Stricter Tax Oversight for Close Companies Proposed: A Guide to New Transaction Reporting Requirements
- TBA
- Jul 1
- 5 min read
Small, owner-managed, and family businesses play a vital role in the economy. However, an issue that cannot be ignored is the widening tax gap among small businesses.
Currently, the small business tax gap accounts for 60% of the overall tax gap, with the Corporation Tax component being particularly prominent. In the 2023 to 2024 tax year, this gap reached £14.7 billion, representing 40.1% of the theoretical Corporation Tax liability for small businesses.
Recently, the government published a new consultation document planning to introduce stricter information reporting requirements for 'close companies' to strengthen tax oversight, reduce tax loss, and narrow the small and medium-sized enterprise (SME) tax gap.
Why strengthen oversight?
The consultation document proposes to require 'close companies' to report details of their transactions with 'participators' to HM Revenue and Customs (HMRC), including the amount and date of each transaction, as well as information about the payee.
The document notes that due to the close relationship between close companies and their participators, such structures are more susceptible to tax loss risks. Although current regulations already address some scenarios (for instance, loans provided by a company to a participator must be reported and taxed under specific circumstances), HMRC believes it still lacks a comprehensive overview of relevant transactions.
Therefore, introducing new reporting requirements is deemed necessary to reduce tax errors and evasion, and to further narrow the SME tax gap.
What is a 'close company'?
Broadly speaking, a company is typically classified as a close company if it meets the following criteria:
It is controlled by five or fewer participators, or
Any number of participators are also directors.
Here, a 'participator' refers to any individual or entity that has a share or financial interest in the company, including shareholders, loan creditors, and anyone entitled to a share of the company's income or assets. This definition encompasses not only direct shareholders but also related parties holding share options or similar rights.
In practice, the vast majority of private limited companies fall into this category.
For example, a typical owner-managed business, usually consisting of just one or two members who act as both directors and shareholders, will almost certainly be treated as a close company.
Although companies of all sizes in theory could be classified as close companies, in reality, this classification predominantly applies to SMEs.
Proposed transaction types and information to be reported
Under the proposal, close companies would be required to report on a wide range of transactions with their participators, including:
Cash withdrawals, loan arrangements, debt agreements, and dividend distributions;
Other forms of asset transfers or benefit distributions (whether flowing from the company to the participator or vice versa).
However, employment income that is already reported through the Real Time Information (RTI) system, such as salaries paid to directors, would not be included in these new reporting requirements.
For each transaction within the scope, companies are expected to provide detailed information, including the transaction amount, date, and the identity of the payee, such as their name, address, and National Insurance number (NINO). If a company is unable to obtain the relevant individual's NINO, it may need to provide additional supporting information to help HMRC accurately identify the other party to the transaction.
Reporting mechanism and timeframe
The government has not yet finalised the specific reporting mechanism, but it leans towards annual reporting, potentially linked to the existing Corporation Tax return. At the same time, it is evaluating whether there is a need to introduce more frequent or even real-time reporting mechanisms.
It should be noted that while the exact implementation date for the new rules has not yet been announced, it is expected that the current general penalty regime will apply.
Furthermore, the government has indicated it does not rule out the possibility of introducing specific penalties for the deliberate concealment of transactions.
The consultation period closed on 10 June 2026, and the industry is now awaiting the government response.
Existing anti-avoidance regimes and practical operations
There is in fact already a relatively comprehensive regulatory framework targeting common tax avoidance behaviours within close companies, the core of which is the loans to participators regime.
Loans to participators regime
Under current rules, if a company provides a loan or an untaxed benefit to a participator, or if a participator owes a debt to the company, and the relevant amount remains unpaid nine months after the end of the accounting period, the company is required to pay an additional tax charge set at the higher dividend rate.
Although the company can claim a refund of this tax once the debt is finally repaid, if the debt is released or written off, the relevant amount is treated as a dividend, and the participator must pay individual Income Tax accordingly.
Director's loan accounts
In practical business operations, many SME owners withdraw funds from their company for personal expenses.
These funds are often not immediately processed as salary or dividends but are initially recorded as a 'loan' in the company's books and allocated to what is known as a director's loan account (DLA).
The issue is that without proper record-keeping and management, such accounts can easily become high-risk areas for tax compliance, involving situations such as long-term outstanding balances, unclear usage of funds, or deliberate avoidance of dividend tax.
A word from TB Accountants
Alongside strengthening oversight at the corporate level, recent years have also seen improvements to the personal tax reporting system.
From April 2025, company directors have been required to disclose more information when submitting their personal Self Assessment tax returns, including basic details of the company they work for, dividend income received, and their shareholding percentage. This aims to further enhance transparency and strengthen the cross-checking capabilities of tax data.
At the same time, although the government has decided to pause the rollout of Making Tax Digital for Corporation Tax, it has clearly stated its intention to collaborate with stakeholders to explore future optimisations of the Corporation Tax administration system, and to continue researching other policy tools to narrow the SME Corporation Tax gap. This series of initiatives indicates that the future development of the tax system will place a greater emphasis on information connectivity, data transparency, and structural coordination.
Overall, the focus of the latest tax measures is on improving transparency and compliance rather than simply increasing the tax burden. For the majority of legally compliant SMEs, this is an opportunity to strengthen management and reduce tax risks.
By standardising financial records and establishing clear boundaries between company and personal funds, businesses can improve their resilience and credibility under strict regulatory scrutiny.
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