Close Companies and Director’s Loans in HMRC’s Sights: What the Proposed Reporting Could Mean for You

OWNER-MANAGED BUSINESSES

3K Financial & Accounting Services Ltd  |  Keeping Klient Knowledgeable

HMRC has set out proposals that would require close companies to give more detailed information about transactions between the company and its participators. The aim is to tackle the £14.7bn small business tax gap. These are proposals rather than rules, so details could change, but the direction is clear.

What is being proposed?

The reporting would cover transactions such as:

•     cash withdrawals

•     transfers of assets

•     dividends

•     loans and repayments

•     releases of loans

Does this affect your company?

Very probably, if you own and run a small business. A close company is one controlled by five or fewer participators, or by any number of participators who are also directors. A participator is anyone with a share or interest in the company’s capital or income. In practice, nearly all small owner-managed and privately owned companies would be caught.

Why is HMRC doing this?

HMRC accepts that under-reported income and over-claimed expenses both feed the tax gap, but these proposals focus on transactions between a company and its owners. Its concern is that the line between company money and personal money can become blurred, creating room for both honest mistakes and deliberate non-compliance. Better data could help it spot disguised distributions and mismatches between company and personal returns.

The concerns

Commentators have pointed out some difficulties. Genuine director’s loans, dividend timing, expense reimbursements and family business transactions can look unusual without the commercial background, so there is a risk of thousands of time-consuming queries about entirely legitimate transactions. The key question is whether HMRC can separate real risk from noise.

There is also a worry that the most reliable data will come from businesses that already comply, while those deliberately avoiding the rules may not engage. Some suggest clearer guidance and risk-based reviews of existing data would work better.

What could change in practice?

•     More detailed and possibly more frequent reporting for many owner-managed companies.

•     Greater scrutiny of payments between the company and its owners or directors.

•     Smaller items could count. Even reclaiming a business expense paid on a personal credit card might become reportable.

•     Less flexibility. Taking cash first and sorting out the paperwork later would become harder, particularly where loans or dividends need to be regularised.

What you can do now

1.      Separate business and personal money. Use the company account for company costs and keep a clear trail for anything paid personally.

2.      Keep your director’s loan account up to date during the year, not just at the year end, and avoid accidental overdrawn balances, which can create tax charges for both the company and the director.

3.      Document everything. Use proper dividend paperwork and written loan agreements where appropriate.

4.      Plan your cash flow so dividends and loan repayments are made on time.

5.      Talk to us early. More frequent record-keeping is easier with regular support than with a year-end clear-up.

Good records are valuable anyway, especially if you plan to seek finance or investment. We will keep you informed as the proposals develop.

KEY TAKEAWAYS •     HMRC proposes more detailed reporting of transactions between close companies and their owners. •     Nearly all small owner-managed companies would be caught if the plans go ahead. •     Start now: separate finances, keep loan accounts current and document dividends.