Chapter 27 - Close Companies

Question 1

What is a close company?

Answer 1

One which is controlled by a small number of people and can therefore be manipulated possibly for tax purposes.

• UK resident company
• fiver or fewer participators
• any number of directors who are also directors of the company

Question 2

When is a person deemed to have control over a company?

Answer 2

If together they:

• own over 50% of the company’s issued share capital
• have over 50% of the company’s voting power
• would receive over 50% of the company’s income if it were all distributed
• would receive over 50% of the company’s assets if the company were wound up

Question 3

What is a participator?

Answer 3

Someone who has a share or interest in the capital or income of the company. Most cases a company’s participators are its shareholders but people such as options holders or loan creditors can also qualify

Question 4

What is a director?

Answer 4

a person:

• who occupies a position of director (whether called or not)
• whose directors or instructions are normally obeyed by directors
• who is a manager of the company and (possibly together with associates) controls at least 20% of the company’s ordinary share capital

Question 5

What is an associate?

Answer 5

• The participator’s business partners
• the participator’s relatives
• the trustees of a settlement established by the participator.

Question 6

Statutorily excepted from close company status if:

Answer 6

• Voting shares have been dealt in and listed on a stock exchange within the 12 months prior to the date on which the company’s status is being determined
• The total voting power possessed by the principal members of the company must not exceed 85% of total voting power
• At least 35% of the company’s voting power is in the hands of public

Question 7

Consequences of close company status

Answer 7

Benefits in kind provided by company to participators or their associates are generally treated as distributions
- Loans made to participators or their associates are assessed to tax

Question 8

How are close company benefits in kind treated?

Answer 8

• The cost of the company providing benefit is disallowed when computing corporate tax liability.
• The person receiving the benefit is taxed as if had received dividend of the same amount as the deemed distribution

Question 9

How are loans to participators treated?

Answer 9

The company is required to pay tax equal to 32.5% of the loan. payable nine months and 9 days after end of accounting period. No tax is payable is this is repaid before this time.
Tax is repaid to company is participator repays loan or it is written off. This is made 9 months and 1 day after the end of the accounting period in which the loan is written off.