Many businesses make loans as part of their employee incentive arrangements typically to fund the purchase of shares in the company by employees or the trustees of an employee benefit trust. These loans are often on relatively "soft" terms which can give rise to corresponding benefit in kind tax charges where the recipient is an employee or director. If the company making the loan is a "close" company for tax purposes and the recipient is a "participator" (which includes shareholders and those entitled to acquire shares) an additional tax charge can arise for the company. Under proposals set out in a current government consultation, on top of these considerations, close companies will have to comply with additional reporting obligations in respect of transactions with participators to avoid penalties.
Loans by Close Companies – More "Paperwork" in the Pipeline?
Overview
What's behind the proposals?
The government is concerned about a significant but increasing gap between the tax that small businesses (particularly self-run family companies) should pay and how much they actually do pay. Although it recognises that most small businesses seek to comply with their tax obligations, the government believes part of this "tax gap" lies in errors and evasion in transactions between these companies and their owners. In a bid to combat this, the government proposes that close companies provide HMRC with information about certain transactions with their participators – including loans.
What is a close company?
A close company is, broadly, one that is under the control of five or fewer participators or any number of participators who are also directors. Although such companies are usually small, this isn't always the case - for example, AIM listed companies can be close for tax purposes.
When a close company makes a loan to a participator and the loan is not repaid within nine months of the end of its accounting period, subject to some exceptions, the company must pay an amount treated as corporation tax at the dividend income tax higher rate (currently 35.75%). This regime was introduced to stop owners of companies lending themselves money rather than incurring income tax charges on the receipt of dividends or salary. The company can claim relief from tax if the loan is later repaid, released or written off. Separately, if the loan is made to an employee and exceeds £10,000, there is likely to be a benefit in kind charge if the rate of interest charged is lower than the Official Rate (currently 3.75%).
Doesn't information about loans to participators already need to be reported to HMRC? If that's the case, what would change under the proposals?
What information must currently be provided?
Under the existing system, close companies must declare their liability to pay tax on loans to participators as part of their annual corporation tax return. They also need to provide information about any loans repaid within nine months of the end of the accounting period which reduces such liability. In addition, directors must state whether the company is close in their own self-assessment tax returns and, since last year, they've also had to provide more details including the company's name and registration number. If the loans give rise to a benefit in kind income tax charge, employees need to declare this in their self-assessment returns.
What information will need to be provided under the new proposals and how?
The government's proposals do not currently limit the new reporting requirement to situations where a tax charge arises (indeed, this is part of the reason for them) and this will create an additional burden for companies. Loans of £15,000 or under made to full time employees that don't have a material interest in the company are outside the corporation tax charge outlined above and will also be below the threshold for a benefit in kind charge. A company might make season ticket loans (of under £10,000) to employees that are repaid by regular deductions from salary. If those employees are also shareholders in the company (perhaps because they participated in its share incentive plan) there would be a reporting obligation under the new rules, even where no tax is payable by the company or the individual. Companies would be expected to keep careful records of this information for their own purposes, but they could now face the prospect of having to disclose this to HMRC and risk penalties if they fail to comply with the new requirements.
The information to be provided will be more detailed than is currently the case and could include the name and identifying details of the person receiving the loan (such as their address and National Insurance number (where relevant)), the amount drawn down, the date of the loan and details of repayments and amounts released or written off.
In terms of how the information must be provided, the government has not proposed a specific format or frequency, and the consultation emphasises that it doesn't want to create a greater administrative burden for companies than is necessary. However, while it acknowledges that this might mean providing the information annually alongside the existing company tax return, the government has asked for views on whether more regular or real time reporting would be beneficial. A bespoke digital solution is one of the suggestions put forward but the government has confirmed that the Making Tax Digital model which applies to VAT and Income Tax Self-Assessment will not be introduced for Corporation Tax.
What if companies get their reporting wrong?
Companies failing to comply with the new requirements will face the standard Corporation Tax penalty regime, but the government is also considering introducing specific penalties, for example when transactions are deliberately omitted.
Is anyone excluded from the proposals?
At present, the proposal is for details to be provided in respect of all transactions by close companies with all participators (including those that are companies). However, the government notes that this could be complicated where a close company is part of a group and there are a significant number of intra group transactions. It will be interesting to see what exclusions are put forward as part of the consultation process. We would suggest that loans to employees or trustees of employee benefit trusts to purchase shares should be excluded from the reporting requirements (perhaps subject to a threshold). It is very unlikely that such loans will be used to extract funds from the company in any meaningful way as the amount lent is immediately applied in the subscription or purchase of shares.
The government has said that it will look at whether there should be any changes to the personal tax reporting requirements, and the information provided under the new system will, it seems, be used to cross reference the relevant participator's income tax self-assessment return. No doubt, if the details harvested under these proposals expose areas where there are frequent errors or evasion is rife, we can expect to see enforcement powers or even legislation directed at them to narrow the tax gap.
The consultation period ends on 10 June 2026.
