HMRC has introduced a new voluntary process in relation to Director’s Loan Accounts (DLA) when they are written off within a corporate insolvency procedure. The new code, which is voluntary, allows Insolvency Practitioners (IP) to notify HMRC when the DLA (or part of it) is written off.
A DLA is deemed to have been written off, for HMRC purposes, when the Company acting through its IP accepts that the DLA will not be repaid and gives up on attempting to collect it.
If the DLA is written off, whilst it may relieve the director from the obligation to repay the debt, it does have tax implications.
The IP can recover S455 tax on the part of the loan that is written off.
On the other hand, after notification of the write off of the DLA by the IP is made to HMRC, directors are expected to declared the write off of the DLA in the Self-Assessment tax returns. Whilst this nothing new HMRC will be now more likely be aware of the write off and returns will be monitored and formal enquiries raised.
If you are a director and have had, or trying to agree that, a DLA is written off you should seek the advice of your accountant before submitting your next tax return.