HMRC Turns Its Focus to Directors’ Loans: What You Need to Know

HMRC has recently launched a new compliance campaign that targets company directors who owed money to their companies and had those debts written off or waived between April 2019 and April 2023. If you’re a director and this applies to you, it’s critical to understand the implications. The tax treatment, and the steps you should take now to stay compliant — and minimise any potential penalties.

This article outlines what HMRC is doing. What it means for directors, and the actions you may need to take right away.

What’s Happening?

HMRC has confirmed that it will soon issue letters to directors who it believes had one or more loans from their companies written off or waived during the period from April 6, 2019, to April 5, 2023. If you didn’t report the release of the loan in your self-assessment return — or notify HMRC through any other route — you may now face further income tax liabilities.

This compliance push follows HMRC’s wider effort to tackle what it sees as underreported or misreported income. Loans written off by a company are not tax-free benefits — they are viewed as taxable income in most circumstances. If a director received this benefit but failed to account for the tax, HMRC is likely to act.

Why Loans Written Off Are Taxable

When a company writes off (or forgives) a loan that was owed by a director, employee, or shareholder. HMRC generally treats this as a taxable event. The loan effectively becomes income — because the recipient no longer has to repay it. How that income is taxed depends on the context:

• As earnings: If the loan relates to your employment, HMRC may treat it as earnings, subject to income tax and National Insurance.
• As a dividend: If you’re a shareholder and the loan write-off is connected to your shareholding, HMRC may treat it as a distribution, taxable as if it were a dividend.

The important point here is that in both cases, there’s a tax liability — but the tax rate differs. Dividend tax rates are typically lower than those on employment income.

Why This Matters: Financial and Legal Risk

The distinction between whether the write-off is taxed as employment income or a dividend can significantly affect how much tax you owe. Taxed as earnings, the liability can be much higher  and your company may also be liable for Class 1 National Insurance Contributions (NICs).

In fact, this is one of the key traps for businesses. If HMRC determines that the loan was linked to employment and the company failed to account for NICs. Both the director and the company could face enforcement action.

Furthermore, companies may have unintentionally misclassified the nature of these loans or failed to properly report them in corporation tax returns. With HMRC now focusing on these transactions, such oversights are being picked up with increasing frequency.

What Should You Do Now?

If you’re a company director and you know (or even suspect) that a loan you owed to your company was written off or waived between 6 April 2019 and 5 April 2023 — and you didn’t report it — you should take action as soon as possible. You may be able to resolve the matter with minimal penalties. Especially if you disclose voluntarily before receiving a letter from HMRC.

Here’s how to act:

1. Review your records
   Check if your company forgave any loans to you during the relevant period. Look for board meeting minutes, accounting adjustments, or entries in the company accounts indicating that a director’s loan was written off.

2. Determine if it was reported
   Did you report the write-off in your personal tax return for the year it happened? If not, this is likely the root of the issue.

3. Understand the tax treatment
   Consider whether the write-off should have been taxed as employment income or as a dividend. This distinction matters for calculating your liability and for understanding whether your company should have reported Class 1 NICs.

4. Amend your self-assessment tax return
   If the write-off or waiver took place after 5 April 2023, you can amend your 2023/24 self-assessment return. If the event occurred earlier and you did not file or include it in a return. You will need to disclose the income using HMRC’s online digital disclosure service.

5. Use HMRC’s disclosure facility
   HMRC operates a voluntary disclosure service that allows you to report income and pay any tax owed. By using this service proactively, you may benefit from lower penalties and avoid more serious enforcement action.

Timing Is Everything

If you wait to act until after you receive a letter from HMRC, you may find yourself under much greater scrutiny. You will also lose the chance to be seen as proactive in correcting your affairs. Which is an important factor when HMRC calculates penalties.

By acting now, you retain more control. You can clarify the facts, calculate the liability correctly, and potentially reduce interest and penalties. You also prevent the stress and disruption of a formal investigation.

Don’t Ignore a Letter From HMRC

If you do receive a letter from HMRC in the coming weeks, don’t panic — but don’t ignore it either.

The letter will likely include guidance on how to disclose unreported income and may reference HMRC’s digital disclosure service. While you may still have an opportunity to settle the matter with limited penalties. Your window for voluntary disclosure is narrowing.

Speak to a tax adviser as soon as possible if you receive a letter, or if you think you may be affected. A professional can help you determine the tax position, liaise with HMRC if needed, and ensure you meet disclosure obligations correctly and efficiently.

Final Thoughts: A Proactive Approach Is Best

This latest compliance campaign is a clear signal that HMRC is increasing its oversight of directors’ financial dealings with their companies. With tax authorities becoming more data-driven and coordinated, transactions that were once overlooked are now coming under the spotlight.

If you’re in any doubt about past loans, disclosures, or your current tax position. Now is the time to review and act. At Merranti, we’re here to help guide you through the process. Ensuring you meet your obligations, protect your business, and minimise unnecessary costs.

If you think you may be affected by this campaign, contact us today for tailored advice.