HMRC is watching YOU!
HMRC and the government believe there is a tax gap in relation to small businesses. Given the ‘black hole’ in the government’s finances, they’re clearly desperately looking for ways to reduce borrowing. ‘Someone’ has estimated that this tax gap is in the region of £14.7 billion.
HMRC is increasing its scrutiny and disclosure of transactionsbetween close companies and their shareholders.
A close company is one that is controlled by five or fewer shareholders. The target is owner managed and family business within the small and medium company sector.
HMRC are currently in the consultation phase, so there are no set dates or information on exactly what information will be required to be reported to HMRC, but the consultation has outlined close companies may need to disclose details on the corporation return of the following:
- Loans given to shareholders and loan repayments made in an accounting period
- Shareholders drawings
- Dividends paid
- Transfer of assets between the company and shareholders
- Personal expenses paid by the company on the shareholders behalf
- Write off of shareholders loans.
It is important to stress this is not legislation as yet, but the fact HMRC are looking at this area and issuing consultation suggests it could be on the cards in future.
Get your house in order
The best plan is to ensure yourdirectors/shareholders loan accounts are in order before increased reporting legislation comes into play.
Best practice would be to review your current bookkeeping and recording of payments to shareholders as soon as possible, to ensure, when these transactions are reported to HMRC, there is nothing that could, potentially, trigger enquiry from them.
Strategies that will reduce that risk are to:
- Cease all personal payments from the company.
- Set a monthly dividend payment and, when profits and taxation are assessed after the business’s year end, vote a bonus dividend.
- Keep track of business expenses paid personally and ensure these are recorded as funds owed to you by the company, so that the repayment of expenses can be matched to these.
- Ensure loans from the company to a director or shareholder are recorded as a loan not a dividend and prepare the necessary paperwork from the shareholders to agree this loan.
New self-assessment disclosures from 2025/26
While closing the tax gap is still at the consultation stage, the new self-assessment disclosure requirements are already in place.
You can check out the Income Tax (Additional Information to be included in Returns) Regulations 2025, which states that self-assessment returns relating to the 2025/26 tax year onwards must be applied. As it’s now after the end of that tax year, it’s time to take action.
Previously there was just a box for dividends received on the self assessment tax return, but no detailed breakdown was required. Now that’s changed and, where the company is a close company, the director must disclose on their self-assessment tax return:
- The name of the close company.
- The company’s registered number.
- The amount of dividend income received from that close company during the tax year (including nil where applicable).
- The highest percentage shareholding held during the tax year.
HMRC’s AI tools will check out this information against Companies House and other sources to validate what’s in the return, so ensure you’re quoting accurate figures.
And, if you need a hand, just give us a call on 01992 554444.
