The term ‘close company’ is extensively used in tax legislation in the United Kingdom, including Scotland, to identify privately owned companies controlled by a small group of shareholders. A close company is an important classification from a tax perspective, leading to particular tax implications for the company and its shareholders.
Defining a Close Company
A close company, according to UK tax legislation, is broadly defined as a company that is under the control of five or fewer participators (a term including shareholders and loan creditors), or any number of participators who are directors. A company may also be deemed ‘close’ if it is controlled by its directors and those directors are also shareholders.
Control, in this context, refers to ownership of more than half of the company’s share capital or voting rights, entitlement to more than half of the company’s assets in a winding up, or the ability to remove the majority of the board of directors.
Notably, there are exemptions to this rule. For example, non-profit companies, such as charities, and companies controlled by other companies (that are not themselves close companies) are not classified as close companies.
Implications of Being a Close Company
Being classified as a close company has specific tax consequences. For instance, a close company has to be wary of ‘benefits in kind’ to shareholders. This could be in the form of low-interest loans or the use of company assets. Such benefits may incur a tax charge unless they are treated as distributions.
Close companies must also adhere to rules regarding ‘apportionment of income’ and ‘loans to participators’. These complex areas may require professional advice to ensure the correct handling of tax affairs.
The ‘apportionment of income’ rules can cause some income of a close company to be treated as if it were the income of its shareholders. The ‘loans to participators’ rules can impose tax charges on close companies that make loans to their shareholders or other participators, though this tax may be refunded if the loan is repaid.
Close Companies in Scotland
The rules governing close companies are the same across the UK, including Scotland. The Scottish legal system differs from that of England and Wales in many ways, but tax legislation is largely uniform across the country, including the treatment of close companies.
It is worth mentioning that the Scottish government has devolved powers over certain aspects of taxation, including income tax rates and bands for Scottish taxpayers. But corporation tax, including the rules concerning close companies, remains a reserved matter and is controlled by Westminster.
However, it’s worth noting that Scottish company law does have some unique features that affect how companies operate, such as the potential to incorporate a company as a ‘Scottish limited partnership’. While these features don’t directly affect the close company rules, they may influence how a company chooses to structure itself.
A close company, in Scotland, is no different from the rest of the UK in terms of its definition and the tax implications that follow. However, it is always recommended to seek professional advice when dealing with complex tax affairs such as those associated with close companies. Understanding these rules and regulations helps in maintaining transparency, avoiding penalties, and promoting sound financial health for any company operating in Scotland.
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