New reporting requirements are currently under consultation for close companies that could see them managing increased administrative responsibilities.
While some of the details are still being decided, enough is known about the proposals for close companies to need to begin making preparations.
It is worth understanding what is changing so that you can start to prepare early.
What is changing for close companies?
Close companies, those companies controlled by their directors or by five or fewer participators, may soon need to disclose details of transactions with participators in order to stay compliant with changing legislation.
Given the focus of the changes, it is expected that the new obligations will impact Director‑owned personal service companies, family‑owned companies, property SPVs and companies with Director Loan Accounts (DLAs) in particular.
In order to combat the risk of error and fraud, HMRC have felt the need to improve oversight of these transactions.
This means it will soon be necessary to provide details concerning the amount transacted, the date and the details of the recipient, including their name, address and national insurance number.
This will impact a range of transactions, including:
- Cash withdrawals
- Loans
- Debts
- Dividends
- Other distributions and transfers of assets to and from the company
If you currently submit any of this information to HMRC, then you can rest assured that those records will be sufficient to comply with the new obligations.
There is no need to submit the same data twice and the proposals only cover transactions and details that currently fall outside the scope of reporting.
Why are the rules for close companies changing?
Whether due to a lack of understanding or an inability to make accurate filings, small businesses are known to struggle with the current tax system.
This has resulted in a tax gap, the difference between the amount of tax owed and paid, across the spectrum of small businesses.
HMRC has noticed and is trying to eradicate the discrepancy to make the system fairer and to empower the Government to have more funds.
The reporting changes aim to ensure that participator transactions are handled legitimately and that no discrepancies can be introduced.
As for the implementation of these changes, more details will be revealed after the consultation.
For now, it seems that no new deadlines will be imposed as the records will be tied to the company tax return.
Penalties are expected for failure to comply, but it is not yet known whether these will be bespoke or follow an existing approach to penalties.
Regardless of the specific implementation of the changes, it will be necessary to adopt the new approach soon.
When will the changes be decided?
The new reporting requirements are currently subject to a public consultation, so it is possible to have your opinion heard.
While the consultation may change the specific requirements and implementation of the new measures, it is unlikely to prevent them from coming into effect.
In spite of the extra layer of admin that may increase the stress for small businesses, the tax gap is too great for HMRC to ignore any longer.
What should businesses do to prepare?
A thorough review of current practices should be undertaken to ensure that you are ready for the changes.
As HMRC will soon be able to note if things are not being handled effectively, the best way to avoid any potential penalties will be to route out problems ahead of time.
As such, you should review director loan accounts and check dividend documentation to ensure it will stand up to scrutiny.
Likewise, maintaining clear records of any cash withdrawals or asset transfers will enable you to prove that any transactions were legitimate and have been handled effectively.
Our team can help you to review your record-keeping to ensure that you are prepared when the time comes.
We can also help you manage your participator transactions to ensure that they are compliant and not a cause for concern.
Keep up with new close company compliance measures by speaking to our team today.