HMRC has launched a consultation that could change the way many owner-managed businesses report transactions between their company and its shareholders.
While no new rules have been introduced yet, the consultation is another clear indication that HMRC is looking to increase transparency around Directors’ Loan Accounts (DLAs) and other payments made by close companies to their owners.
What is being proposed?
HMRC is consulting on introducing new reporting requirements for transactions between close companies and their participators – typically shareholders and directors.
The proposals go much further than simply reporting outstanding Directors’ Loan Accounts. They could require businesses to report a wide range of transactions, including:
- Directors’ loans and repayments
- Cash withdrawals
- Dividends and other distributions
- Transfers of assets between the company and its shareholders
- Other payments or transfers of value
The aim is to give HMRC greater visibility of transactions that may currently only become apparent through corporation tax returns or enquiries.
Why is HMRC doing this?
HMRC believes that a significant proportion of the UK’s corporation tax gap arises within small businesses, particularly where the distinction between company finances and personal finances becomes blurred.
Rather than introducing new tax rules, the consultation focuses on increasing reporting so HMRC can more easily identify transactions that may require further review.
What does this mean for business owners?
At this stage, nothing changes.
This is a consultation, not new legislation, and HMRC is seeking feedback on what should be reported, when it should be reported and how any new reporting requirements would work in practice.
However, it does reinforce an important message for directors of owner-managed businesses.
Directors’ Loan Accounts have always been an area HMRC pays close attention to. If funds are regularly moving between you and your company, it’s important that those transactions are accurately recorded, appropriately authorised and supported by good records.
Businesses with well-managed accounting systems are unlikely to find this concerning. Those relying on informal bookkeeping or making frequent ad hoc withdrawals may find future compliance becomes more demanding if the proposals are implemented.
What should you do now?
There’s no immediate action required, but it’s a good opportunity to review how your Directors’ Loan Account is managed and make sure you understand how a directors loan account works.
Ask yourself:
- Are all withdrawals and repayments recorded correctly?
- Are dividends and salary clearly distinguished from loan transactions?
- Are your bookkeeping records kept up to date throughout the year?
- Would you be comfortable explaining each transaction to HMRC if asked?
Good record keeping has always been best practice. This consultation suggests it may become even more important in the future.
How Wilson Partners can help
Although these proposals are still at consultation stage, they reflect HMRC’s continuing focus on improving tax reporting and reducing errors.
We’ll continue to monitor developments and keep clients informed if the proposals progress into legislation.
If you’re unsure how your Directors’ Loan Account is currently being managed, or you’d like to review your wider tax position, speak to your usual Wilson Partners adviser. A proactive review today can often prevent unnecessary issues tomorrow.
