directors and inviting disclosure where amounts were omitted from Self Assessment. The enforcement focus means directors should not assume that insolvency eliminates tax exposure: where a loan is genuinely written off, declare it; where it is not, retain the documentation (from the liquidator or administrator) confirming that recovery rights remain.

Nor does insolvency merely bear tax consequences for overdrawn DLAs. As Andrew Brown, a barrister at Radcliffe Chambers specialising in insolvency asset recovery litigation, notes:

“DLAs are one of the most common assets looked at by office-holders as potential post-insolvency litigation against directors. They are relatively easy to litigate and recover, and there are few defences against such a claim. A common approach taken by some directors is to claim that DLAs were actually remuneration / salary or dividends, but the Courts have deprecated this approach and held that payments recorded as DLAs remain that and cannot be ‘recatagorised’ after the fact. There is little escape from an overdrawn DLA in any insolvency. Further, the granting of excessive DLAs when the company is nearing insolvency is a potential misfeasance claim as well”

For further details on the difficulties of attempting to reclassify DLAs as remuneration, please see our blog on the Treatment of Director’s Loan Accounts. 

Recent Case Law: HMRC Enforcement in Insolvency and Restructuring

Quillan v HMRC (2025): Mr Quillan, sole director of BOH Investments Ltd, had an overdrawn DLA of £439,954 when the company entered liquidation. After paying £57,498, £382,456 remained outstanding when the company was dissolved. HMRC assessed income tax under s415 ITTOIA, arguing the loan had effectively been written off because the liquidator did not intend to pursue it. The First‑tier Tribunal rejected HMRC’s position. A decisive factor was the liquidator’s correspondence reserving the right to restore the company and seek recovery if Mr Quillan’s means improved. Without a formal release or clear write‑off, there was no s415 distribution. The case underscores the importance of formalities and language in liquidator reports and letters.

Powell v HMRC (2025): Mr Powell owed £512,713 to Thermoline Ltd. As part of a reorganisation, a deed of novation transferred the debt to a holding company. HMRC contended—and the Tribunal agreed—that the novation amounted to a release for the original creditor and triggered s415 on Mr Powell, even though valuable consideration passed between companies and the debt continued to exist to another entity. Practically, directors and groups should take great care with intra‑group reorganisations of director debts: unless the original lender actually receives satisfaction (cash or assets), a deemed dividend risk arises.

Paul Bailey, partner and co-founder of BABR provides current insights below

“This is a clear and informative article on Directors’ Loan Accounts. As an Insolvency Practitioner, I am seeing a marked increase in overdrawn DLAs in formal insolvencies. Following a review of directors’ personal finances, many are either unrecoverable or only partially repayable for the benefit of creditors, meaning directors often need to prepare for a realistic negotiation with HMRC where full repayment is not achievable”.

FAQs

Does HMRC tax directors’ loans if they are unpaid? Yes. If the balance is not cleared within nine months and one day after year‑end, the company pays a temporary s455 charge at 33.75% (or 32.5% for older loans). The charge is reclaimable when the loan is permanently repaid or otherwise cleared, but HMRC interest on late payment is never refunded.

Does liquidation or administration remove personal liability? No. Where the loan is formally released or written off, ITTOIA 2005 s415 taxes the director—typically at dividend rates. If the loan is employment‑related, HMRC may seek to apply earnings treatment and Class 1 NIC. If the office‑holder has not released the loan and retains the right to pursue recovery, no s415 charge should arise until a genuine release or write‑off occurs.

What interest rate applies for beneficial loan calculations? HMRC’s official rate was 2.25% in 2024/25 and is 3.75% from 6 April 2025. Charging interest at least at the official rate and actually paying it during the tax year can avoid a BiK and the employer’s Class 1A NIC.

Can the company reclaim s455 tax? Yes. Relief is available when the loan is permanently repaid or is written off in a way that creates a taxable event for the participator. Relief is claimed in the period after the repayment or release; any interest previously paid to HMRC on late s455 remains irrecoverable.

How do the anti‑avoidance rules affect planning? Repaying and immediately re‑borrowing within 30 days is ineffective. Even outside 30 days, HMRC can invoke the arrangements rule where the repayment was made with the understanding that funds would be redrawn. Genuine, permanent repayment and clear commercial documentation are essential.

What practical steps reduce risk? Keep DLAs reconciled monthly, charge and pay interest where balances exceed £10,000, minute decisions and board approvals, avoid circular loan movements across group companies, and seek early advice before restructurings or formal insolvency.

Conclusion

DLAs can be efficient cash‑management tools, but they carry a meaningful tax risk if balances are allowed to drift or if clearance is left to the last minute. The combination of the Section 455 charge, beneficial loan rules, and the possibility of dividend or earnings taxation on releases makes careful planning essential. Insolvency adds another layer: unless a loan is formally released, there may be no immediate s415 charge, but HMRC’s current enforcement campaigns mean directors should be ready to evidence the status of any DLA at the point of liquidation or administration.

In practice, the most robust approach is to manage DLAs actively throughout the year, ensure interest is charged and paid where required, clear balances within the nine‑month window, and document decisions rigorously. When restructurings or insolvency are on the horizon, obtain specialist advice to avoid unintended releases (as in Powell) and to make sure the paperwork does not imply a write‑off (as considered in Quillan). With good governance and timely action, most s455 and write‑off exposures can be avoided or mitigated, preserving cash and preventing unwelcome HMRC surprises.

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