Definition of a close company

Produced by Tolley
Definition of a close company

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Definition of a close company
  • Qualifying conditions
  • Condition A
  • Condition B
  • Participator
  • Loan creditor
  • Directors
  • Control
  • Attribution of rights
  • Associates
  • More...

There are several sets of provisions in the Taxes Acts which relate to ‘close’ companies, most of which are anti-avoidance measures aiming to catch transactions between those companies affected and their owners, where there may otherwise be a tax advantage. Broadly speaking, most owner-managed or private family businesses will be close, but in many cases close company status may not be immediately apparent. For a useful aide-memoire to determine close company status, see our interactive flowchart. Alternatively, for a static pdf, see the Flowchart ― close company status.

For guidance on the effects of being a close company, see the Implications of close company status guidance note.

Qualifying conditions

A close company is a company which is resident in the UK where it meets either Condition A or Condition B and does not fall within one of the specific exceptions (exceptions are discussed below).

Condition A

Condition A requires that the company is under the control of either:

  1. five or fewer participators

  2. any number of participators who are directors

CTA 2010, s 439(2); Simon’s Taxes D3.102

There are links to further guidance on the definitions of ‘participator’, ‘director’ and ‘control’ below.

See Example 1.

Condition B

Condition B requires that either of the following together possess, or are entitled to acquire, rights to receive the majority of assets available for distribution to the participators on winding up:

  1. five or fewer participators; or

  2. any number of participators who are directors

or would do so ignoring any rights held by any person as a loan creditor.

CTA 2010, s 439(3); Simon’s Taxes D3.102

In applying the test in Condition B, participators in / directors of companies entitled to receive assets on winding up are treated as participators / directors of the company under consideration. In other words, you look through any intermediary company. Participators which are companies are ignored, unless acting in a fiduciary or representative capacity.

To determine whether five or fewer participators, or any number of participator directors, are entitled to the greater part of the

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