Understanding the Concept of a Close Company
If you are involved in running a business in the UK, you’ve probably stumbled upon the term “close company”. Understanding the implications and significance of this term is pivotal for your financial planning and taxation. This article will clarify what a close company is, the related tax implications, and how it might affect your business.
Defining a Close Company
According to HM Revenue and Customs (HMRC), a close company is a UK resident company that is under the control of five or fewer participants or is under the control of its directors. It is a term commonly used in UK taxation and denotes a company closely held by a small group of people.
Criteria for a Close Company
A company may be classified as a close company if it meets any of the following conditions:
- It is a private company.
- Five or fewer individuals possess, directly or indirectly, more than half of the company’s issued share capital.
- Any number of directors hold, directly or indirectly, more than half of the company’s issued share capital.
Why is this Classification Important?
The classification of a company as a “close company” is significant for UK tax purposes. Close companies are subject to specific rules regarding tax charges and benefits that are not applicable to other companies. This includes the taxation of loans to shareholders and the ‘benefit in kind’ value of certain assets provided to shareholders or their families.
Tax Implications for Close Companies
Close companies face several unique tax implications. Let’s look at some of the most significant ones.
Loans to Participators
If a close company provides a loan to a shareholder (also known as a participator), the company may be liable for tax under Section 455 of the Corporation Tax Act 2010. This tax, known as the ‘Section 455 charge’, is currently charged at a rate of 32.5% (2025 rate) on the amount of the loan. Further information can be found on the HMRC’s website.
Benefits in Kind
If a close company provides a benefit or asset to a shareholder or a member of the shareholder’s family, this may be considered a ‘benefit in kind’. These benefits are usually taxed as additional income on the recipient’s Self Assessment tax return. The company may also have to pay National Insurance contributions on the value of the benefit.
Capital Gains Tax
When a close company disposes of an asset and makes a gain, it’s liable to Corporation Tax on the gain. According to HMRC, as of 2025, the standard rate for Corporation Tax on capital gains is 19%.
Conclusion
Understanding whether your company qualifies as a close company is crucial in navigating your tax obligations. The tax implications and benefits associated with being a close company can significantly impact your financial planning. If you need further assistance or clarification, consider consulting a tax advisor who specialises in UK company taxation.
