Whilst attention may have been focused elsewhere in the latter part of the tax year, a consultation document released on 19 March may be worth some consideration in the near future.
“Reporting company payments to participators – modernising the reporting framework” is worth reading. HMRC have identified that “The predominant risks contributing to the tax gap in the small company population are:
- under-reported income and over-claimed expenses
- error and evasion in transactions that occur between a company and its owners
The proposals in this consultation are more directly focused on the second of those risks, but HMRC expects the information to be applied in finding and addressing, and in time preventing, the first.
The government is consulting on:
- proposals to mandate the reporting to HMRC of transactions between close companies and their participators
- the scope of the transactions to be included
- the specific requirements as to what will need to be reported, including the format and timing
- the consultation will run for 12 weeks starting on 19 March 2026 and ending on 10 June 2026
The government is therefore consulting on plans to require close companies to provide detailed information of transactions between the company and its participators, including:
- payments, via cash, bank transfer or otherwise
- sales of assets to the company
- purchases of assets from the company
- dividends or other distributions
- any other transfer of value from the company to the participator
Reading between the lines and in plainer English it seems likely that HMRC are not entirely happy where the approach take by some close companies is to withdraw funds as required during the course of the financial year leaving the accountants to identify the quantum of the overdrawn account after the year end. Providing that the accounts are produced timeously a dividend is then voted within nine months so that the overdrawn balance has been cleared by the time the corporation tax return is filed and no detailed disclosure is required. The notional interest on the account can also be calculated and charged to the loan account so that no benefit in kind arises. This leaves two areas in which HMRC may not like:
- Although the loan account may have been cleared retrospectively it is quite likely that further overdrawn payments may have been made between the year end and the date the dividend is voted, which may not be disclosed to them
- Unless an enquiry is raised, they cannot be sure that the interest has been properly calculated and no benefit in kind is chargeable
- They also cannot be clear that the dividends have been properly evidenced or are even legal (i.e. is there enough profit to even vote a dividend?)
- They might argue that if there is inadequate evidence or a proper paper trail, the payments which have been charged to the loan account are not loans at all and that PAYE and NIC should be charged at the time the payments are made.
The consultation also remarks ominously in passing that “The government expects to explore other ways in which to address the small business CT gap in future”
In terms of where this is likely to go the consultation states “The government is proposing that close companies provide HMRC with details of transactions between the company and its participators, including cash withdrawals, loans, debts, dividends, other distributions and transfers of assets to and from the company. Currently, the only exception the government considers may be appropriate would be items already reported to HMRC under the RTI system for employment income, such as salary paid to a director. At a high level, required details will include the recipient, amount and date of each transaction. However, any new requirements must be proportionate and not impose undue burden on businesses.”
Comments are required by 10 June.
*the views expressed are the author’s and not ICAEW’s