HMRC has released a consultation that could significantly change how small companies report transactions. In particular, HMRC proposes new reporting rules for payments to directors and shareholders, with a clear focus on increasing transparency between companies and their owners.
Overall, HMRC proposes requiring companies to report these payments in a more detailed and structured way. This article explains what is changing, who is affected, and what SME directors should do now.
At first glance, this may seem like a routine compliance update. However, it signals a clear shift in how HMRC monitors small companies. Put simply, HMRC proposes new reporting rules for payments to directors and shareholders that significantly expand the level of detail required. As such, Most SME directors and shareholders are likely to fall within scope.
You can read the full consultation hereWhy HMRC is increasing scrutiny
The consultation highlights that small businesses now account for around 60% of the UK tax gap. Furthermore, HMRC estimates that the Corporation Tax gap has risen to around 40% of the total tax gap.
As a result, the government considers closer monitoring of owner-managed businesses necessary.
In addition. HMRC notes that risks are often higher in close companies. Directors typically control both the company and its finances. Consequently, the distinction between company funds and personal funds can become unclear. In turn, this can lead to errors in reporting, particularly in relation to dividends and director loan accounts.
Therefore, HMRC proposes reporting company payments to directors and shareholders to improve accuracy, increase transparency, and reduce opportunities for error or avoidance
In addition. HMRC notes that risks are often higher in close companies. Directors typically control both the company and its finances. Consequently, the distinction between company funds and personal funds can become unclear. In turn, this can lead to errors in reporting, particularly in relation to dividends and director loan accounts.
Therefore, HMRC proposes reporting company payments to directors and shareholders to improve accuracy, increase transparency, and reduce opportunities for error or avoidance
Who will be affected
The proposals apply to close companies, which include most SME business. A company is close if it is controlled by five or fewer shareholders, or by its directors. In practice, this means most owner-managed companies will be affected.
The rules apply to “participators”, including shareholders and anyone with an interest in the company’s income or capital. As a result, the scope extends broadly across directors and shareholders.
What transactions will need to be reported
HMRC is seeking a complete picture of value moving between a company and its owners. Accordingly, the proposals cover a broad range of transactions, going beyond current reporting requirements.
Specifically, these include:
However, payments already reported through RTI, such as salaries, are expected to be excluded.
What information HMRC will require
HMRC plans to collect structured data for each transaction. This will enable it to match company records with personal tax returns and identify discrepancies more quickly.
Consequently, companies may need to report:
However, this may create practical challenges, particularly where shareholders are not employees and their details are not readily available.
How the new reporting system may work
At present, HMRC has not yet finalised how reporting will operate. Nevertheless, it is considering several options that build on existing systems.
For example, these may include:
Reporting could take place annually alongside the tax return. However, HMRC is also considering more frequent reporting, possibly in real time. While annual reporting may be manageable, more frequent reporting would require significant changes to processes and systems.
HMRC has confirmed that these proposals do not form part of Making Tax Digital for Corporation Tax.
What this means for SME directors
These proposals increase the focus on accuracy and record-keeping. Given that, many SMEs already face pressure from existing compliance requirements, so any additional reporting will need careful management.
As a result, directors should expect more detailed bookkeeping requirements, greater reliance on advisers, increased compliance costs, and greater scrutiny of director's loan accounts.
In addition, there are practical concerns around collecting data and tracking complex ownership structures. Accordingly, early preparation will be key.
What directors should do now
Although these rules are not yet final, they indicate a clear direction of travel. Therefore, taking action now may reduce future disruption and risk.
Given this, directors should focus on:
Ultimately, robust systems and processes will make future compliance significantly easier.
Summary
This consultation represents a clear move towards greater transparency. HMRC's proposed reporting of company payments to directors and shareholders is intended to improve compliance and reduce the tax gap.
The consultation closes on 10 June 2026. Therefore, directors and advisers should consider submitting feedback, (using the online form here) even if brief. Practical input may influence the final rules and reduce unnecessary administrative burden.
Looking ahead, HMRC is expected to move quickly to the next stage, with draft legislation potentially following as early as this summer.
Even if these proposals are amended, further reform is likely. HMRC continues to focus on small companies, so additional reporting requirements should be expected over time.
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