What is a Close Company, and what are the tax effects if any of a Close Company on its shareholders or directors?
Peter Harris
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Close Company
Why do I feel someone did not do their homework on time and is looking for a model answer!.
A can of worms is what it is.
Basically, as Mr Bunny says, it is a company controlled by five or fewer participators or by any number of participators if those participators are directors. Normally, a participator is a shareholder but it can be a loan creditor. You have to link together associates of particpators etc. You can ignore some non-close companies when looking at participators but you include close companies that control close companies.
Consequences are that there are additional rules for treating benefits as distributions, there is the tax on the loan to a participator and a close investment-holding company will be subject to full rates of tax. There are some other problems but they are the main issues.
Ch ch ch changes
Even though apportionment has been gone these many years, you still find a reference on some firm's due diligence questionnaires. I then have to explain what it was and why it is not relevant since we are way past any time limits except for fraudulent etc.
There are about 30 separate consequences of comanies being close
Apart from the points made by Jim Greenwood,consider one positive and two negative aspects of a company being "close".
A positive one first.
If an individual borrows money to invest in a company, the interest paid is allowable[ICTA s.360] only if the company concerned is close[which itself includes a requirement that it is UK resident]
Two further important negatives
There are penal IHT consequences of shifting value amongst shareholdings[IHTA s.94].
Holdings [including those of "associates"]in excess of 10% in non resident companies which:-
1]would be close if they were UK resident
and
2]make what would be chargeable gains if they were UK resident
give rise to a personal tax charge on a "see through" basis to the shareholder/participator concerned[TCGA s.13]
I must be getting old
There are, as Mr Rothenberg says, many consequences but none of these are as exciting as the old rules of statutory apportionment. Who can forget the joy of calculating the apportionment of trading income, estate income and investment income? This of course was in the days before computers. These young accountants don't know they are born.
examples of Clothes companies
Marks and Spencer, or Gap are two good examples. You have to imagine me saying this in a Melvyn Bragg accent, or with a heavy cold.
If you want the definition of a Close company it is a company that is controlled by a small number of individuals (so Closely held). It is a very difficult definition, but if 51% of the shares are held by 5 or fewer people the company is Close (subject to extensions, qualifications and exceptions).
I'll leave someone else to deal with the tax consequences of Close company status.