As Government spending rises and HMRC constantly try to find more tax revenues, closing the perceived “tax gap” is a perennial concern.
One area which has particularly attracted attention is the small company sector. According to a report published on 19 March “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”.
HMRC expects to make progress in both these areas but are initially looking to implement procedures to focus on the level of shortfall in order to be able to crack down on the amounts of tax apparently lost.
The consultation, which ran from 19 March to 10 June, covers both private companies and their shareholders/ directors (in HMRC terms “close companies and their participators”) looking at:
• mandatory 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 intention appears to be a requirement for to require close companies to provide detailed information of internal transactions including:
• sales and purchases of assets to or from the company
• dividends or other distributions
• any other transfer of value from the company to the participator.
The consultation does not make it clear how frequently such reports will be required, the options presumably being a single report as part of the annual corporation tax return or more regular reports along the lines of the quarterly “making tax digital” legislation.
One aspect which is likely to come under scrutiny is the tendency for some company directors is to withdraw funds as required over of the financial year with the accountants sorting the tax aspects after the year end. This normally involves the payment of a dividend between the year end and the filing of the accounts to cover both the amounts withdrawn and the notional interest on the balance – more regular reporting would presumably accelerate the payment of the dividends and possibly move the personal tax liability into an earlier year.
There is also a danger that if such dividends have not been properly evidenced there is an argument that the payments which have been charged to the loan account are not loans at all and that PAYE and NIC should have been charged at the time the payments are made.
However, irrespective of what the consultation might conclude, it is clear that HMRC are already pressing ahead with the factfinding. The 2025/26 tax return pages for SA102 directors and employees now include a requirement to disclose:
• Whether they are a director of a close company
• The identity of the company
• The amount of dividends received
• The proportion of shares held.
Clearly the intention is for to HMRC to link dividend income to specific companies and to identify discrepancies between personal tax returns and company results
The consultation concludes that “The government expects to explore other ways in which to address the small business CT gap in future”
Aside from the point that HMRC have begun the collection of data before even publishing the “consultation” (which might lead the cynical to question the value of even making a response) it is worth considering which genuine business activities might be fall within the terms of the proposed rules:
• Limited companies within an existing partnership (quite common in agriculture)
• Rental arrangements (which will not always be at arm’s length terms) with participators
• Parallel businesses in corporate and non-corporate structures which trade together on a regular or even daily basis.
It is clear that in addition to the requirements of the 2025/26 tax returns there will be future reporting requirements in the near future, and clients will need to ensure both that accounting systems are able to extract the necessary reports and that dividend processes are fully compliant in future.
If you require any advice with regard to the above, please do contact Nicola Tarry FCA at Mapus-Smith & Lemmon LLP, Hunstanton office on 01485 534800 or ntarry@mapus.co.uk
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