In March 2023 the First-tier Tribunal (FTT) has judged that debts due to a close company were released at the time a settlement agreement was entered into, so the close company shareholders were taxable on the grossed-up written off portion of loans in that tax year.

After financial difficulties, a close company, of which both the taxpayers were directors, went into liquidation.  They owed the company just over £1m.  As part of the liquidation, they entered into a settlement agreement whereby they paid £100,000 in instalments and the rest of the debt was released.  A clause stated that if the payments were not made as agreed, then the whole of the debt would become payable.  The issue at the FTT was whether the debt was released in the tax year of the settlement agreement or later. The taxpayers argued that the debt was not released until they had finished making the payments required under the agreement.

The FTT agreed with HMRC that the debt was released when the agreement was signed. The agreement was labelled as in full and final settlement, and referred to a release, so the main transaction of the release was made then.  The close company directors were taxable on the forgiven loans at the earlier point in time.

The decision can be found The Finance & Tax Tribunal (tribunals.gov.uk)

Many small businesses are structured as close companies, a company that has five or fewer participators, and we can help owners manage their affairs so any charges are mitigated or planned for.