Definition of a close company

Produced by Tolley

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

  • Definition of a close company
  • The close company tests
  • Condition A ― the control test
  • Condition B ― the winding up test
  • Close companies ― meaning of participator
  • Loan creditor
  • Close companies ― meaning of directors
  • Close companies ― meaning of control
  • Attribution of rights
  • Close companies ― meaning of associates
  • More...

Definition of a close company

The detailed definition of a close company is set out below (and can also be viewed in the Close Company Definition video), but in summary the rules are targeted at those companies where the owners can manipulate the activities of the company to influence their own tax position.

Therefore, broadly speaking, most owner-managed or private family businesses will be close, but in many cases close company status may not be immediately apparent.

When reviewing if a company is close the following actions are taken:

  1. confirm who are the participators in the company and which are directors

  2. establish who is associated with the participators

  3. detail what share capital and voting power the participators and their associates have, including any rights which are attributed

  4. detail what rights on the winding up of the company the participator and their associates have

  5. determine if the share capital or those rights on winding up give five or fewer participators or all the participators who are also directors, control of the company or more than half the assets in a winding up

  6. confirm that the company is not covered by the exceptions to close company status

The requirements underlying all of these actions are detailed further below.

For a useful aide-memoire to determine close company status, see the 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 Close companies ― overview guidance note.

The close company tests

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

Condition A ― the control test

The control test requires that the company is under the control of:

  1. five or fewer participators, or

  2. any number of participators who are directors

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

See

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