HMRC has launched a wide-ranging consultation that could significantly change how small companies report financial transactions involving directors and shareholders. The proposals focus on tighter reporting requirements for directors’ loan accounts and participator loans, aimed at addressing what HMRC sees as widespread misuse.
The move forms part of HMRC’s broader strategy to reduce the small business tax gap, which reached £14.7 billion in 2024. This figure represents around 40% of the total corporation tax liability for small businesses, highlighting the scale of the issue.
While no firm implementation date has been set, the direction of travel is clear. These measures are likely to be introduced relatively quickly as part of the Government’s ongoing efforts to tighten compliance and reduce tax avoidance.
Increased scrutiny on close company transactions
The consultation centres on “close companies”, typically businesses controlled by five or fewer participators, or by directors. A participator is anyone with a financial interest in the company, most commonly shareholders.
HMRC believes there is often insufficient separation between company funds and personal finances in these structures. According to the consultation, this can range from innocent errors to deliberate tax avoidance.
To address this, HMRC is proposing mandatory reporting of a wide range of transactions between close companies and their participators. This would include:
- Payments made in any form, including cash or bank transfer
- Sales of assets to the company
- Purchases of assets from the company
- Dividends or other distributions
- Any other transfer of value between the company and participators
The level of detail required would be significant, with companies expected to report the recipient, amount and date of each transaction. This would apply not only to individuals but also to corporate participators, which could add complexity for groups with multiple entities and frequent intra-group activity.
Director’s loan accounts in focus
Director’s loan accounts are a key area of concern for HMRC. Under current rules, if a loan to a participator is repaid, written off or released, the company may be able to reclaim Section 455 tax paid under the Corporation Tax Act 2010.
The proposed changes would require far more detailed reporting of these transactions. Companies would need to disclose repayments made by participators, as well as any instances where loans are written off or released.
HMRC argues that this will provide greater visibility and ensure that the correct tax treatment is applied. In particular, it would allow HMRC to identify when relief is due to the company and when income tax should be charged to the individual.
The consultation also suggests expanding reporting requirements to include more granular information on dividends and capital gains, further increasing the compliance burden on small businesses.
Reporting framework and practical challenges
At this stage, HMRC has not finalised how the reporting system will work in practice. Its preferred approach is an annual reporting cycle aligned with corporation tax return deadlines. However, it is also exploring the possibility of more frequent or even real-time reporting, depending on how readily businesses can provide the data.
Some exemptions are being considered. For example, transactions already reported through PAYE using the Real Time Information system, such as director salaries, may be excluded.
Even so, the proposals raise practical questions. One area under review is whether companies should be required to provide National Insurance numbers for participators where no employment relationship exists. HMRC is considering thresholds or connection tests to determine when this would apply.
For many small businesses, the administrative burden could be significant. Director’s loans and similar arrangements are widely used for cashflow management and tax planning, particularly in owner-managed businesses. Increased reporting requirements may force companies to review how they structure these transactions.
HMRC’s position is that the changes are necessary. It argues that blurred lines between company and personal finances directly contribute to the tax gap, enabling both errors and non-compliance.
The consultation, which includes 20 detailed questions, seeks feedback on the scope, format and timing of the proposed rules. While the final shape of the legislation is still to be determined, it is clear that greater transparency and tighter oversight are on the way.
For small companies, the message is straightforward: expect more reporting, more scrutiny, and less flexibility in how funds move between the business and its owners.
To discuss any aspect please contact Neil Armstrong, Tax Partner E: neilarmstrong@bakertillymm.co.uk T: 028 9032 3466.
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