Corporation Tax - Close Companies Flashcards
(18 cards)
What is a close company?
Company that is under control of:
- Five or fewer participators, or
- Any number of participators who are also the directors
What is a participator?
A person who has a share or interest in the capital or income of the company, eg shareholders or certain creditors
Which companies are excluded from being close companies?
- Whose shares are quoted on a recognised stock exchange
- Companies controlled by one or more non-close companies
What does control mean in the context of close companies?
Ability to control company affairs through voting rights, holding more than 50% of income rights and holding more 50% of assets on winding up
Whose rights must be considered when assessing ‘control’?
Rights held by a person’s associates, nominees and controlled companies are included.
Who is considered an ‘associate’?
A person’s close relatives
What is a nominee?
Someone who holds property on behalf of another person
What are the exceptions to participator loans?
- Trade credit not exceeding 6 months
- Loans made in ordinary course of money lending business
- Loans under £15k where borrower works full time doe the company and has no material interest
What is the material interest in a close company?
More than 5% control of the ordinary share capital or entitlement to more than 5% of assets on winding up
What tax must the close company pay on participator loan?
Corporation tax on the loan amount, calculated at dividend higher rate of tax (currently 33.75%)
When is tax on participator loan payable by the company?
Within 9 months and 1 day after the end of the accounting period in which the loan was made
Can the company reclaim the tax on a participator loan?
Yes - if the loan is repaid, waived or written off
What happens if the participator loan is written off?
The participator is deemed to receive a dividend equal to the written-off loan amount and must pay income tax on it
How is ‘distribution’ interpreted for close companies?
Term includes benefits in kind provided to participators, except when provided by reason of employment
What is the IHT implication of a close company making a transfer of value?
The value of the transfer is apportioned between shareholders, preventing IHT avoidance via company gifting
What are the ‘transactions in securities’ rules?
Anti-avoidance rules that apply when a receipt normally treated as income is converted to capital for tax advantage.
When might transactions in securities rules apply?
If a close company is wound up and distributes profits as capital instead of dividends, leading to lower CGT rather than income tax.
What can be done if a transaction may trigger the securities rules?
A company can apply for advance clearance from HMRC to confirm the rules do not apply to the proposed transaction.
