For the purposes of UK Taxation a close company is broadly defined as being one controlled, directly or indirectly, by five or fewer “participators” or by any number of directors who are participators.

HM Revenue & Customs (HMRC) defines a participator as a person who has a share or “interest” in a company. A participator is usually a shareholder or director but the term also includes any “associate” – for example, spouse or civil partner, business partner, relative, trustee, or a loan creditor. A participator’s interest in a company can be in its shares or in the income of the company.

The majority of UK-based, private limited companies are close companies. They employ relatively few people and have a small organisational structure and it is easier for these companies to arrange the business affairs in such a way as to significantly reduce the overall tax liability of the owners and of the company.

To counter this, the UK government introduced legislation designed to remove tax advantages that would otherwise be available. Subject to certain exceptions, a close company is defined in the legislation as one that is under the control of:

  • five or fewer participators, or
  • any number of participators if those participators are directors, or
  • in the event of winding up the company more than half the assets of the company would be distributed to five or fewer participators, or to participators who are directors.

In general where value, cash or otherwise, is extracted from a close company other than by way of salary or dividend, by participators (usually as loans or advances of money) a tax charge will be incurred if not immediately, at some future point. See Tax Loophole Closed for Loans to Directors & Shareholders

Please note that the above definitions are not necessarily the same definitions used by other HMRC tax areas (e.g. VAT), other government agencies (e.g. Companies House), or various accounting conventions used to prepare statutory accounts.

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Category: Taxation


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