HMRC to clamp down on director’s loan accounts

Sara White, Editor, Business & Accountancy Daily. Croner

In a sweeping consultation, HMRC plans draconian reporting requirements on director’s loan accounts and participator loans to connected companies.

The move is designed to target the enormous £14.7bn small business tax gap, which hit a record high in 2024, representing 40% of small business corporation tax liability.

The proposals to clamp down on potential abuse of close company loans to participators will affect owner managed businesses and small companies although HMRC has not put a figure as yet on the number likely to be affected by the rule change. Likewise there is not a timetable for the changes, although it is likely to be introduced quickly as it is part of the government’s wider anti tax avoidance strategy.

HMRC pointed to a ‘a failure to distinguish between the company’s and the participator’s monies’, adding ‘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’. 

The consultation on close companies sets out plans to introduce new requirements to report transactions between close companies and their participators to HMRC with detailed granular reporting.

This will affect director’s loan accounts, which currently when a director’s loan to a participator is repaid, released or written off, then the company can claim back any section 455 tax (under CTA 2010) that has been paid.

Under the new proposals on director’s loan accounts, new reporting requirements would capture details of any repayments made by a participator to the company, with directors required to inform HMRC of transactions.

The government is proposing to extend the requirement in future to include instances where close companies release or write off loans to their participators. It will also require much more detail on dividend transactions and gains.

From HMRC’s perspective this move would give them much deeper insight into transactions and loan activity, while it says one of its objectives is to ensure the correct reliefs are paid out to directors.

The HMRC consultation states: ‘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 income tax charges due on the participator.’

The 20-question consultation seeks views on proposals to introduce new requirements to report transactions between close companies and their participators to HMRC, including proposals to mandate the reporting to HMRC of transactions between close companies and their participators, the scope of the transactions to be included, and the reporting timeframe and format. It also wants to understand the level of awareness of the tax intricacies of director’s loan accounts, and insight into the level of internal reporting at small companies.

The proposals would have a major impact on small businesses taking advantage of the likes of director’s loans and other close company financial arrangements.

HMRC sets out 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; and

• any other transfer of value from the company to the participator.

If these rules go ahead, HMRC will require details in relation to all participators, including corporate participators, not just from individual participators. HMRC acknowledged ‘this may be complicated when the close company is part of a group and there are a significant number of intra-group transactions’.

At this stage, HMRC has not settled on a precise reporting framework, but indicated that the preferred option is an annual reporting cycle aligned with the existing company tax return filing deadlines.

But this timetable issue is one of the questions in the consultation and HMRC stressed it was ‘keen to understand if stakeholders see any benefit in more regular or real-time reporting, especially if the underlying data would be available to this timescale’. 

The proposed rules look like they will capture the majority of loan arrangements and company payments to participators.

The only exception the government considers may be appropriate would be items already reported to HMRC under 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.

Close companies are those controlled by five or fewer participators, or by any number of participators who are directors. A participator is a person with a share or interest in the capital or income of a company; usually they are the shareholders. Nearly all small companies are close. The legislation is set out in section 439(1)-(3) Corporation Tax Act 2010.

The new approach would not be without complexity. HMRC stated: ‘Where there is no employment relationship, the government is considering in what situations it is appropriate to require a company to provide a National Insurance number, such as a minimum shareholding or being connected with a person holding such a stake in the company.’

With the stated primary purpose of stopping what the government sees as extensive tax evasion in the small business sector, HMRC expects the tougher rules will stop abuse of close company structure. 

HMRC stressed: ‘The risks we see in the tax gap 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.

‘The small company corporation tax gap is very large and growing, and in many cases it appears there has been some blurring of the boundaries between what is rightly the company’s money and what is the participator’s, enabling both mistakes and deliberate non-compliance.’

The consultation closes for comment on 10 June at 9:30am.