Whether or not a limited company is considered a ‘close company’ can have tax implications further down the line. In this post, we’ll help you ascertain if your limited company is a close company. Let’s get started.
Definition of a close company
A close company is a UK-based, privately owned company that, as defined by the Corporation Tax Act 2010, is:
- Under the control of 5 or fewer participators, or
- Under the control of participators who are also directors, or
- A company where more than half the assets of which would be distributed to five or fewer participators, or to participators who are directors, in the event of the winding up of the company
‘Close’ is used to describe the proximity of the people within the company to the company, as the business is closely controlled. It has nothing to do with the company’s trading status (such as active or dissolved).
Close companies are private companies limited by shares or private companies limited by guarantee. A public limited company or limited liability partnership cannot be a close company, nor can a private company that is controlled by a close company.
Definition of participators
If you are familiar with the limited company structure, you will know that ‘participators’ is not a term that is used by Companies House. Directors, secretaries, shareholders, guarantors (in the case of a limited by guarantee), yes – but not participators. So, what does it mean?
Generally speaking, a limited company participator is someone who has shares within the company, voting rights, or rights to capital upon winding up.
In the majority of cases, a limited company’s participators will simply be its shareholders (or guarantors).
Is it a close company or not?
Let’s take a look at some examples.
Mr. A is the sole shareholder and director of the company.
This is a close company because it is ‘Under the control of 5 or fewer participators’.
Mrs. A, Mrs. B, Mrs. C, Mrs. D, Mrs. E, and Mrs. F are all shareholders and directors of the company.
This is a close company because it is ‘Under the control of participators who are also directors’.
Mr. A, Mr. B, Mr. C, Mr. D, Mr. E, and Mr. F are all shareholders. Mr. A is also a director.
This would typically not be considered a close company, because there are more than 5 participators and they are not all directors.
Mrs. A, Mrs. B, Mrs. C are all shareholders. Mrs. D and Mrs. E are directors only.
This is a close company, because it is ‘Under the control of 5 or fewer participators’.
Why is it important to know?
The purpose of the close company classification is to assign certain tax rules to companies being run by families and other small groups of people.
Fundamentally, these include rules related to any loans that are made to participators and loans made to the company.
For example, if the company were to provide a loan to a participator, and it’s not paid within 9 months and 1 day of the company’s year-end – the company will then have to pay extra tax.
If you are in any doubt as to whether your company is closed or not, we recommend contacting HMRC.
So there you have it
Most private companies in the UK will be considered close companies. This is because the majority of limited companies are smaller businesses running with just a few people (so 5 or fewer participators).
We hope you have found this post helpful. Please get in touch if you have any questions related to this post or limited companies in general.