What Is A Close Company? Definition & Rules

A close company is a UK-based business where 5 or fewer individual participators have ownership or control over the business. Read on to learn more!

Ron Pearson

As a small business owner, you may have come across the concept of a close company. The concept can be complex and a little confusing at first, however, as tax rules for close companies differ from other companies, it is crucial to understand the difference. This is why we've compiled this short guide to what close companies are and the tax rules that apply to them.

Close Company Definition

A close company describes a limited corporation with five or fewer "participators" having ownership or control over the business. Largely, participators are just the company's shareholders.

There are other, more complex, legal circumstances that make a business a close company - for example, if all participators who are directors have control of the business in question (bearing in mind that control has a special, broad meaning for this purpose), or if all participators who are directors together hold (or can gain) the rights to receive the majority of the business's assets on a notional winding up.

If you are unsure whether your company is classified as a close company, there is a number of resources available online or you could consult an expert.

Example

Company A has five shareholders, Persons V, W, X, Y, and Z. They are all directors and the only participators in Company A. Company A, therefore, is also classified as a close company.

What Is A Close Company Participator?

As mentioned, in most cases, "five or fewer participators" can be translated to "five or fewer shareholders". Participator describes anyone who influences the business and finances. This can be a shareholder or anyone who has invested money. It can also include a company director or someone who has voting rights within the business.

Thomson Reuters defines a participator in a closed company as follows:

"A person who has a share or interest in the capital or income of a close company, including a person holding (or entitled to acquire) share capital or voting rights in the company, a loan creditor and any person entitled to secure that income or assets of the company will be applied (directly or indirectly) for his or her benefit."

When is a company not a Close Company?

Of course, there is a multitude of reasons why a company can not be a close company, for example:

  • Not a UK resident company: To be a close company, a business must be a UK resident company. This means either being incorporated in the UK or centrally managed from the UK.
  • Owned or controlled by a close company: A company owned or controlled by a close company cannot itself be a close company.
  • Quoted company: A quoted company, i.e., a company whose shares have been accepted for trading on a stock exchange, cannot be a close company.
  • Limited Liability Partnerships: The status of a close company does not apply to limited liability partnerships.

Close Company Tax Rules

As mentioned above, there are some special rules for tax purposes which apply to a close company. These tax rules are designed to address businesses closely controlled by, for example, a family or a small group of people.

Amongst other things, a close company must self-assess tax liabilities in respect of loans to participators or associates, which can result in the requirement to make tax payments to Revenue & Customs equal to 25% of the outstanding loan or advance made during the accounting period.

There is a number of tax implications for a close company. It is therefore advisable to do thorough research or consult an external advisor.

Close Company FAQs

  • What are the implications of being a close company?

There is a number of tax rules with close companies, for example when it comes to loans given to participators, generating an inheritance tax exposure, or interests on loans to a close company. It is crucial to always be aware of your tax obligations, so do thorough research or consult an expert if you are unsure.

  • Can a listed company be a close company?

A company whose shares have been accepted for trading on a stock exchange, cannot be a close company.

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