Close companies directors’ loan waiver scheme

Four close companies implemented a scheme that involved the release of loan balances on the directors’ loan account. In essence a board minute explained the companies’ wish to release sums owing by the directors by way of a bonus for their services to the business. A deed was executed and the companies’ paid National Insurance but no PAYE tax on the sums released. They deducted the amounts from their taxable profits.

The companies said the amounts released were taxable in the hands of the directors under ITTOIA 2005 s 415 at the dividend ordinary rate. HMRC said the payments were subject to tax as employment income under ITEPA 2003 Pt 2 on the basis that the waiver of the loan was in reality a reward for the directors’ services.

The First-tier Tribunal found that from reading the board minutes the companies wished to...