Reporting requirements for close companies to grow

Tucked away among the more eye-catching announcements at last year’s Budget was a line indicating HMRC would be taking a closer interest in the interactions small companies have with their shareholders. With the publication of a new consultation, Reporting company payments to participators – modernising the reporting framework, on 19 March, we now have more of an idea what this might look like.

Who is in scope?

The consultation sets out proposals for additional reporting of transactions between close companies and their participators to HMRC.

As a reminder, a company is ‘close’ if either:

• it is under the control of five or fewer participators, or any number of participators who are directors, or

• in the event of a winding up, more than half of its assets would be distributed to five or fewer participators, or to participators who are directors.

A participator is any person who has a share or interest in the capital or income of a company.

So effectively, most small and owner-managed businesses will be close companies and their shareholders will be participators.

What’s the problem?

The main reason for the proposed changes lies in the tax gap.

The latest estimates show that small businesses make up 60% of the overall tax gap for 2023/24, a figure that has increased over the past five years (from 48% in 2019/20). In the same period, the corporation tax gap has increased from 24% to 40% of the overall tax gap.

HMRC is concerned that the drivers for these increases may be particularly acute in close companies. For example, participators may not have a clear distinction between company funds and their own (anyone advising small companies will know it’s not uncommon for shareholders to dip into the company funds). The level of control seen in close companies can also lend itself to planning, structuring and even avoidance to minimise participator’s tax liabilities.

Establishing the current position

The consultation not only sets out HMRC’s plans to address these issues, but also asks a number of questions to establish the current situation.

These include how well understood the close company and loans to participators rules are among the small company population. There are also questions about how small companies currently keep records of transactions with participators, and where they get advice from – is this predominantly agents, or other sources?

It may be challenging for HMRC to get answers to these from small companies. Those with the time and resources (not to mention awareness) to respond to consultations are often professionals or representative bodies – not taxpayers themselves. However, getting input from unrepresented small companies directly will be key to properly targeting any changes.

What’s proposed?

The consultation proposes that close companies will be required to provide detailed information on a wide range of transactions with participators, including:

• any payments (whether by cash, card, bank transfer or other method)

• sales/purchases of assets to/from the company

• dividends and other distributions

• any other transfers of value from the company to a participator

• any repayments, write-offs or releases of loans to participators.

It is expected that, for each of these, the information to be reported will include the recipient’s identity, and the amount and date of each transaction.

Currently, the only exception being considered is where information is already reported to HMRC under Real Time Information (RTI) – for example, directors’ salaries or payrolled benefits.

The consultation doesn’t set out firm proposals as to the frequency of reporting. There are hints that, to limit admin burdens, this could be an annual cycle tied in with the company tax return. However, there are also references to the possibility of more regular or even real-time reporting. Methods of reporting suggested include updates to the CT600A or company tax return more widely, or a bespoke digital solution.

What are the concerns?

A main concern is the additional admin burdens that these proposals could place on an already overburdened small-business sector.

The consultation states that any new requirements should not introduce disproportionate burdens on companies and should build on existing record-keeping. However, striking a balance between HMRC receiving useful information and not imposing undue additional burdens is likely to be very tricky in practice.

This will especially be the case if HMRC goes down the path of more regular reporting. While pulling together information as part of preparing the company tax return may not impose significant additional burdens, any requirement to report more regularly or in real time would require a marked change to how businesses keep their records and interact with agents and/or HMRC.

The proposals also raise some specific practical concerns. For example, to allow HMRC to cross-reference the data received to self assessment returns, it is proposed that the recipient details would include their name, address and national insurance number. How will this work where there is no employment relationship (so the company does not hold the national insurance number) or where there are minority or indirect holdings involved?

Next steps

The consultation closes on 10 June 2026, and I would encourage anyone with clients who might be affected to send in their thoughts (however brief) using the online form. The more evidence that is presented to HMRC, the more chance we have of avoiding disproportionate admin burdens being imposed.

The next step in the process will be draft legislation, which could be published as early as this summer.

Whatever happens with this specific consultation, given the concerns over the tax gap, it is unlikely that this will be the last change proposed for small companies and owner-managed businesses.