Director's Loans: Lessons from a Recent Tax Appeals Case

A recent determination by the Tax Appeals Commission (TAC) has provided some significant points to note in respect of whether amounts put to a director’s loan account are classified correctly as such – and not deemed to be disguised remuneration.

Our lesson from this case, is to ensure where a loan is being provided to directors etc. there should be documentation (minutes, agreements etc.) in place to show this is a loan or where a loan is being repaid to the directors, they have documentation to support same (minutes, agreements etc.). In the absence of documentation, Revenue will assume it is remuneration within the remit of Section 112 TCA (rightly or wrongly), and it will not be possible to reclassify after the event.

Case Overview – 148TACD2024

The dispute centred on whether payments from a company (Second Appellant) to its director (First Appellant) constituted a director’s loan, as claimed by the appellants, or disguised salary/emoluments, as argued by the Revenue (Respondent).

Some key facts of the case:

• Parties Involved: The First Appellant, a UK-based entrepreneur, was the sole director and shareholder of the Second Appellant, an Irish company.

• Transactions: In 2021, the First Appellant withdrew €290,468.22 from the company, claiming these as loans. These amounts were recorded in the company’s accounts and financial statements.

• Dispute: The Respondent assessed the payments as taxable income, raising alternative tax assessments against both parties for alleged salary/emoluments.

• Loan Repayment: The director repaid the loan via a €990,000 dividend in December 2022. Tax on this dividend was accounted for in the UK.

• Compliance Issues: The company initially failed to properly document the loan and did not follow company law procedures for director loans.

Some issues dealt with/discussed in the case:

• Employment Status

The First Appellant argued he was not an employee had no employment contract, salary, or personal service obligations. The Irish Supreme Court's Domino’s test (the Karshan Case) for employment (work-for-wage bargain, personal service, control) was not met.

• Nature of Payments

Evidence supported that the amounts were intended as loans, not salary/emoluments. Despite poor documentation, the amounts were recorded in financial statements, distinguishing them from misappropriations in precedent cases. The loan was repaid, showing no “measurable profit” under tax law. The timing for the Appellant may have been fortunate as no financial statements had been prepared at the time the Revenue Audit commenced.

• Legal Framework

Taxation required that payments be classified as “perquisites” or emoluments under Section 112 of the Taxes Consolidation Act 1997. The Commissioner found the payments did not meet these criteria.

• Benefit-in-Kind (BIK)

The loan constituted a preferential loan, requiring BIK tax on imputed interest, which was duly paid and income tax paid over on the loan as is required by Section 438 TCA.

Key points and conclusions to take

In respect of how to assess whether the payments were in respect of a director’s loan or actually disguised remuneration etc, the critical distinction in this case rested on the classification of the payments. For a payment to be considered a loan, it must be clearly documented as such at the time and there must be a clear intention of repayment, which was evidenced here by the repayment of funds via dividends and their recording in the company’s financial statements.

The timing for the Appellant may have been fortunate as no financial statements had been prepared at the time the Revenue Audit commenced. A loan does not confer a measurable profit or benefit that the recipient can convert into money or money’s worth (Conolly v McNamara), and therefore, it does not constitute taxable income under Section 112 of the Taxes Consolidation Act 1997.

In contrast, remuneration or emoluments arise from a work-for-wage arrangement, providing a benefit tied to services rendered or employment obligations.

This case reaffirmed that in the absence of a formal employment relationship, salary agreement, or control over the individual, payments recorded as loans cannot be reclassified as taxable income without evidence of personal gain or intent to disguise remuneration. The Appeal Commissioner noted that the Revenue had failed to engage in the five-step test. The Appeal Commissioner noted none of the first 3 steps had been met.

If you are navigating similar challenges around director’s loans, compliance documentation, or Revenue audits, our team at BNO is here to help. Do not wait for issues to escalate—reach out today to ensure proper documentation, robust advice, and peace of mind.