Host

• Stephen Relf, Technical Manager, Tax, ICAEW

Guests

• Angela Clegg, Tax Technical Manager – Business Taxes, ICAEW
• Katherine Ford, Tax Technical Manager – Personal Taxes, ICAEW

Producer

• Ed Adams

Transcript

Stephen Relph: Hello, and welcome to the Tax Track, the podcast series from ICAEW, exploring the latest developments in the world of tax. Close companies and their directors are in HMRC sights as it attempts to close the small business tax gap. In this episode, we'll look at new information requirements for directors completing their self-assessment tax return for tax year 2025-2026, and the challenges those requirements pose.

[Teaser audio] Katherine Ford: The government believes that improving the information provided to HMRC will deliver better outcomes for taxpayers and businesses, as well as improving compliance, resulting in a more resilient tax system.

SR: And we'll explore the government's proposals to impose additional reporting requirements on close companies, proposals that ICAEW believes will place unnecessary strain on compliant businesses.

[Teaser audio] Angela Clegg: The biggest problem is that business expenses are not currently recorded by participator, even in highly digitised environments, so much of the information won't be a simple download from the existing systems.

SR: I'm Stephen Relph, a Tax Technical Manager at ICAEW. Today I'm joined by two colleagues from the Institute's Tax Faculty, Katherine Ford and Angela Clegg. Katherine is Technical Manager for Personal Taxes and Angela for Business Taxes. Welcome, Katherine and Angela.

AC: Hello.

KF: Hi, Stephen.

SR: Now, I'd like to begin this episode by taking a few moments to explain some of the terms we'll be using in this episode, that is 'close company' and 'participator'. I will include links in the show notes to detailed guidance, but broadly, a company is a close company where it's controlled by its directors or by five or fewer participators. A participator is someone who has an interest in the capital or income of the company, for example, a shareholder. Angela, have I got that right?

AC: That is a good summary, but like most things tax, it can get quite complicated. So another rule to remember is that this legislation requires you to add in the shareholdings of some of your relatives. So for example, if you had 'Mum owns 40% of the share capital, daughter owns 20% of the share capital', these would be added together and the legislation would assume that was one participator owning 60% of the share capital and therefore having control. What the rules are trying to do here is they effectively assume that close relatives can act in concert and collectively work together to control the company, and therefore they're not viewed as separate participators, they're aggregated together.

SR: So that does indeed sound quite complicated. Is it fair to say, as a general rule of thumb, that if you're a small or medium-sized company then it's very likely that you're a close company?

AC: In fact, an awful lot of companies are close and the population is quite diverse. We have some very large family-owned businesses in the UK that are in fact close. Perhaps one of the most common structures is single shareholder of a company or husband and wife ownership. These companies would be close. So we see an awful lot in the UK.

SR: So then let's move on to the information that directors must provide when they complete their 25/26 tax return. We have published an article on this, which covers all the key points in detail, and there will be a link to that in the show notes. But Katherine, could you start us off by quickly running through what additional information directors will need to provide?

KF: So this is really a data gathering process for HMRC. So on this year's employment pages, we've got some extra boxes added. First of all, the individual needs to indicate if they are a director. If they are, they then have to indicate whether it's a close company, and if you have a close company, then you have to put the name of the close company in and its company registration number. You also need to show the dividends that the individual received from that close company during the tax year and their percentage shareholding in the company.

SR: Now, on the face of it, there is a lot there, but it doesn't sound too onerous because much of that information should be readily available. But that final point there, determining the percentage holding, I guess that could be challenging in some circumstances?

KF: It certainly can. For example, you are required to use the nominal value of all shares in the company, so that will affect multiple share classes as well, so it's not just your voting rights or your dividend rights. It's purely the nominal value of shares that you are reporting here when you fill out that percentage box. Bear in mind, we are applying the corporation tax close company rules. So as Angela said, you need to potentially aggregate holdings of relatives and potentially some trust holdings might need to be aggregated as well, and if your shareholding has changed during the year, you have to show the highest percentage during the tax year.

SR: There are some other complications too, aren't there, Katherine? So just looking at the article, we do identify some areas of uncertainty, including where the taxpayer doesn't receive any remuneration for their role where they have multiple directorships, and also where they are a director of the company but do not hold shares in it. Could you talk us through those starting with unpaid directorships?

KF: Of course. So where there is no remuneration, the notes generally to the employment pages suggest that you do not need to complete the employment pages. But that is where the information at this point needs to be provided. So this is one of the issues we have asked HMRC to clarify, because previously you could just put the information in the white space. If HMRC still wants an employment page and the company doesn't have a PAYE scheme, the HMRC guidance is to use none, the word 'none' as the PAYE reference. If your software does reject that, then the advice potentially is to use 000/N as the PAYE code in order to get those pages submitted.

SR: Okay. That sounds like really helpful guidance there for taxpayers who find themselves in that position. Should we move on then to multiple directorships? What's the issue there?

KF: So the issue is that some software limits the number of employment pages to eight. Now, I can't imagine many people would ever envisage having to complete more than eight employment pages, but it will be a problem for professionals who act as directors of multiple charitable companies, where to all intents and purposes they are trustees, except at Companies House, where they are classed as directors.

SR: And finally, we have where the taxpayer is a director, but not a shareholder, and I guess that must be fairly common?

KF: Absolutely, yeah. It's possible to be a director, but not a shareholder. So if you get an error message when you're trying to submit a return, then depending on your software, you may need to put zero entries in some of these additional boxes on the employment pages for the data gathering, rather than just leaving them blank. But these are all points that we are waiting for HMRC to clarify.

SR: Yeah, and we will come back to this in a future article when we do get those answers from HMRC. But before we move on, Katherine, do you have any advice for taxpayers and agents when it comes to these additional information requirements?

KF: So we would suggest that you're aware and prepare gathering data from clients so that tax return submissions are not delayed. Keep your eye out for the updates that we'll provide once we've heard back from HMRC. If there are any other issues with these boxes that come up, then people are welcome to drop me an email.

SR: Thank you, Katherine. I think that's been really helpful, and hopefully a lot of people will have become aware of a situation that could well be problematic in the future. So then let's now move on to companies and to a consultation document published in March, which requires close companies to report deals of transactions with participators to HMRC. Now, Angela, what types of information is the government looking at here?

AC: Well, this appears to be very much a grassroots consultation document in that the government and HMRC are seeking views and further information to shape what the final law might look like. But currently, they are interested in most transactions between the company and its participators. So we're looking at things like cash withdrawals, loans, transfers of assets to and from the company by the participator, dividends, so an awful lot of information. They haven't mentioned anything about employment income paid to participators and directors because this is very readily available as part of the real-time information submissions. Now, in terms of what information the consultation documents suggest they might be interested in, for each transaction, the suggestion was the amount, the date, the recipient's name, address, and National Insurance number. So quite wide in scope.

SR: Yeah, indeed. That seems like quite a lot of information. Now, assuming the government goes ahead with this, how often would companies need to report that information?

AC: Well, as I said earlier, it's very much grassroots consultation at the minute, so there's no formal decisions on anything, but we consider it most likely that this will be an annual reporting requirement linked to the corporation tax return filings. That's certainly been our suggestion, and we understand that HMRC have received a lot of other similar feedback in this regard, so we anticipate that this is where they'll land on this issue, but there are no guarantees.

SR: Okay. So I know that ICAEW has responded to the consultation, and Angela, you were heavily involved in that. What conclusions did we come to in the response?

AC: Well, our biggest concern is the administrative burden that this will place on businesses. The biggest problem is that business expenses are not currently recorded by participator, and this is the case even in highly digitised environments, so much of the information won't be as simple as a download from the existing systems. So if we think about reimbursed expenses, travel and subsistence, fuel scale rates, all these things would not be recorded per shareholder. Even with dividends, the company would tend to keep one nominal account, and any reconciliation by a shareholder would be done by the participator's personal tax advisor, and that would be on a tax year basis. So we are concerned that, in its existing form, it would pose a significant burden to businesses. This is exacerbated by the fact that there is no suggestion of a de minimis or any exceptions, so any types of expenses or transfers that would be excluded, so this could make it more problematic.

SR: So quite a lot there that we're concerned about, but I think we've also made some recommendations to improve this, haven't we? Could you chat us through those?

AC: Well, we are really urging HMRC to consider looking at the information already available to them rather than imposing significant burdens on businesses. So this is information through the corporation tax filings, the iXBRL tagging in the accounts, those filings, the personal tax returns. We understand that there are some limited disclosures for micro-entities, and they might need some targeted measures, but we think as it currently stands, that there should be some information that they can look at that they already have. Another big recommendation was that HMRC should focus on transfers of value, so not any transfer, and if the government were to focus on transfers of value, that should limit the disclosure considerably and also remove the need to disclose a lot of transactions which are effectively tax neutral and shouldn't pose a tax risk. Similarly, transfers of value we would expect to be being identified by companies anyway and disclosed accordingly.

SR: So that all sounds quite positive, and let's hope the government does take that feedback into account. Now, with these proposals and the changes to the self-assessment tax return that we talked about earlier, the government does seem to be taking a keen interest in close companies and directors. Why is this?

KF: The government believes that improving the information provided to HMRC will deliver better outcomes for taxpayers and businesses, as well as improving compliance, resulting in a more resilient tax system. Obviously, a lot of this information is piecemeal at the moment, so it's part of pulling data together for HMRC so they better understand businesses and where tax risks are.

AC: I think the justifications the government has given for the company proposals are very similar. They use the phrase they don't believe they're receiving the full picture around how companies interact with their participators and that further action is needed to reduce evasion and error. Now, to a degree, we do understand this. The affairs of a close company and the affairs of its participators are naturally more blurred than in a highly regulated environment, so we do understand that the risks are more acute.

SR: So I think as well the motivation, certainly for the close company one, was to reduce or close the tax gap. I know that comes up a lot in the Tax Track podcast, so a quick recap: the tax gap is a difference between the tax HMRC expects to collect and the amount it actually does collect. In recent years, the small business share of the tax gap has been growing. It was 40% for 2017/18, 62% for 2024/25, and corporation tax does make up a significant part of this. Angela, do we think that the government's proposals for close companies will close the tax gap?

AC: We had a lot of feedback from members that they do not think this, these measures will have a significant impact on the tax gap whilst placing unreasonable demands on taxpayers. I think they're also very unlikely to deter evasion and deliberate misconduct. We think it's far more likely that these taxpayers will simply not disclose these transactions. So, we feel that the burden will fall on compliant taxpayers without addressing the concerns of the government around the tax gap.

SR: So if not this measure, what should the government be doing to try and close the tax gap?

AC: Our biggest feedback is that there needs to be a credible risk of inquiry in this small business space. Now, this needs to be targeted and proportionate and done with minimal disruption to compliant taxpayers, and that will rely heavily on it being appropriately resourced by HMRC with suitably trained staff. Now, what we don't want to see is what we saw in R&D, which was volume-based inquiries driven by large scale data collection, and that did have significant disruption on compliant taxpayers. But, we do feel that to address the hidden economy and non-compliance, there really does need to be more compliance interventions and inquiry work.

SR: So do you think that the government's plans for small companies will stop at these proposals, or is it likely that more changes could follow?

AC: Well, there was certainly a hint in the consultation document. I think it actually explicitly said the government expects to explore other ways in which to address the small business CT tax gap. This does accord with our wider interactions with Treasury and government that we know that this is a focus of the existing government.

SR: So then very likely we'll come back to this again in articles and in the podcast. That is all we have time for today. As usual for the podcast, we have covered a lot of ground, but I think there are two key takeaways from this episode. So first, if you have self-assessment tax returns to complete between now and the end of January, please do remember those new tax return boxes. Second, if you're a close company or the agent, do keep an eye out for developments with regard to the consultation. We will of course cover the government's response in our tax news service when it's available. Many thanks Katherine and Angela for your contributions.

KF: Thank you.

AC: Thank you, Stephen.

SR: And thank you for listening. All of the topics we've discussed today are covered in more depth in the articles linked in the show notes. If you found this useful, then don't forget to subscribe so you never miss an episode. You can rate and share the podcast too. We'll be back next month with the next Tax Track. In the meantime, why not check out the sister podcast from ICAEW. Accountancy Insights provides business, finance, and accountancy analysis, while each episode of Behind the Numbers offers a deep dive into a selected topic. There's also the Students Podcast aimed at young professionals. To keep up with the latest developments in tax, please make sure to subscribe to our weekly TaxWire newsletter. Tax faculty members also have access to our in-depth Tax Line articles. Thank you for listening.