A close company is defined in s.439 of the Corporation Tax Act 2010 (CTA/10) as one where one of the following applies:
- Controlled by 5 or less participators.
- Controlled by director participators where there are more than 5 participators
- On winding up more than 50% of the assets would be distributed a) to 5 or fewer than 5 participators or b) to participators who are directors.
Participator is defined under s 454 of CTA/10 to mean a person having a share or interest in the capital or income of the company and includes the following:
- A person who possesses, or is entitled to acquire, share capital or voting rights in the company,
- A loan creditor of the company,
- A person who possesses a right to receive or participate in distributions of the company or any amounts payable by the company (in cash or in kind) to loan creditors by way of premium on redemption,
- A person who is entitled to acquire such a right as is mentioned in paragraph (c), and
- A person who is entitled to secure that income or assets (whether present or future) of the company will be applied directly or indirectly for the person’s benefit.
The following are NOT ‘close’ companies:
- A company not resident in the UK (s.442)
- A society registered under the Industrial and Provident Societies Acts (s.442).
- A building society (s.442).
- A company controlled by or on behalf of the Crown (s.443)
- Companies controlled by companies that are open (not close) companies (s.444).
- Companies whose shares are listed on a recognized stock exchange where the ‘public’ holds 35% or more of the voting power (s.446).
Tax consequences for close companies;
- Expenses incurred in providing benefits (that ‘fit’ the definition of ‘distributions’) to participators or their associates will not be allowed as a deduction in computing the taxable income of the company (s.1305 CTA/09).
- Certain loans to directors will attract a charge (s.455 of CTA/10).
- Close investment-holding companies (s.34 CTA/10) will not be eligible for small profits rate; this will become irrelevant from 2015 when CT rates will be 20% across all the forms of companies.
- Where a close company is used to transfer value, such transfers may be taxed under s.94 of the Inheritance Tax Act 1984
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When a person having control of a company exercises his control to transfer value out of the shares in the company he makes a disposal under s 29(2) of the Transfer of Chargeable Gains Act 1992.
- And finally one sweetener: where a person, subject to meeting certain eligibility conditions, borrows money to buy interest in a close company will be eligible to claim interest relief under s.392 of the Income Tax Act 2007.
