Proposed Changes to The Reporting on Close Companies

The window for consultation on the proposed changes to Close company reporting is now closed. If the measures go forward as set out, it will lead to a significant change in the way that owner-directors engage with their companies. 

Close company definition

In simple terms, a close company is a company owned by its directors or five or fewer shareholders (called participators by the legislation). The vast majority of owner- managed companies are close.

Proposals

The proposals set out that information on date, amount and recipient for all transactions between it and its participants must be disclosed to HMRC, and this includes cash withdrawals, loans, debts, dividends and other distributions and transfers of assets to and from the company. The timing of providing the information will likely tie in with the current reporting framework.

Implications

For those who draw a clear line between their company and their personal affairs, the proposals simply mean reporting of information that is already readily available and well organised. For those who see the company as an extension of themselves and view the company’s money as their own are in for a rude awakening. Changes in behaviour will be required, or significant extra time will be needed to ensure compliance, likely meaning extra cost.

Inevitably, those who blur the line between the two will fall foul of the new regime, and of course, it is likely to be those who are running smaller businesses where the owner needs the cash to make ends meet. Hence, the cost burden will fall harder on them than on others.

Summary      

Coupled with the changes to the reporting of dividends from the 25/26 tax year, the approach to owner directors by HMRC has hardened significantly. Perhaps there is significant non-compliance in this area; if there is, we don’t witness it, so I hope that in targeting this group of taxpayers, HMRC have chosen the right focus for their efforts and can manage the tidal wave of information they will receive without further compromising service to taxpayers.