Taxation

Close Companies
What you need to know about the
way such companies are taxed


	Introduction Tax implications Are you a close company?			If your company's directors are also it's major shareholders, then you may be a 'close company'. Many family-run companies are close companies and will be affected by the special taxation rules that apply to this kind of business. This infosheet covers three main topics: Section 1 - The tax implications of being a close company. Section 2 - How to determine if your company is close. Section 3 - Definitions of some of the special terms that apply to this legislation. The relaxation of the requirement for companies with an annual turnover of less than £1M to undertake a formal audit each year, has encouraged many individuals to start trading through their own limited companies. Close companies are so named because the directors and shareholders are often one and the same. In such companies, it is easier to arrange the business affairs to significantly reduce the overall tax liability of the owners and company. By careful tax planning, it is possible to save thousands of pounds - even on quite modest incomes. Unfortunately the Inland Revenue are aware of this fact too. They continue to introduce even more effective tax-avoidance measures that are targeted specifically at close companies, thus reducing the scope for tax saving strategies in such businesses. Many close companies are of course family-run businesses, devoting their time to making their business prosper. Spending time making sure they comply with the growing body of tax and business regulations is not one of their highest priorities. There is a growing feeling amongst many accountants and tax advisers that small businesses can no longer afford to be quite so complacent. The Inland Revenue are clearly intent on significantly increasing annual tax yield by improving overall tax compliance right across the board. They have been steadily increasing the number of compliance officers to police the system and recover any undeclared tax. Close companies can prove particularly rich pickings for inspectors. If you are a director and shareholder of your own company, then you should be aware of the special taxation rules that apply to close companies.
	The taxation implications Back to top			If your company meets the close company criteria, then the following special taxation rules apply. 1. A close company must pay over an extra 25% tax on any loan remaining outstanding after nine months from the end of the chargeable accounting period. Where the company makes a loan on or after 6 April 1999 to a participator or an associate, the company must make a payment to the Inland Revenue of an amount equal to 25% of the loan or advance. This tax will be due and payable, together with the mainstream corporation tax under the corporation tax self assessment regime, nine months and one day after the end of the chargeable accounting period in which the loan was made. It is important to note that "loans" will include an overdrawn director's current account, where the director concerned is also a shareholder. Tax Tip: When the loan is repaid, the company can reclaim any tax paid previously paid under this rule. It follows from this provision that no tax will fall due for payment, if the loan or overdrawn account is repaid within 9 months of the end of the chargeable accounting period in which it arises. Close company director/shareholders should make every effort to repay their overdrawn accounts within the nine months of the year end. 2. Benefits paid to certain participators' will be deemed to be distributions. Any benefits in kind provided to a participator who is not also a director or a higher paid employee of the company, will be deemed to be distribution. From the company's perspective the cost of providing the benefit will not be a tax allowable expense. The money value of the benefit in kind will be personally assessed on the participator, as though it was a paid dividend at his or her highest rate of tax. 3. A close investment company cannot take advantage of the small companies or marginal rates of corporation tax. They have to pay the full 30% rate on all their profits chargeable to corporation tax.
	Are you a Close Company? Back to top			How to determine if your company is close. A close company is essentially one that is under the control of either: The directors together with their associates; or five or fewer participators together with their accociates. Click on the highlighted items to see a definition of terms used. There are certain other conditions and exemptions that are shown in the following flowchart that should help you decide if your company has 'close' status.
	Definitions of the key terms Back to top			Control: A person is deemed to have control of a company if they: own more than 50% of the share capital; possess more than 50% of the voting power; are entitled to receive more than 50% of the distributable income; or are entitled to receive more than 50% of the distributable assets in a winding-up of the company. Director: A director includes any person: Who occupies the position of director (by whatever named position they go by); In accordance with whose instructions the directors are accustomed to act; or Who is a manager of a company, and who is the beneficial owner of, or together with any associates, is able to directly or indirectly control, at least 20% of the ordinary equity share capital of the company. Participator: This is taken to be any person having a share or interest in the capital or income of the company, and includes: any person possessing, or is entitled to acquire, share capital or voting rights; any loan creditors created by lending money or capital assets, although a person lending money in the ordinary course of business, such as a bank, is excluded; or any person possessing, or entitled to acquire, a right to receive, or participate in any distributions made by the company. Associate: An associate of a participator is defined as: Any relative of that person, including spouse, brother, sister, parent or remoter forebear, child or remoter issue; A business partner; A trustee(s) of any settlement in relation to which the person is, or any relative of theirs (living or dead) is or was, a settlor; The trustee(s) or personal representative of a settlement which holds shares in the company in which the person, being an individual, is a beneficiary; or If the person is a company, then any company which is a beneficiary under a settlement whose assets include shares in the company in which the person is also a beneficiary.