By WatkinsonBlack
HMRC has launched a major consultation that could significantly change how small companies report transactions with their owners.
At the heart of this is a proposed clampdown on directors’ loan accounts and loans to shareholders (known as “participators”). While that may sound technical, the practical impact is straightforward: if you run a limited company and move money in or out beyond salary and dividends, these changes could affect you.
Why is HMRC acting?
The move is driven by the growing “tax gap” – the difference between the tax HMRC believes should be paid and what is actually collected. In 2024, the small business corporation tax gap reached £14.7 billion, representing around 40% of total liabilities. HMRC believes a significant portion of this shortfall is linked to how funds move between companies and their owners.
In its consultation, HMRC points to a “failure to distinguish between the company’s and the participator’s monies”, highlighting how easily the line between business and personal finances can become blurred.
What is being proposed?
In essence, HMRC wants much more detailed reporting of transactions between close companies and their participators. This would go far beyond current requirements. It would include not just obvious items like dividends, but also cash movements, bank transfers, asset sales and purchases between the company and its owners, and any other transfer of value. In practical terms, almost every financial interaction between a company and its shareholders could fall within scope.
Directors’ loan accounts under the spotlight
Directors’ loan accounts are very much in the spotlight. These have long been an area HMRC monitors closely. At present, if a company lends money to a shareholder and it is not repaid within the required timeframe, a temporary tax charge arises—commonly known as Section 455 tax. This can be reclaimed once the loan is repaid.
Under the new proposals, however, HMRC is seeking far greater visibility. Companies may be required to report the date and amount of repayments, details of any loans written off or released, and ongoing movements throughout the year. The intention is to ensure that the correct tax is paid at the right time, and that any reliefs claimed are justified.
Who will be affected?
In terms of who is affected, the answer is simple: almost all small limited companies. Under UK tax rules, most owner-managed businesses are classed as “close companies”, meaning they are controlled by a small number of shareholders or directors. The proposals would therefore apply widely across the small business sector.
They would also extend to corporate shareholders and group structures, which HMRC acknowledges could add complexity where there are significant intra-group transactions.
What is excluded?
There is one notable exception. Payments already reported through PAYE, such as salary, are likely to be excluded as HMRC already receives this information through its Real Time Information system. Beyond that, however, very little appears to fall outside the proposed scope.
Why this matters
While the stated aim is to tackle tax avoidance, the impact will be much broader. Directors’ loan accounts are often used for entirely legitimate reasons, such as managing cash flow or dealing with timing differences between income and personal drawings.
The concern for many business owners is not the principle, but the practical burden. More detailed reporting will inevitably mean more record-keeping, greater scrutiny from HMRC, and less flexibility in how funds are moved. Even relatively straightforward transactions could require careful tracking, including dates, amounts and counterparties.
The bigger picture
Viewed more broadly, this is part of a clear direction of travel. HMRC is increasingly focused on close companies because of the overlap between ownership and control. Where the same individuals both run and benefit from a company, the boundary between company funds and personal funds can become less distinct.
HMRC believes this creates both opportunity for deliberate non-compliance and a higher risk of genuine mistakes.
What should business owners do?
For now, these proposals are not yet law. However, they send a strong signal about where things are heading. Business owners would be wise to take note. Keeping company and personal finances clearly separated, maintaining accurate and up-to-date directors’ loan accounts, and avoiding informal or undocumented transactions will become increasingly important.
The reality is that the days of treating the company bank account as a flexible extension of personal finances are likely coming to an end.
WatkinsonBlack have considerable experience in all areas of taxation and business services. This includes providing a very cost-effective payroll bureau service, as well as assisting to ensure compliance with the latest Making Tax Digital legislation. If you are employed or self-employed either as a sole trader, partnership or limited company and want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us by telephone on 01925 413210 or by e-mail to info@watkinsonblack.com. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.
