The government is consulting on new reporting requirements for close companies, focused on how small limited companies report payments, loans and other transfers of value involving their shareholders (‘participators’).
For most contractors operating through a limited company, this means HMRC is likely to ask for more information on how and when money is taken out of the company.
HMRC is consulting on new rules that would require close companies to report individual transactions, including dividends, director’s loans, repayments and other withdrawals or transfers of value. Although the tax rules are not changing, the level of detail reported to HMRC is likely to increase, making it easier to identify inconsistencies in company accounts.
Here, Christian Hickmott, MD of Integro Accounting explains more.
What is a close company?
Most contractor limited companies are close companies.
Broadly, a close company is one controlled by five or fewer participators, or by any number of directors who are also participators.
That definition covers the vast majority of one-person and family-owned contractor companies.
What are HMRC’s proposals?
HMRC is consulting on a requirement for close companies to report transactions with participators in more detail.
The consultation was first published on 19 March 2026 and runs until 10 June 2026.
According to the consultation, the government is seeking views on the scope of transactions to be included and on the format and timing of reporting.
The proposal was flagged in Budget 2025, which said the government would consult in early 2026 on new requirements to report transactions between close companies and their shareholders to HMRC.
Which transactions could be reported?
The potential scope of the consultation is wide.
The ATT says the proposed additional reporting could include cash withdrawals, loans, debts, dividends, other distributions, and transfers of assets to and from the company.
It adds that HMRC is expected to want the recipient, amount and date of each transaction.
This is a more granular approach than many company directors are used to. It points towards transaction-level reporting, rather than relying solely on year-end accounts.
Why this matters to contractors
The consultation only covers increased reporting requirements; the underlying tax rules on dividends and directors’ loans are not changing.
The most likely outcome is that HMRC will receive more detailed information on individual transactions.
For contractors, this is significant because small company accounts often include routine transactions between the company and its directors, such as dividends, reimbursed expenses, and loans.
In many cases, these transactions are recorded throughout the year and finalised later when the accounts are prepared.
This increases the importance of consistent bookkeeping and of keeping accurate descriptions of all entries in your accounts. See also maintaining accounting records for a limited company.
Dividends and director’s loans in the firing line
The main areas affected are likely to be dividends and director’s loans.
Dividends must only be declared when there is sufficient retained profit in the accounts to support them, and loans must be recorded and managed correctly.
Where directors withdraw funds casually, this can lead to accounting issues and potential tax consequences later on, particularly illegal dividends and overdrawn director’s loan accounts.
A common example is when funds are withdrawn during the year and recorded in the director’s loan account, then reclassified as dividends later, once the annual profits are known.
That approach relies on year-end adjustments and assumptions about available profits.
This increases the importance of treating withdrawals correctly at the time they are made, rather than relying on adjustments at the year end.
The ICAEW notes that HMRC is stepping up its interest in director’s loans and how they are reported. The tax authority has also introduced a new tool for providing details of certain director’s loan repayments.
The s455 tax rate applied to overdue loans has also risen from 33.75% to 35.75%, mirroring the increase in the higher rate of dividend tax.
What directors may need to do differently
The likely outcome of the consultation is that contractors will need to maintain clearer records throughout the year, not just in advance of preparing the annual accounts.
That means:
- recording dividends clearly and separately
- keeping director’s loan transactions up to date
- avoiding vague “drawings” or “director account” entries that are not clearly identified
- ensuring the timing of dividends matches when they are declared, not just when cash is withdrawn
- making sure amounts posted through the bank, bookkeeping software and year-end accounts all match
- keeping supporting paperwork for anything that is not straightforward cash salary through PAYE
Most contractors already use accounting software such as FreeAgent or Xero to record transactions. While this helps maintain a consistent record, the underlying treatment of each entry still needs to be correct.
Will this make life harder for contractors?
Probably, at least to a degree.
Contractors who already keep tidy and accurate records shouldn’t notice any changes.
For those who treat the company bank account informally or rely on year-end reconstruction of dividends and director’s loan entries, this could be a bigger problem.
This is particularly relevant where director’s loan balances fluctuate during the year and are only cleared once the company’s final position is known.
The consultation closes on 10 June 2026.
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