Family businesses face fresh tax scrutiny as £14.7bn gap sparks clampdown

HMRC tells us the small business tax gap now accounts for around 60% of the total, with Corporation Tax alone estimated at £14.7 billion. Much of that sits within close companies—those owned and controlled by a small number of people—where the line between personal and company finances can too easily become blurred.

That is the backdrop to these proposals. HMRC is looking to tighten oversight of transactions between companies and their owners, where both genuine error and deliberate avoidance can arise. The intention is to improve accuracy and bring more structure to record-keeping and reporting. Done well, that should support compliant businesses and help ensure a level playing field. The real test will be whether the detail delivers that without placing disproportionate pressure on the very businesses trying to do the right thing.

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There’s a consultation open until 10th June 2026. Please have your say. Reporting company payments to participators — modernising the reporting framework - GOV.UK

In simple terms, a Close Company is one that is controlled by a small number of people. Most small, owner‑managed limited companies fall into this category.

This is a specific UK tax concept and understanding it matters because Close Companies face additional tax rules and reporting obligations, especially around:

• director’s loan accounts

• dividends and distributions

• transactions with participators

• new reporting requirements from 2025/26

HMRC defines a Close Company as a company that is under the control of:

• Five or fewer ‘participators’, or

• Any number of participators who are also directors

A participator is anyone with a share or interest in the company’s capital, typically shareholders, but it can also include loan creditors or others with rights to company assets. HMRC also says a company is Close if more than half of its assets would go to five or fewer participators (or participator‑directors) if the company were wound up.

The following types of companies are typically Close:

Most small, owner‑managed limited companies

If a company is owned by:

• a single director‑shareholder

• a husband‑and‑wife team

• a small group of founders it is almost certainly a Close Company.

Family‑owned companies

Are Clues where control sits with a small number of family members.

Companies controlled by their directors

Even if there are more than five shareholders, if the directors collectively control the company, it is still Close.

Companies where five or fewer people control more than 50% of shares or voting power

This includes companies with:

• multiple minority shareholders

• a small controlling block

Companies where five or fewer people would receive most assets on winding up.

Companies are not close if:

• They are widely held (e.g., a large public company)

• No small group of participators controls them

• They are controlled by a large, diverse shareholder base

HMRC refers to these as “Open Companies”.

Close Companies are subject to special tax rules, including:

• Loans to participators (director’s loan account rules)

• Extended definition of distributions

• Close investment‑holding company rules

• Additional reporting requirements (including new 2025/26 SA disclosures)

HMRC emphasises that these rules exist to prevent small groups of controllers from extracting profits without paying the correct tax.

Consultation on new reporting requirements:

HMRC is consulting on proposals to make it a requirement for Close Companies to report every transaction between the company and its participators (shareholders/directors), including:

• Cash withdrawals

• Loans and repayments

• Asset sales or purchases

• Dividends and distributions

• Any transfer of value

This goes far beyond current (CT600A) reporting and would create a new, detailed reporting burden for small companies. This means a huge increase in reporting requirements and additional admin burden for small businesses.

Concerns:

Glenn Collins from the accountants’ body ACCA says: “HMRC is underestimating what is already reported so we’re concerned about duplication. Small companies already report:

• Dividends on directors’ Self-Assessment returns

• Dividend and directors’ loan account reporting in statutory accounts

• Related‑party transaction reporting

• New 2025/26 SA reporting requirements for close‑company directors

The consultation doesn’t fully acknowledge this existing data, raising concerns about duplication and unnecessary burden in terms of time and cost”.

There’s a risk that all director cash withdrawals must be reported

The proposals appear to require disclosure of every cash withdrawal, even when:

• The director is owed money by the company

• The transaction is routine

• The movement is temporary

This could create thousands of reportable items for even the smallest companies.

There’s no clarity on reporting timelines

The consultation doesn’t say:

• When reporting would be required

• Whether it is annual, quarterly, or real‑time

• How corrections would be made

Given HMRC’s track record with third‑party reporting, this is a major concern.

There’s a high risk of errors and penalties

HMRC proposes using the normal CT penalty regime, but:

• Close Company transactions are complex

• Errors are common

• HMRC systems often hold incorrect data

• Correcting HMRC data is costly and difficult

This raises the risk of penalties for compliant taxpayers.

There’s no explanation of how HMRC will use the data

The consultation doesn’t explain:

• Why HMRC needs this level of detail

• How it will use data already held by Companies House

• How it will avoid duplication with SA reporting

• Whether the data will improve compliance outcomes

This lack of clarity makes it difficult for small companies to assess the value of the proposals.

This adds up to a significant additional administrative burden for small companies

Small companies will face:

• More bookkeeping

• More reconciliations

• More detailed tracking of directors’ loan accounts

• More alignment of company and personal records

• More software requirements

For many micro‑companies, this is a major new cost which will reduce their already stretched margins to breaking point.

Software and systems may not be ready

The consultation assumes software will support the new requirements, but:

• Many small companies use basic or manual systems

• Current software does not track participator transactions in the detail required

• Integration with HMRC systems is unclear

This could force small companies to upgrade systems at additional cost.

There’s no recognition of the challenges advisers face

Matt Gambold Co-Founder & Director of ChadSan Limited (business accountancy) says: “The effect of this on a business owner’s ability to focus on their day job can’t be underestimated. If these proposals are adopted it will put greater pressure on the relationship between advisors and their small business clients. Apart from additional layers of detailed reporting to HMRC this will increase the (incorrect) perception amongst some business owners that the advisor is working against them and the increase in admin for the advisor is likely to increase fees. Small business owners will resent having to bear additional cost for reporting that adds absolutely no value to their operations at a time when tech advances are leading to an expectation of more value add and advisory level services. The minority of dishonest small business owners will continue to be dishonest.”

Tax advisers already struggle with:

• Poor client records

• Incomplete director loan data

• Misaligned personal and company information

• High correction costs when HMRC holds incorrect data

Related‑party disclosure rules are already expanding

FRS 102 (September 2024) significantly increases related‑party disclosure requirements for small entities. This means:

• More detail already needs to be included in statutory accounts

• HMRC will already receive this information

• The consultation does not acknowledge this overlap

This raises questions about why additional reporting is needed.

Impact on Small Businesses

If these proposals are implemented as drafted, they will:

• Create substantial new admin burdens

• Duplicate existing reporting

• Increase compliance costs

• Increase the risk of penalties

• Require new bookkeeping processes

• Require new software or system upgrades

• Add complexity to already complex director/shareholder transactions

For many small companies, this could be a material operational and financial burden.

Questions for HMRC:

1. Why is additional reporting needed when extensive data is already provided via SA, CT600, statutory accounts and Companies House?

2. How will HMRC avoid duplication of existing reporting requirements?

3. Will HMRC publish clear reporting timelines and formats before implementation?

4. How will HMRC ensure software providers can support the new requirements?

5. What safeguards will be in place to prevent penalties for minor or technical errors?

6. How will HMRC ensure that incorrect data can be corrected easily and without cost?

7. What analysis has HMRC done on the administrative burden for small companies?

8. Will HMRC provide exemptions or simplified reporting for micro‑entities?

9. How will HMRC use the data it already holds before requesting more?

10. Will HMRC publish a full impact assessment before legislating?

If you’re a small business owner or an adviser to small businesses/Close Companies please have your say by responding to the consultation. It closes on 10th June and you can find details here: Reporting company payments to participators — modernising the reporting framework - GOV.UK