Proposals recently issued by HMRC would result in an increased level of information being collected from close companies. Close companies are generally a company controlled by five or fewer participators, or by any number of participators who are also directors. Most owner managed and family businesses fall into this category.
Under the proposals, these businesses would report transactions between companies and their participators, including cash withdrawals, drawings, dividends, loans, repayments, loan write-offs and asset transfers. With this additional information, HMRC aims to identify issues and inconsistencies between company accounts and personal tax returns.
If these proposals are implemented the need for maintaining records throughout the year increases with routine transactions potentially becoming reportable. This may include information including the amount, date and recipient. This will result in additional administrative work and the extraction of funds becoming less flexible. Potentially legitimate activity could trigger additional enquiries from HMRC.
While we await the outcome of the consultation, the direction of travel is clear - HMRC will require more detailed and potentially more frequent reporting as they aim to close the small business tax gap.