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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.

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