A recent case highlighted by AccountingWEB is a timely reminder that tax decisions made without professional advice can become expensive very quickly.
The case involved a company director who believed he could resolve an overdrawn director’s loan account by writing it off himself. Although his adviser had explained the correct tax treatment and the steps that needed to be followed, the director chose not to act on that advice. HMRC later reviewed the position and concluded that the loan write‑off had been handled incorrectly. The result was a £5,000 penalty on top of an unexpected tax bill.
For many business owners, director’s loans feel informal. It is easy to see company funds as an extension of personal finances, particularly in owner‑managed businesses. HMRC treats director’s loans very seriously. If money is taken from the company outside of salary or dividends, it creates a formal loan, with strict rules around repayment and how write‑offs are treated.
In this case, the director assumed that writing off the loan would remove the problem. What was missed was that a loan write‑off is not tax‑free. It is usually treated as taxable income, and additional company tax charges can arise if the process is not handled correctly or within the required time limits. HMRC viewed the failure to follow the advice given as careless behaviour, which is why a penalty was imposed.
What makes this case particularly uncomfortable is that the penalty was avoidable.
HMRC did not dispute that professional advice had been provided. The issue was that the director did not act on it. From HMRC’s perspective, ignoring guidance meant the responsibility, and the consequences, fell squarely on the director.
Sean Farnell, Partner at Burgis & Bullock, commented: “We often see business owners trying to simplify things or save time by making decisions themselves, especially around director’s loans. Unfortunately, these are exactly the areas HMRC pay close attention to. Taking advice is only half the job – it also needs to be followed. A short conversation at the right time can prevent penalties, stress and some very awkward letters later.
“The wider lesson is not limited to director’s loans. HMRC expects taxpayers to take reasonable care with their affairs. Where advice is available but ignored, penalties are far more likely to apply. Even where mistakes are genuine, HMRC will look at whether an individual took appropriate steps to understand their position and acted on the information given to them.”
For business owners, this means being cautious about assumptions, particularly when money moves between you and your company. What feels like a practical fix can carry tax consequences that are not immediately obvious. If something does not fully make sense, it is often a sign to pause rather than push ahead.
If you are unsure how director’s loans, dividends or other personal transactions interact with your company, getting clear advice and acting on it can make the difference between a straightforward resolution and an expensive problem. Cases like this show that HMRC has little sympathy for avoidable errors, even where the solution initially appeared simple.
For further advice, please contact Burgis & Bullock www.burgisbullock.com
Sean Farnell, Partner at Burgis & Bullock
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