HMRC targets director loan reporting gap

HMRC is considering new reporting requirements for close companies as part of a wider effort to improve visibility over director loan accounts, shareholder withdrawals, dividends, asset transfers, and other payments to participators.

The proposals, set out in a consultation on reporting company payments to participators, would require close companies to provide the tax authority with more detailed information about transactions between companies and the people who own or control them.

Under the approach being examined, companies could be asked to report payments made by cash, bank transfer, or other means, 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.

The consultation is aimed at close companies, typically businesses controlled by five or fewer participators, or by directors who are also shareholders. Owner-managed companies and family-owned businesses are likely to face the most direct effect, especially where the distinction between company funds and personal finances is not tightly managed.

HMRC said: “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 department said some company owners do not fully understand the obligations that come with incorporation, particularly where participators were previously self-employed or where records are not kept carefully. It also said the level of control in close companies can allow tax charges on participators to be minimised, ranging from routine planning to aggressive avoidance.

The proposals would increase the volume and detail of data HMRC receives about money moving between companies and their owners. Required information could include the recipient, amount, and date of each transaction. Salary already reported through Real Time Information is currently the only category HMRC has identified as potentially excluded.

Director loan accounts are likely to be one of the most closely watched areas. These accounts record money owed between a company and its director outside salary, dividends, expenses, or ordinary business costs. An overdrawn loan account can trigger a corporation tax charge under section 455 if the loan remains outstanding beyond the relevant deadline.

The issue has become more prominent because the tax charge on loans made to participators by close companies rose from 33.75% to 35.75% for loans made on or after 6 April 2026. ICAEW has also noted that HMRC’s corporation tax online service will not be updated for that rate change until 6 April 2027, meaning affected companies may need to amend returns after that date.

Repayments, releases, and write-offs are also under review. Where a participator loan is repaid, released, or written off, the company may be able to claim back section 455 tax, while the participator may face income tax consequences. The consultation proposes extending reporting to capture loan releases and write-offs, giving HMRC clearer data on relief due to companies and tax charges due from individuals.

The administrative impact could be significant. Many small companies already maintain director loan records, but the level of granularity, frequency of reconciliation, and quality of supporting data varies widely. A requirement to report every relevant transaction with dates, amounts, recipient details, and potentially National Insurance numbers would shift record keeping away from year-end accounting clean-up and towards more continuous compliance.

Accountants are likely to face another advisory and workflow burden if the proposals proceed. Clients who draw funds informally, pay personal costs through company accounts, or mix expenses with owner withdrawals may need more disciplined monthly reviews. Clear dividend documentation, repayment allocation, and board approval for loan write-offs will also become harder to treat as year-end formalities.

HMRC’s objective is to narrow part of the small business tax gap by making transactions more visible. The practical challenge is proportionality. Owner-managed companies do not usually have large finance teams, and many rely on external accountants to reconstruct records after the year end. Highly detailed reporting may increase costs for compliant companies without necessarily identifying deliberate evasion more quickly.

The consultation points towards a more data-led approach to close company compliance. Digital reporting, structured information, and targeted interventions are increasingly central to tax administration, replacing heavier reliance on retrospective checks.

Director loan accounts are a normal feature of many owner-managed businesses, but they are becoming harder to treat informally. Regular reconciliation, clear separation of personal and company spending, and earlier tax planning are likely to become more important if the reporting proposals are implemented.

HMRC is seeking evidence on what companies currently record, how often data is collated, and where reporting may be impractical. The final design will determine whether the measure becomes a targeted compliance tool or a wider administrative burden on small companies.