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Share options used to pay off overdrawn director's loan account

Was director’s loan paid off with share options?


In a recent tribunal case, a director’s loan account, overdrawn by £3m, was supposedly cleared by the transfer of US company share options worth £4m, but the value of the option agreement couldn’t be verified.

30th Nov 2021
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The Grangewood Enterprises Ltd v HMRC (TC 08264) tribunal case is a good example of a taxpayer attempting to use the transfer of an asset to repay an overdrawn  director’s loan account, which HMRC warned about in its updated corporation tax manual (para CTM61604).

Funds extracted

Grangewood Enterprises Ltd (GE) incorporated in 2000 buying and selling real estate. It had a single director/shareholder throughout: Anthony Marsden.

Marsden drew money from the company each year and the accounting period ending 30 September 2015 showed an overdrawn director’s loan account of £2,895,295.64. Corporation tax of £723,801.75 had been paid on this under CTA 2010, s 455. Marsden then drew an additional £379,641 from the company in the period ended 30 September 2016, leading to a further s.455 tax charge of £103,472.03.

However, GE’s 30 September 2016 accounts also included an intangible asset introduced by Marsden and valued at £4m. This changed the overdrawn loan into a credit balance of £723,666.

GE’s accountants filed the 2016 accounts and corporation tax return and claimed a repayment of the £723,801.75 s.455 tax, as well as relief from the £103,472.03 which would have arisen.

HMRC queries

During the following tax enquiry GE’s advisers notified HMRC that the intangible asset in question was an option agreement on fractional shares (scrip) convertible to full shares in the US Company Gable Holdings Inc, worth $5.2 million. The advisers further confirmed that they could not procure the documents to support the transaction and so were amending the accounts and withdrawing the CT claim.

Amended accounts and a CT return were submitted; the tax position was agreed and settled.


In July 2019 HMRC issued penalties of £434,318.73, representing a 52.5% penalty on the potential lost revenue (PLR) in the form of the s455 tax of £723,801.75 and £103,472.03. The 52.5% was based on a 70% weighting for a deliberate unconcealed error, adjusted to reflect the assistance GE provided through the process.

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Replies (4)

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By Paul Crowley
01st Dec 2021 09:52

The FTT agreed with HMRC that the error was deliberate. In their opinion the advisers had had doubts as to the value of the shares prior to the submission of the accounts and CT return in question, noting as they did in correspondence to HMRC that the valuation had been ‘subject to the asset being genuine’ and their immediate backing down at the first resistance from HMRC. That they chose not to investigate further constituted a deliberate act."

Sounds as if advisors deliberately flagged this up about as directly as possible
Would HMRC have noticed without the flag?

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Replying to Paul Crowley:
taxinvestigations tax HMRC HMRCenquiries
By rbusfield1
06th Jan 2022 15:43

Where there is a big change in one year HMRC are likely to ask questions. Rebecca Busfield

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By thestudyman
05th Dec 2021 15:56

Is this a record for an overdrawn debit directors loan balance? Never heard of anything above £500k, let alone almost £3m

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taxinvestigations tax HMRC HMRCenquiries
By rbusfield1
06th Jan 2022 15:42

We have had a few HMRC enquiries relating to director loan accounts over £1 million eg being paid off with tax planning such as pension arrangements or hidden in another company or not included in the CT return. If tax arrangements include fake meetings which did not occur or the loans have been concealed in other companies then the taxpayer should consider COP9 for tax fraud to get immunity from prosecution. The definition of deliberate behaviour is now quite broad based on recent case law. Where the DLA was overdrawn for a long number of years HMRC expect the additional 10% in the penalty calculations.
Rebecca Busfield (Watt Busfield Tax Investigations LLP)

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