Reporting company payments to participators: HMRC consultation

HMRC has published a consultation on proposals to introduce new requirements to report transactions between close companies and their participators to HMRC. The consultation seeks responses on these proposals, including the scope of the transactions to be included and the specific requirements as to what will need to be reported, including the format and timing.

The government is particularly concerned at the level of the small business tax gap and considers that transactions between small businesses and their owners is a significant factor in the scale of the gap. The proposal to require detailed reporting of transactions between close companies and their participators is designed to enable HMRC to police this risk factor more actively, whilst noting the importance of not imposing unnecessary administrative burdens on those affected businesses. However, the proposal to apply the reporting requirements to intra-group corporate transactions creates the prospect of very significant levels of reporting where there is substantial intra-group activity.

Background

The consultation notes that the small business tax gap is 60% of the overall tax gap, and the small business corporation tax gap makes up a significant proportion of this. This tax gap has been increasing and for 2023/24 stands at 40.1% of the small business theoretical corporation tax liability. One of the predominant risks identified by HMRC relates to error and evasion in transactions that occur between a company and its owners.

HMRC considers that the risks are particularly acute with close companies, where there may not always be a clear distinction in practice between the company and its participators, and the merger of interests and finances can both encourage error and facilitate evasion. Close companies are those controlled by 5 or fewer participators, or by any number of participators who are directors.

On one hand, some companies and their participators do not fully understand the significance of operating through a company and the associated obligations, where there is a failure to distinguish between the company’s and the participator’s monies. On the other hand, the level of control allows close companies to easily structure their affairs to minimise the tax charge on participators, ranging from benign planning to aggressive avoidance.

It is clear from the focus on the consultation that a key area of concern for HMRC are the loans to participator rules. Where a participator takes a loan or extracts value from a close company otherwise than by way of a distribution or as employment income, it falls within the loans to participator regime. The regime charges tax on the company at the dividend upper rate of income tax on the value of: any loans to participators; any benefit conferred on participators which is not otherwise chargeable to income tax; and any other participator indebtedness to the company, which is outstanding more than 9 months after the end of the company accounting period in which the loan was made or the indebtedness arose.

When the participator repays their debt, the company can make a claim to HMRC for relief or repayment of the tax charge. However, if the company releases or writes off the loan or indebtedness, then the participator is charged to income tax on the amount released or written off as if it were a dividend.

Consultation

In view of these issues around close companies, the government is consulting on plans to require close companies to provide detailed information of transactions between the company and its participators, including:

• payments, via cash, bank transfer or otherwise
• sales of assets to the company
• purchases of assets from the company
• dividends or other distributions
• any other transfer of value from the company to the participator.

The proposed reporting requirements would capture details of any repayments made by a participator to the company and the government is proposing to extend the requirement to also include instances where close companies release or write off loans to their participators. Providing the date and amounts of any releases or write offs will enable HMRC to be aware of any relief due to the company or any tax charges due on the participator.

The proposal is to require details in relation to all participators, including corporate participators, not just from individual participators. This may be complicated when the close company is part of a group and there are a significant number of intra-group transactions. The government will also explore whether the benefits of these proposals could be enhanced by making associated changes to the personal tax reporting framework. To allow HMRC to cross-reference the data with that from the participator’s Income Tax Self-Assessment return, HMRC will need the identifying details of those participators.

The method and frequency of the provision of the information is yet to be decided. The government does not want to impose any greater administrative burden than necessary, which may suggest that an annual reporting cycle tied to the existing company tax return should be preferred. However, the government is keen to understand if stakeholders see any benefit in more regular or real-time reporting. Possible methods include an update to the CT600A or to the Company Tax Return more widely, or a more bespoke digital solution.

Comments

The consultation will run until 10 June 2026. Responses to the consultation can be made by submitting this form by 10 June 2026.

Queries about the consultation can be sent by email to closecompanyconsultation@hmrc.gov.uk, which is also the address to use if stakeholders wish to contribute through round tables and other events which may be organised by HMRC.

The consultation notes Making Tax Digital (MTD) model which applies to VAT and Income Tax Self Assessment will not be introduced for corporation tax. However, HMRC is looking to work with stakeholders to develop what the future administration of corporation tax should look like, and how to best accommodate the wide range of entities and situations within the corporation tax framework. In particular, the government expects to explore other ways in which to address the small business tax gap in the future.