CLOSE COMPANIES

1
CLOSE COMPANIES
Theory and Practice of Tax B C33TB2 Lecture 12a
2
CLOSE COMPANIES

• IntroductionA company which is controlled by a
  small number of people. This would enable them to
  take advantage of corporate status to avoid tax.
  Special rules relate to close companies to
  prevent this happening

3
CLOSE COMPANIES

• DefinitionsA close company is one which is
  under the control of either
• a) five or fewer participators, or
• b) any number of its participators who are
  directors
• Participator is someone who has a share in the
  capital or income of the company. Mostly this is
  shareholder. To ascertain a participators
  interest include the interest of his associates

4
CLOSE COMPANIES

• Definitions (cont)Control is having ability to
  exercise control over the companys affairs.This
  will most commonly be through ownership of more
  than 50 of the share capital
• Associates includea) relatives parents
  remoter ancestors children remoter issue
  spouses siblingsb) business partnersc)
  trustees of settlements set up by participator,
  or his relatives

5
CLOSE COMPANIES

• Definitions (cont)Director is any persona)
  who occupies position of director, orb) whose
  directions are followed by other directors, orc)
  who is a manager of the company and controls at
  least 20 of the ordinary share capital

6
CLOSE COMPANIES

• IllustrationZ Ltd Share Capital 2,400
  sharesShareholders
  Shares A
  201 B
  200 C
  200 D
  Ltd 200
  E
  200 F
  200
  1,201 Others(20)
  1,199 Total
  2,400Is Z Ltd
  a close companya) Assume all are independentb)
  E is As grandson

7
CLOSE COMPANIES

• Answera) Control by 6 personsNot a close
  companyb) 5 Largest shareholders A grandson E
  401
  BCDF 200 each 800
  
  1,201 This is more than 50 of 2,400
  Close company

8
CLOSE COMPANIES

• Exceptions to close company statusCompany under
  the control of 5 or fewer participants etc will
  not be a close companya) if it is not resident
  in the UKb) where there is a substantial public
  interest
• Substantial public interest occurs wherea)
  shares carrying not less than35 of the voting
  power are held by the public,b) principal
  members do not hold more than 85 of the voting
  power andc) shares have been quoted and dealt in
  on a recognised stock exchange in the previous 12
  months

9
Exceptions to close company status

• DefinitionsPublicExcludesa) directors (and
  associates) and companies controlled by themb)
  associated companiesc) principal members
• Includesa) open companiesb) pension and
  superannuaton funds, whether or not they are
  principal membersc) strangers

10
Exceptions to close company status

• Definitions (cont)Principal members5 largest
  shareholdings (including associates) provided
  each has more than 5 of the voting power
• Public and principal membersOnly open companies
  and pension and superannuation funds can be both
  public and principal members

11
Exceptions to close company status

• ExampleIs A Ltd a close company?Principle
  Shareholders Shares Dir/ Public
  members
  Prin mem J Ltd (open)
  45
  K dir 15
  
  L dir 13
  
  H dir 11
  G
  dir 4.5
  F
  4.5
  others
  7
  Total 100

12
Exceptions to close company status

• Approach1) Apply test to establish if close
  company (control by participants etc)
• 2) Ascertain if exception applies
• a) Identify principal members
• b) In order to identify members of public
  note those that cannot be members of public
• c) Remainder (plus those that can be both
  principal members and members of the public) are
  members of public
• d)Apply tests of 35 and85 and stock
  exchange

13
Exceptions to close company status

• Answer1) Control J Ltd 45
  K 15
  60Two participants have control
• Does exception apply?
• 2)a) PM 5 largest gt5. Not G and F
• b) identify PM and dir
• c) public F, others and open company (J
  Ltd)
• d) public owns over 35 prin mem do
  not own more than 85 therefor if quoted
  and dealings on recognised stock exchange
  exception applies and company is not close

14
Exceptions to close company status

• ExampleIs A Ltd a close company?Principle
  Shareholders Shares Dir/ Public
  members
  Prin mem 45 J Ltd (open)
  45 x 45
  15 K dir 15
  x 13
  L dir 13
  x 11
  H dir 11 x
  G dir
  4.5 x
  F
  4.5 4.5
  others
  7 7
  84 Total 100
  56.5

15
CONSEQUENCIES OF CLOSE COMPANY STATUS

• Reason for legislation To bring transfers from
  the company within the tax net. The legislation
  covers benefits in kind and loans
• 1 Benefits in kind treated as distributions
  Benefits provided to participators and their
  associates which are not taxable under Schedule E
  are treated as distributionsa) the cost to the
  company is disallowed when computing profitsb)
  the cost is the amount that would have been a
  benefit for an 8,500 employeec) person
  receiving benefit is treated as having received a
  dividend of the same amount

16
Benefits in kind treated as distributions

• Example.Close Ltd lends electrical equipment
  costing 3,000 to a participator who is neither a
  director or an employee. If the participator had
  been an employee, the benefit would have been 20
  of 3,000. What are the consequences?
• Solution Participator is treated as having
  received a net dividend of 600. Company cannot
  claim capital allowances for the equipment and is
  treated as having paid a dividend of 600.

17

• 2 LOANS TO PARTICIPATORS
• a) If such loans are made, the company must make
  a payment to Inland Revenue of 25 of the loan
  (Due 9 months after the end of the CAP (in
  quarterly instalments if the company is large)
  but need not be made if loan is repaid before the
  tax is due).
• b) This will be repaid when the loan is repaid or
  if it is written off
• c) If the loan is written off the participant is
  deemed to have received a dividend of the amount
  written

18
LOANS TO PARTICIPATORS

• Excluded from loan provisionsRules do not apply
  if
• a) loans made in the ordinary course of business
  or
• b) loans do not exceed 15,000 per borrower and
  are made to employees or directors whoi) works
  full-time for the company ANDii) do not own,
  with associates, more than 5 of ordinary share
  capital of the company

19
CLOSE INVESTMENT HOLDING COMPANIES

• A Close company which is NOTA trading company
  andA member of a trading group.
• CONSEQUENCESA CIC is not entitled to the small
  companies rate of Corporation Tax or to tapering
  relief