Quarterly news

The proposals stand to impact profit extraction, recording and financial management for many owner-managed businesses.

Understanding close company proposals

Hard on the heels of the requirement for directors of close companies to report additional information on the Self Assessment tax return from 2025/26, the government is now considering further change. It is widely expected that this will mean a requirement to report transactions between close companies and their participators to HMRC.

Would this impact you? Close companies, broadly speaking, are companies controlled by five or fewer participators, or by any number of participators who are directors. Participators are those who have an interest in the capital or income of a company, such as a shareholder. Most small and medium-sized companies are close companies.

Why the possible change? The small business Corporation Tax gap makes up a significant slice of the tax gap, and HMRC is concerned that in close companies, the boundary between company monies, and the monies of those involved in the company is not always tightly drawn. Increased reporting requirements would give HMRC more information and help it check that transactions are taxed appropriately.

What are the proposals?

The main risks HMRC sees are under-reported income and over-claimed expenses, alongside error and evasion in transactions between a company and its owners.

It therefore suggests that close companies report details of transactions between the company and its participators including: cash withdrawals; loans; debts; dividends; and other distributions, and transfers of assets to and from the company. This would mean reporting the recipient; amount; and date of each transaction; and possibly also the National Insurance numbers of participators. Rules would also extend to corporate participators.

Company financial housekeeping, such as the operation of directors’ loan accounts, is very much a focus for HMRC at present. The current consultation highlights HMRC’s push for companies to keep records of monies passing between the company and its owners, with a more structured framework around those records and good habits around tracking the company’s money.

Change along the lines indicated therefore seems inevitable, and will mean more demanding compliance. We can help you assess possible impact now, looking at areas such as profit extraction strategy; use of directors’ loan accounts; and the correct issue and documentation of dividends. Please don’t hesitate to get in touch.

New legislation to tackle late payments is currently going through parliament.

Key provisions of the Bill

The Bill will introduce a new 60-day cap on payment terms for larger firms paying smaller suppliers, alongside new mandatory interest on late payments, with a requirement for all commercial contracts to include statutory interest set at 8% above the Bank of England base rate.

Additional measures include a time limit for raising disputes on payments and action to ban the practice of withholding retention payments under construction contracts, to prevent small firms losing retentions to insolvency or non-payment.

The legislation also grants significant new powers for the Small Business Commissioner to investigate poor payment practices, adjudicate disputes outside the courts, and fine the worst offenders. Provisions are intended to apply UK-wide, though this will require regulatory alignment in Scotland, Wales and Northern Ireland.

Payment issues are always disruptive, and we can advise on cash and debtor management if this is relevant to you. Please don’t hesitate to contact us for an in-depth discussion.

A company undertaking an innovative research and development project may be able to take advantage of significant tax breaks, but the availability of relief can attract fraudsters.

Tax relief and rogue advice

R&D tax relief comes via two schemes. The new merged R&D scheme offers a 20% above-the-line taxable credit, and the enhanced R&D intensive support scheme (ERIS), available to loss-making, R&D-intensive, small and medium-sized enterprises, provides an enhanced deduction of 86%, and a potential repayable tax credit. Financially, the stakes can be high and unscrupulous so-called advisers know this.

A typical fraud sees rogue firms posing as specialist advisers, submitting R&D claims for their clients, and creaming off the proceeds while leaving behind a claim that may later fail HMRC scrutiny. Taxpayer business Beer Express Ltd found this to its cost at the First-tier Tax Tribunal.

The company had appointed an external firm that suggested its inventory forecasting software and new lager development projects qualified for tax incentives. In 2023, HMRC rejected the claim in full and asked for repayment after the advisers disappeared.

Navigating the rules

Broadly speaking, to qualify as R&D for tax purposes, a project must involve the resolution of uncertainty to achieve an advance in science or technology, and fit within government guidelines. Further specific requirements apply, such as the need for a project to be overseen by a competent professional.

The Tribunal decided that Beer Express failed to qualify because the company owner did not have in-depth technical knowledge or direct responsibility for the design, creation, planning, and implementation of the projects.

Eligibility requirements for R&D tax relief are complex. Please don’t hesitate to get in touch for further advice.

HMRC is currently looking at claims to Business Asset Disposal Relief made in the 2024/25 Self Assessment tax return.

What is BADR and what is HMRC doing?

Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief, is an important Capital Gains Tax relief available when someone disposes of qualifying business assets. Where conditions are met, capital gains tax on qualifying gains is charged at reduced rates of 10% for 2024/25, 14% for 2025/26, and 18% from 2026/27.

HMRC has been writing to taxpayers who claimed BADR where data suggests they might have exceeded the 1 million pound BADR lifetime limit. This can happen if the limit was exceeded previously or if the current claim pushed the total over the threshold. However, it is entirely possible that the claim is correct and requires no amendment.

Responding to HMRC letters

HMRC routinely uses these letters to nudge taxpayers to check their tax position. While they do not necessarily indicate a problem, they must not be ignored and require a response within the given deadline. Failure to act can result in amended returns, formal enquiries, interest, and penalties.

As your agents, we should receive a copy of any such letter and will deal with it on your behalf. If you receive a letter and have any concerns, please don’t hesitate to get in touch.

With the extension of Inheritance Tax to most unused pension funds and pension death benefits from April 2027, IHT is very much in the public eye.

Valuable IHT exemptions

With timely advance planning, it is still possible to take advantage of valuable IHT exemptions. These include the annual exemption of 3,000 pounds and the exemption for small gifts made to individuals not exceeding 250 pounds per tax year per recipient. Gifts from one spouse or registered civil partner to another are also generally fully exempt.

Another option is the exemption for normal expenditure out of income, which can apply when a gift is part of normal expenditure, made out of income taking one year with another, and leaves the giver with sufficient income to maintain their usual standard of living.

Lessons from recent tribunals

A recent First-tier Tax Tribunal case involving gifts totaling over 1.7 million pounds highlighted the strict evidentiary requirements for the normal expenditure exemption. Despite having income well in excess of living needs, the taxpayer’s case failed because there was no clear evidence of a settled prior commitment or predictable regularity in donations over time.

To benefit from this exemption, it is essential to demonstrate a settled pattern of expenditure measurable over a period of time. Please don’t hesitate to get in touch for further advice on this or any other aspect of IHT.

HMRC has recently partnered with British-based data analytics and AI leaders Quantexa in a 175 million pound deal.

Modernising core data infrastructure

Quantexa works with public sector organisations globally on fraud, risk, compliance, and data modernisation initiatives. The aim in this case is to support the modernisation of HMRC’s core data infrastructure, giving it a clearer, connected view of its data to improve performance, identify tax at risk, and strengthen control.

According to HMRC, modern data and AI tools help reduce duplication, better link customer information across systems, and support right-first-time outcomes, improving customer service while continuing to tackle fraud and non-compliance.

Spotting patterns and relationships

The new tools will give HMRC a bird’s-eye view of both internal data and external sources, enabling it to spot patterns and relationships suggesting fraud more rapidly and accurately than ever before. The programme will also lay the groundwork for advanced AI capabilities and wider transformation efforts to close the tax gap.

If you have questions about how HMRC data changes affect your compliance, please don’t hesitate to contact us.

To make family days out more affordable and support businesses, the government has announced the Great British Summer Savings scheme.

The temporary reduced VAT rate

A temporary, reduced VAT rate of 5% will apply over the summer holidays to selected activities and services for families with children, replacing the standard 20% rate. The government expects businesses to pass these savings on to customers.

The temporary rate is effective from 25 June 2026 to 1 September 2026 inclusive. It applies to certain supplies of children’s meals eaten on the premises, children’s admission to theatres, cinemas, concerts, exhibitions, and shows, and admission tickets to family attractions like amusement parks, fairs, adventure parks, and soft play areas.

Qualifying rules and practical steps

Children’s meals must be supplied for consumption on the premises, served from a dedicated children’s menu, and marketed as intended for children. Where meals or admissions are bundled with other goods for a single price, normal VAT rules determine liability for non-qualifying elements.

Businesses will need to pivot rapidly to update systems and revert to normal rules when the scheme ends. Please don’t hesitate to get in touch for help with this or any other VAT issue.

Businesses impacted by changes to the main financial reporting standard, FRS 102, should be alert to potential repercussions for their tax position.

Changes to FRS 102

Changes to FRS 102 take effect for accounting periods starting on or after 1 January 2026, introducing a new five-step model for revenue recognition and altering lease accounting. The distinction between operating and finance leases for lessees is removed, bringing most leases directly onto the balance sheet.

The impact of these developments can be far-reaching, extending to tax liabilities, timing, and wider compliance issues. Because the Corporation Tax calculation is based on accounting profit before tax, timing changes in accounting profit can alter the timing of taxable profits.

Wider compliance consequences

Changes to revenue recognition may accelerate or defer taxable income, and transitional adjustments will typically impact tax liability in the first applicable accounting period. Furthermore, higher asset and liability levels from leasing changes can affect thresholds for compliance regimes like off-payroll working or eligibility for tax reliefs like the Enterprise Investment Scheme.

As these changes bed in, early discussion is recommended. Please don’t hesitate to get in touch.