If you run an owner-managed or family business, there’s a strong chance your company is classified as a close company. If recent HMRC activity is anything to go by, this is an area now firmly in the spotlight.
What is a close company?
In simple terms, a close company is one that is controlled by five or fewer shareholders (or participators), or by directors who also hold shares. This definition captures the vast majority of UK private companies, from freelancers operating through limited companies, to family-owned businesses and growing SMEs. You can view the HMRC internal manual, CTM60060 - Close companies: general: broad definition, here.
Why is HMRC focusing on close companies?
HMRC’s interest is driven by one key concern: the small business tax gap. The government estimates that small businesses account for a significant proportion of unpaid tax, with a particular risk around:
- Under-reporting income
- Over-claiming expenses
- Transactions between companies and their owners
Following a recent open consultation on “Reporting company payments to participators — modernising the reporting framework”, close companies are often seen as higher risk because the lines between business and personal finances can become blurred.
What’s changing?
1. New reporting requirements (proposed)
HMRC is currently consulting on new rules that would require close companies to report detailed transactions with shareholders and directors. This could include:
- Loans to and from participators
- Dividends and other distributions
- Cash withdrawals
- Transfers of assets
Crucially, HMRC may require details such as the amount, date, and recipient of each transaction to be declared on future returns. If implemented, this would represent a significant increase in reporting obligations for these close companies, compared to the current system.
2. Increased scrutiny of directors’ tax returns
From the 2025/26 tax year onwards, directors of close companies will also need to disclose more information personally, including:
- The name and registration number of the company
- Dividends they have received from that company
- Their shareholding percentage they own
This gives HMRC a clearer picture of how profits are being extracted. All of these are required to be submitted on the Self Assessment Tax Return, in the salary section of the return.
3. Existing rules are already tightening
Even before these proposals, HMRC has been increasing enforcement activity in areas such as directors’ loan accounts. For example:
A tax charge (currently 33.75%, rising to 35.75% from April 2026) called Section 455 Corporation Tax charge (s455) applies if loans to shareholders aren’t repaid within 9 months and 1 day of the year-end
Additional income tax or benefit-in-kind charges may arise depending on how loans are structured
These rules are complex and frequently reviewed during HMRC enquiries.
What does this mean in practice?
Taken together, these developments point in one direction:
- Greater transparency, more data, and increased HMRC scrutiny.
For business owners, this means: - Less flexibility around informal withdrawals
- A higher risk of enquiries if records don’t align
- Increased compliance requirements going forward
Even routine transactions (like taking money from your company) may soon be subject to more detailed reporting and review.
What should you be doing now?
1. Keep accurate, real-time records: Ensure all transactions between you and your company are clearly recorded and properly classified.
2. Review your director’s loan account: Overdrawn loan accounts are a common trigger for tax charges and HMRC queries.
3. Plan profit extraction carefully: Salary, dividends, and loans all have different tax implications, getting the mix right is essential.
4. Be prepared for more reporting: Systems and processes may need to adapt if HMRC introduces the proposed reporting changes.
While the consultation is ongoing, the direction of travel is clear: HMRC is tightening its grip on close company compliance.
For most business owners, there’s nothing to worry about, provided records are accurate and transactions are structured correctly. That said, the cost of getting it wrong is increasing.
What is Section 455 Corporation Tax charge (s455)
It applies when a close company makes a loan to a shareholder (or participator) and that loan is not repaid within 9 months and 1 day after the end of the accounting period. The current rate is 35.75%, (33.75% for loans made before 6th April 2026). The tax is paid by the company, not the individual, but it is temporary, meaning that the company can reclaim it once the loan is repaid. However, it can only be claimed in the Corporation tax submission for the period in which it is repaid, normally submitted up to 9 months after the year end, in which it is repaid.
Need help?
If you’re unsure whether your company falls within the close company rules, or you’d like a review of your current setup, we’re here to help. Get in touch for practical, straightforward advice tailored to your business.