In a recent consultation, HMRC is intensifying its crackdown on transactions between ‘close’ companies and its participators, including directors’ loan accounts, targeting overdrawn accounts and undeclared written-off loans.
The move has been designed to target the £14.7 billion small business tax gap, which hit a record high in 2024, and represents 40% of small business corporation tax liability.
Our Tax team explain the proposed changes to reporting requirements and what the stricter measures mean for companies and their directors.
Who will be impacted by this?
The clamp down on the potential non-compliance of ‘close’ company loans to participators will affect owner-managed businesses and small companies, although HMRC has not yet stated a specific number that are likely to be affected by the changes in reporting requirements being considered by HMRC as part of this ongoing consultation. A ‘close’ company is one that is controlled by five or fewer participators or any number of directors who are also shareholders.
There is also no timeline for when the changes will come into effect, or confirmation of what these changes may be, but it is likely that there will be feedback within the current tax year.
The consultation sets out proposals to introduce new reporting requirements for transactions between close companies and their participators (directors and shareholders) to HMRC with detailed reporting.
How will this affect directors’ loan accounts?
Under the proposals outlined in the consultation, it is anticipated that new reporting requirements would highlight details of any transactions involving a participator, with companies required to inform HMRC of each individual transaction as part of the corporation tax return.
The proposals in the consultation indicate there will be an exception from this additional reporting for information that falls under the Real Time Information (RTI) system reporting that HMRC currently has in place for employment income, such as salaries.
The government is proposing to extend the requirement in future to include instances where close companies release or write off loans to their participators, and it will also require much more detail on dividend transactions and gains.
What does this clampdown mean for company participators?
The proposals for additional reporting requirements in relation to transactions involving participators is another sign that HMRC is increasing scrutiny of ‘close’ companies and their directors.
From April 2026, participators of close companies are required to include more detailed information on their personal tax returns.
This will cover not only the dividends they receive from close companies but also details of their shareholdings, with the percentage shareholding in a close company being disclosed on the 2025/26 tax return. These changes follow closely behind a further 2% increase in dividend tax rates from April 2026, underlining HMRC’s tougher approach to this area.
Alongside the proposals to increase reporting requirements of close companies, this will give HMRC a deeper insight into transactions and loan activity, while it states one of its objectives is to ensure correct compliance.
I am a company participator – will this impact me?
To avoid potential penalties for failing to comply with the new self-assessment requirements from April, as well as the proposed changes for companies, our team can provide further guidance on these changes, and the actions companies and their participators may need to take. Get in touch today to see how we can help.
