Home > Corporation Tax > What Is A Close Company And How Does It Work?

What Is A Close Company And How Does It Work?

By: J.A.J Aaronson - Updated: 2 Sep 2012 | comments*Discuss
 
Close Company Company Loan Participant

The majority of UK-based, private limited companies are small businesses. They employ relatively few people and have a small organisational structure. The term 'close company' describes most of these organisations and furthermore, most of the private limited companies in the country.

Definitions Of A Close Company

In order to be classed as a close company, an organisation must fulfil certain criteria. In the first instance, the controlling parties in the company (these may be individuals or other corporations) must number no more than five.

Alternatively, a company can be close if all of its participants (regardless of their number) are also directors, and finally it may also be close if five or fewer participants would be entitled to the majority of the assets were the organisation to be wound up.

Similarly, there are certain circumstances in which a company cannot be described as close, even if it satisfies the criteria above. Primarily, a company is not close if it is based outside the UK, or is controlled by a non-UK resident company that would not be classified as close if it were based in the UK. Similarly, if one of the five participants is not a close company, the organisation in question cannot be described as close.

Finally, there are a number of circumstances in which quoted companies may not be counted as close; this is the case if 35% or more of the voting power is publicly held, and if the shares that convey those votes have been traded on a stock exchange. The exception to the latter of these circumstances is if the participants' total vote exceeds 85%.

Participant Loans And Close Companies

One of the key tax concerns for close companies revolves around loans given to participants or the associates of participants. 'Associate' can mean any relative or business partner of a participant, as well as any trustee for a trust in which the participant was the settlor. It is the company's responsibility to perform Self Assessment in order to ascertain how much Corporation Tax must be paid on loans of this sort.

The term 'loan' also covers an advance on wages. Generally, a close company will be required to pay 25% of the value of the portion of the loan still outstanding in the relevant accounting period in corporation tax.

Furthermore, if the loan has been written off or repaid within nine months of the end of that same accounting period, no tax needs to be paid. If the loan is settled after that date, the outstanding corporation tax need not be paid until nine months from the end of the accounting period in which it was settled.

Finally, it is important to note that most close companies can take advantage of the lower corporation tax rates offered to small businesses. By definition most close companies will fall within this category, but there is one important exception: if the business qualifies as a 'close investment holding company', corporation tax must be paid at the full rate. In order to qualify as such, the company must not draw the bulk of its business from commercial trading or investment in land, which will then be let.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Latest Comments
  • Yorkie
    Re: How Will My Second Job Be Taxed?
    Hi, I'm in full time employment and in my employers service dept. I earn a decent wage, on the edge if being a higher rate…
    9 April 2019
  • White
    Re: Claiming Tax Relief on Mileage
    Hello there im looking for advice on my current role i have been told i need the fill out a self assessment tax return due to my…
    6 April 2019
  • sim
    Re: Claiming Tax Relief on Mileage
    hi I get payed 45p per mile of my employer for business miles but universal credits say that it's income and reduce my monthly…
    29 March 2019
  • Panco
    Re: How Will My Second Job Be Taxed?
    I work 60 hours per week is £459 in week,but I looking for a job on weekends it’s will be 8 hours £68per booths days how much…
    28 March 2019
  • cdoggywoof
    Re: Are DVLA Car Tax Rates Fair?
    For someone who can only afford a car for £1000 and the VED will cost them £200 each year, which is 20% of the vehicle cost, this…
    21 March 2019
  • Whitely
    Re: How Will My Second Job Be Taxed?
    Hi, I am earning approx £9,000pa working in one job. I have been offered a second job where I will earn £3,400pa so it takes…
    19 March 2019
  • Leroy
    Re: How Will My Second Job Be Taxed?
    If i work 16.2.5 hours a week then in a second job do 10 hours a week how much tax will a pay
    13 March 2019
  • Fire
    Re: How Will My Second Job Be Taxed?
    Hi I work part time 22.5 hrs week and earn £17,500 year. I have just been offered extra work of 3 - 6 hours a month earning…
    13 February 2019
  • shelle
    Re: How Will My Second Job Be Taxed?
    i currently work 10 hors in supermarket been offered a job at care home 30 hours a week how / what will happen to tax how…
    23 January 2019
  • Wild child
    Re: How Will My Second Job Be Taxed?
    Hi I have a full time job and get 16,500 a year but thinking of getting a second job that I get 5,280 a month how much tax…
    21 January 2019