Tribunal Ruling on Director Loan Accounts

The First Tier Tribunal has ruled in the Esprit Logistics Management Ltd and others v HMRC [2018] case that director loan accounts written off were taxable as employment income of the directors, and subject to PAYE and NIC, rather than taxed as dividends where a loan to a participator (a person holding 5% or more of the shares) in a close company is written off.

A ‘close company’ is a company under the control of five or fewer participators, or under the control of its director shareholders. A whole raft of anti-avoidance provisions apply to privately owned companies, which can have unintended tax consequences.

The companies in question had paid bonuses to the directors which were offset against their outstanding director loan accounts. The tribunal ruled that the payment of a bonus, which was never intended to be paid to the director, meant the sum written off should actually be taxed like any other salary payment and taxed at a higher rate rather than under the dividend legislation.

This case is a timely reminder that steps undertaken by companies are looked at collectively and advice should be taken from those who specialise in advising privately owned companies, particularly where shares are concerned.

If you have any concerns about the structuring of your employee share schemes contact us on 0208 949 5522 or email