HMRC, in their continuing quest to reduce the tax gap, are including in their focus ‘close’ companies. Whilst the stated target is small companies (which they believe account for 60 percent of the overall tax gap), the definition of a ‘close’ company (see below) is much wider than that and this initiative will impact most privately held companies, including those which are private equity backed.
HMRC have identified two key risk areas around small businesses:
- The under-reporting of income and over-claiming of expenses; and
- Error and evasion in respect of transactions between the company and its owners.
It is in respect of the second of these risks that HMRC have announced proposed measures – specifically they are considering introducing reporting requirements for transactions between ‘close’ companies and their ‘participators.’
The current proposal is 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 Real Time Information (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. At present the only additional reporting that ‘close’ companies are required to undertake is in respect to the loans to participators charge (e.g. when a company makes a loan to a shareholder which is not repaid within nine months of the year end). The scope of the proposed new requirements goes far beyond this.
HMRC appear cognisant that such a reporting requirement will create an administrative burden on companies and have published a consultation titled “Reporting company payments to participators — modernising the reporting framework “, ending 10 June 2026, with the aim of better understanding how businesses retain records of transactions with participators, along with current levels of awareness of the rules affecting close companies and methods of reporting. Individual businesses are able and encouraged to respond to the consultation with their views.
The focus on small companies by HMRC is understandable as there can sometimes be a ‘blurring of the lines’ between a company and its shareholder. HMRC have stated that the intention is, by making companies focus more on transactions with shareholders and reporting them, it will create a better understanding of the relevant tax obligations and work to ensure that companies and their shareholders pay the right amount of tax. For some smaller owner managed businesses, the proposed reporting may have the desired effect. However, as no tax changes are being proposed, for companies which are already fully compliant with the tax rules around transactions with participators (as is generally the case for larger owner-managed business and private equity backed businesses which often have more robust corporate governance measures in place), this proposal will simply add yet another additional compliance obligation.
A ‘close’ company is one that is controlled by five or fewer ‘participators’ or any number of directors (who are also participators). Typically, private equity backed businesses have been considered ‘close’ due to their partnership structures and the role of the general partner. A ‘participator’ is broadly a shareholder or loan creditor (excluding entities such as banks lending in the course of their business) of the company. One of the challenges that is likely to arise from these proposals is the need to identify all participators of the company so that all relevant transactions, including completely benign ones, are reported.
Affected businesses are encouraged to respond to the consultation. Please speak to the authors or your normal KPMG in the UK contact if you have any questions or comments on these proposals.
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