What is a Close Company in England?

As a business owner, you may have encountered the phrase “close company” when working out your company’s tax liability. 

This article will explain which kinds of companies are close companies for tax purposes. It will also look at the restrictions the law imposes on close companies as part of the government’s anti-tax avoidance laws. 

What is a Close Company?

For the purposes of anti-tax avoidance, the law considers any company to be a close company if it is “under the control” of:

• five or fewer “participators”; or 
• any number of participators who are also directors. 

What does “Under the Control” Mean?

The law considers a company as under the control of its participators if five or fewer participators: 

• can exercise their voting rights as shareholders; 
• are entitled to more than 50% of any dividends the company issues; or
• are entitled to more than 50% of the company’s assets if it is wound up.

What is a Participator?

In practice, most participators are company shareholders entitled to dividends or the company’s capital upon its winding-up. 

Another example might apply to a director without any shares in the company. The director would be a participator if they enter an agreement with the company entitling them to dividend payments as if they were a shareholder. 

Exceptions 

Certain companies are not capable of being close companies, even where the criteria outlined above apply. 

These kinds of companies include:

• companies quoted on a stock exchange; or 
• companies controlled by at least one non-close company.

This means that if a company is a wholly owned subsidiary of a non-close company, the subsidiary company is not a close company. 

Practical Considerations 

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. 

However, individuals looking to avoid their tax liability often enter into unusual arrangements with their company that hides the fact 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 “participators in control” to apply to any company that the participators could potentially use to facilitate tax avoidance. 

We will now look at some of the law’s most common restrictions on close companies.

Loans to Participators 

If a loan is made to a participator of a company, the company must pay corporation tax on the amount of the loan at the higher dividend rate, which is currently 33.75%. In addition, the company must pay Her Majesty’s Revenue and Customs (HMRC) within nine months and one day from the end of the accounting period that the company issued the loan. 

Therefore, assuming you are a shareholder in a small company, if your company loans you £20,000, it will have to pay HMRC £6,750. 

If you later repay the loan, HMRC will refund this amount. 

If you write off or never repay the loan, the law will treat the payment as a dividend payment for the full amount of the loan. HMRC will tax this based on your personal income tax liability. Therefore, based on the current dividend rates, you will have to pay a tax rate of 8.75%, 33.75%, or 39.35%. 

Distributions

For tax purposes, ‘distributions’ refers to dividend payments or distribution of the company’s assets upon a wind-up. For close companies, certain other transactions qualify as a distribution. These include:

• company cars; 
• accommodation; and 
• other benefits in kind.

Such distributions can attract additional tax liability. 

Transactions in Securities Rules 

Certain tax laws regulate how companies and individuals are entitled to transform an income receipt into a capital receipt. 

Were your company not a close company, this would be far more tax efficient. However, because it is a close company, there are transactions in securities rules that ensure you do not benefit from any tax advantage.

Key Takeaways

For most practical purposes, close companies are fairly easy to identify. They include companies with five or fewer shareholders that can vote on shareholder meetings and receive more than half of any dividends the company pays out. If your company is a close company, there are additional laws that restrict your company’s ability to take advantage of tax-favourable transactions, such as issuing loans to shareholders. 

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