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.
