Buying a business? Download this free guide to help you negotiate key terms like price, stock, and employee entitlements.<\/p>\n <\/div>\n \n\nDownload Now<\/a> <\/section>\n <\/div>\n\n\n\n\n For the purposes of anti-tax avoidance<\/a>, the law considers any company to be a close company if it is \u201cunder the control\u201d of:<\/p>\n\n\n\n A company is controlled if five or fewer participators: <\/p>\n\n\n\n In practice, most participators are company shareholders entitled to dividends or the company\u2019s capital upon its winding-up<\/a>. <\/p>\n\n\n\n However, a creditor can also be a participator in certain circumstances where they have similar rights as shareholders. A common example is holders of preference shares, which have a right to fixed dividend payments but no voting rights. Even though they hold shares, the law considers these participators creditors, not shareholders.<\/p>\n<\/div>\n\n\n\n Another example might apply to a director without any shares in the company. The director would be a participator if they enter into an agreement with the company entitling them to dividend payments as if they were a shareholder. <\/p>\n\n\n\n Certain companies are not capable of being close companies, even where the criteria outlined above apply. <\/p>\n\n\n\n These kinds of companies include:<\/p>\n\n\n\n This means that if a company is a wholly owned subsidiary of a non-close company, the subsidiary company is not a close company. <\/p>\n\n\n\n In most cases, it is usually quite obvious if your company is a close company. The most straightforward example is any company owned by five or fewer people who all hold ordinary shares in the company. <\/p>\n\n\n\n However, individuals looking to avoid their tax liability often enter into unusual arrangements with their company that hide the fact that they ultimately control the company. The greater the number of shareholders (or individuals with shareholder-like powers), the less likely it is that all of them are engaging in tax avoidance. Therefore, the law widely defines \u201cparticipators in control\u201d to apply to any company that the participators could potentially use to facilitate tax avoidance. <\/p>\n\n\n\n We will now look at some of the law\u2019s most common restrictions on close companies.<\/p>\n\n\n\n If a loan is made to a participator of a company, the company must pay corporation tax on the amount of the loan. In addition, the company must pay Her Majesty\u2019s Revenue and Customs<\/a> (HMRC) within nine months and one day from the end of the accounting period which the company issued the loan. <\/p>\n\n\n\n For example, if your company loans you \u00a320,000, it must pay tax on this to HMRC. If you pay the loan back, the company gets this tax back. If not, the loan is treated like a dividend, and you may have to pay tax on it personally. You should also ensure you seek taxation and legal advice before proceeding to do this. <\/p>\n\n\n\n For tax purposes, \u2018distributions\u2019 refers to dividend payments or the distribution of the company\u2019s assets upon a wind-up. For close companies, certain other transactions qualify as a distribution. These include:<\/p>\n\n\n\n Such distributions can attract additional tax liability. <\/p>\n\n\n\n Certain tax laws regulate how companies and individuals are entitled to transform an income receipt into a capital receipt. <\/p>\n\n\n\n For instance, suppose your close company has a stellar financial year, and you and the other three shareholders want to extract the money out of the company. You could pay yourselves dividends, but this would require your company to declare a profit and pay corporation tax on its total taxable profits. Instead, you could decide to wind up the company to try to distribute the assets that way. This is a kind of transaction in securities.<\/p>\n<\/div>\n\n\n\n Were your company not a close company, this would be far more tax-efficient. However, because it is a close company, there are securities rules that ensure you do not benefit from any tax advantage.<\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nWhat is a Close Company?<\/h2>\n\n\n\n
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What Does \u201cUnder the Control\u201d Mean?<\/h3>\n\n\n\n
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What is a Participator?<\/h3>\n\n\n\n
Exceptions <\/h3>\n\n\n\n
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Practical Considerations <\/h2>\n\n\n\n
Loans to Participators <\/h3>\n\n\n\n
Distributions<\/h3>\n\n\n\n
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Transactions in Securities Rules <\/h3>\n\n\n\n
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\n Buying a Business: Guide to Negotiating Terms<\/div>\n
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