What Is a Close Company and How Does It Work?

What Is A Close Company?

Most UK private limited companies are small businesses with simple structures. The term "close company" describes the majority of them.

Close company directors and shareholders should be aware of common tax compliance issues that may attract HMRC scrutiny, which you can identify using our free HMRC Red Flag Checker.

A company is close if it meets any of these tests:

• Five or fewer participators control it (participators are persons with a share or interest in the company's capital or income, usually through shareholding)
• All participators, regardless of number, are also directors
• Five or fewer participators (or any number of participator directors) would receive the majority of assets on winding up

A company cannot be close if it is based outside the UK, controlled by a non UK resident company that would not itself be close, or if one of the five controlling participators is a non close company.

Quoted companies are not close if 35% or more of voting power is publicly held and those shares have traded on a recognised stock exchange within the previous twelve months. However, if principal participators together hold voting rights exceeding 85%, the company remains close regardless of its listed status.

HMRC Red Flag Checker

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Participator Loans And Section 455 Tax

A key tax concern for close companies involves loans to participators or their associates. An associate can mean a relative, business partner, or certain trustees connected with a participator. The company must account for any tax consequences through its Corporation Tax return under section 455 of the Corporation Tax Act 2010.

The term "loan" is defined broadly: it covers advances on wages, overdrawn director's loan accounts, and other arrangements where company funds pass to a participator. A close company may face a section 455 charge of 33.75% on the outstanding loan balance at the accounting period end. This charge sits alongside ordinary Corporation Tax rather than replacing it.

If the loan is repaid, released, or written off within nine months and one day of the period end, no charge arises. If settled later, the tax is reclaimable only after a waiting period, meaning cash can remain tied up with HMRC for some time. Close companies should monitor director's loan account balances carefully as each accounting period ends.

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Corporation Tax Rates For Close Companies

Close company status alone does not determine the Corporation Tax rate. Since 1 April 2023, the rate depends on profit level: the small profits rate, main rate, and marginal relief may all apply.

A close investment holding company, however, cannot claim the small profits rate and pays Corporation Tax at the main rate on all profits. A company falls into this category if its activities consist wholly or mainly of holding investments, rather than trading or letting land commercially. Further details on rates and thresholds appear in our guide to Self Assessment and related tax matters.

The Next Step

Now that you have read through the advice above, you might want to put it into practice. Our HMRC Red Flag Checker lets you find out which areas of your finances HMRC is most likely to query, what you should be declaring, and roughly what you may owe. Try it now →