Warning that new company reporting requirements will impose burdens on businesses

The ICAEW has warned that proposed UK reporting requirements for close companies could unfairly burden small businesses.

The association says that under the new proposals, close companies will need to report details of transactions with participators to HMRC, placing a disproportionate administrative burden on compliant businesses, while doing little, if anything, to reduce the small business tax gap.

In a consultation that closed last week, the Government said the new reporting requirement – which would include the amount, date, and details of the recipient for each transaction – was necessary as it believed HMRC was not receiving the full picture in terms of how close companies interact with their participators. The Government added this would prevent “error and evasion” to reduce the small business tax gap.

In broad terms, a company is close where it is controlled by its directors or by five or fewer participators; and a participator is someone who has an interest in the capital or income of the company (eg, a shareholder). According to the government, “while companies of any size can be close, the vast majority are small”.

In its response, ICAEW said that reducing the small business tax gap required targeted and proportionate compliance activity undertaken by appropriately trained HMRC staff – not volume-based data collection that disrupted compliant businesses. ICAEW also added that HMRC should first consider the extent to which the information sought is already available before introducing any new administrative requirements for businesses.

The Institute said that, should the government take forward the proposals, reporting obligations should focus on transfers of value to participators, rather than all transactions involving participators. But ICAEW recognised that certain additional information could assist HMRC and noted that some aspects of the consultation could potentially be implemented with relatively limited changes to the existing corporation tax return.

The Institute continued to express broader concerns regarding the increased direction of travel towards large-scale data collection by HMRC. While businesses may incur high administrative costs in compiling information, HMRC may lack the resource capacity to analyse this effectively or use it appropriately. Careful consideration should therefore be given to the scope and proportionality of these requirements, said ICAEW.

Angela Clegg, Tax Technical Manager, ICAEW said “We support reasonable and proportionate measures to reduce the tax gap, but we are not convinced that extensive data requests of this nature are the right way to tackle it. These proposals are inconsistent with the government’s growth agenda and would place unreasonable administrative demands on businesses, particularly smaller companies, who are already resource constrained.

“The additional compliance requirements may divert time and resources away from productive business activities and other reporting obligations while the extensive data requested may not provide HMRC with what is necessary to address non-compliance. This could have the unintended consequence of reducing, rather than improving, overall levels of compliance.”