A close company is a UK corporation tax classification for any company controlled by five or fewer participators, or controlled by any number of participators who are also directors. The label sits on most private limited companies in Britain, and it triggers a distinct set of rules covering loans to owners, personal benefits paid through the company, and the rate of corporation tax on investment-holding structures. The point of the classification is straightforward: where a small group controls a company, HMRC reserves the right to tax the people behind the corporate wrapper as if the wrapper weren’t there.
The Control Test
Section 439 of the Corporation Tax Act 2010 sets the definition. A company is close if five or fewer participators control it, or if participators who are also directors control it in any number.1Legislation.gov.uk. Corporation Tax Act 2010 – Meaning of Close Company That second limb catches companies people assume are safe. A business with a large shareholder register can still be close if every shareholder with real voting weight sits on the board.
Control is not just about who owns the most shares. You control a company if you hold more than half its share capital or voting power, if you could acquire that power, or if you would receive the greater part of the company’s assets on a winding up.1Legislation.gov.uk. Corporation Tax Act 2010 – Meaning of Close Company Rights buried in a shareholder agreement, the articles, or a loan document can all put someone inside the control test. HMRC looks at who calls the shots and who walks away with the value if the company shuts.
Who Counts as a Participator
A participator is anyone with a financial interest in the company’s capital or income. That takes in ordinary shareholders, but also loan creditors, people entitled to distributions, and anyone in a position to direct the company’s income or assets to themselves.2Legislation.gov.uk. Corporation Tax Act 2010 – Section 454 A person who has never set foot in a board meeting can still be a participator if they hold the right kind of loan note.
When HMRC counts heads for the five-or-fewer test, it groups each participator with their associates. Associates include a spouse or civil partner, parents, grandparents, children, grandchildren, and siblings, plus business partners and trustees of family settlements.2Legislation.gov.uk. Corporation Tax Act 2010 – Section 454 A company with 20 shareholders drawn from two families still counts as controlled by two groups. Splitting shares among relatives to duck the threshold does not work.
Companies That Cannot Be Close
Section 442 of the Corporation Tax Act 2010 rules out three categories entirely, however concentrated the ownership: non-UK resident companies (even those trading through a UK branch), registered co-operative and community benefit societies, and building societies.3Legislation.gov.uk. Corporation Tax Act 2010 – Section 442
There is also a quoted company exception. A company whose shares trade on a recognised stock exchange escapes close status if at least 35% of the voting power is held by “the public”, which excludes directors, their associates, and anyone holding more than 5% of the votes.4GOV.UK. Company Taxation Manual – Close Companies: Tests: Specific Exceptions
Tax on Loans to Participators
The close company rules bite hardest here. When a close company lends money to a participator or an associate outside the ordinary course of business, Section 455 of the Corporation Tax Act 2010 imposes a tax charge on the company if the loan is still outstanding nine months and one day after the end of the accounting period in which it was made.5Legislation.gov.uk. Corporation Tax Act 2010 – Section 4556GOV.UK. Company Taxation Manual – CTM61505 – Rate of Section 455 Tax7GOV.UK. Check if You Have to Pay Tax on Dividends The charge sits on the company, not the borrower, and it exists to stop directors extracting cash as a “loan” instead of taking taxable salary or dividends.
Reclaiming the Tax
Section 455 tax is refundable. Once the participator repays the loan or the company releases it, the company can reclaim the tax paid. The refund is not immediate: the claim cannot be made until nine months and one day after the end of the accounting period in which the repayment or release happened. That leaves the company out of pocket for well over a year in most cases. Claims go through HMRC’s L2P service.8GOV.UK. Reclaim Tax Paid by Close Companies on Loans to Participators (L2P)
Bed and Breakfasting
Repaying a loan just before the deadline and drawing the same money back afterwards does not work. Under Section 464ZA, if within any 30-day period a participator repays £5,000 or more and then takes a new loan of £5,000 or more in a later accounting period, the repayment is matched against the new loan rather than the old one, so the original Section 455 charge stays in place.9GOV.UK. Company Taxation Manual – CTM61630 – Close Companies: Loans to Participators A separate arrangements rule catches cases where the outstanding balance exceeds £15,000 before repayment and there is a plan for a further loan of more than £5,000.
Writing the Loan Off
A write-off does not clean the slate; it moves the tax bill. The company can reclaim its Section 455 tax, but the participator is then treated as receiving dividend income equal to the loan and pays income tax at the relevant dividend rate.10GOV.UK. Savings and Investment Manual – SAIM5200 – Dividends and Other Company Distributions National Insurance also becomes due from the individual and the company. Writing a loan off is almost always more expensive than repaying it.
Benefits Reclassified as Distributions
Close companies face an extended definition of distribution. Under Section 1064 of the Corporation Tax Act 2010, if the company covers accommodation, entertainment, domestic services, or any similar benefit for a participator, the cost, less anything the participator pays back, is treated as a distribution.11Legislation.gov.uk. Corporation Tax Act 2010 – Section 1064 – Certain Expenses of Close Companies Treated as Distributions Two things follow. The company loses the deduction against its taxable profits, so its corporation tax goes up. The participator has to declare the amount as income.
Where the participator is also a genuine employee with real duties, the normal employment benefit rules can apply instead, but HMRC looks hard at whether the employment is real.12GOV.UK. Company Taxation Manual – CTM60510 – Close Companies: Extended Meaning of Distribution
Close Investment-Holding Companies
A close company that is not mainly trading commercially or letting property to unconnected parties is a close investment-holding company (CIHC).13GOV.UK. Company Taxation Manual – CTM60710 – Close Investment-Holding Companies: Definition The label typically catches vehicles set up to hold shares, bonds, or intellectual property for their owners.
A CIHC pays corporation tax at the main rate. It cannot use the small profits rate available to active trading companies with lower profits. For a company with profits under £50,000, the gap between the 19% small profits rate and the 25% main rate is meaningful, and the CIHC classification effectively removes the choice.