ACCA ATX UK Syllabus A4. Corporation Tax - Close companies - Notes 2 / 5
What is a close company?
Close companies are
If a person runs their business as a company then they are a shareholder and employee of the company.
The company is a separate legal entity and has the legal rights to own assets.
If the company is UK resident or resident in the European Economic Area (EEA) and is controlled by five or fewer shareholders and their associates or is controlled by any number of directors and their associates, then the company is known as a close company.
The shareholders or director-shareholders are also known as “participators”.
Special rules apply to these companies to prevent participators taking undue advantage of corporation tax legislation by virtue of their positions of influence over the company’s affairs.
Benefits provided to a shareholder who is not an employee of a close company
Shareholder tax implications
The shareholder is treated as receiving a dividend from the company which is subject to income tax if the deemed dividend value exceeds the dividend nil rate band of £500, only the excess value is subject to income tax at 8.75%, 33.75% or 39.35%.
The value of the deemed dividend is equivalent to the benefit which would have been assessable if that person had been an employee of the company.
Close company tax implications
The company is treated as paying a dividend to the shareholder.
The company cannot reduce its trading profits by the expenses incurred in connection with the benefit.
The company does not pay class 1A national insurance on the deemed dividend.
Illustration
Jake Ltd. is UK resident and has 4 shareholders.
The company wants to give one of its shareholders a laptop computer.
The shareholder, John, is not a director or employee of the company.
The company is considering 2 options to give the computer to John:
Option 1 buy the computer for £1,800 and give it to John
Option 2 give a computer that the company has already used and buy a replacement one for the company for £1,800.
The used computer has a market value of £150, and has a balance of £Nil on the main pool.
What should the company do?
Solution:
Option 1 after tax cost
Payment (£1,800)
After tax cost £1,800Option 2 after tax cost
Tax payment from balancing charge on main pool (£150*25%) = (£37.5)
Tax saving from AIA 100% on new purchase £1,800*25% = £450
Payment of new computer (£1,800)
After tax cost £1,388Therefore, it is beneficial for the company to use Option 2.
Loans provided to a shareholder of a close company
Shareholder tax implications
A Loan benefit is assessable if the shareholder is also an employee of the close company.
If this loan is written off by the company then the shareholder/employee is treated as receiving a distribution/ dividend equivalent to the loan written off. This will be subject to income tax if the deemed dividend value exceeds the dividend nil rate band of £500, only the excess value is subject to income tax at 8.75%, 33.75% or 39.35%.
Apart from the income tax, the deemed dividend will also be subject to Class 1 NIC which will be payable by the shareholder/employee.
The shareholder who is not an employee is treated as receiving a dividend equivalent to the loan benefit which would have been assessable.
Close company tax implications
The close company must pay a penalty to HMRC of 33.75% x loan provided to a shareholder within 9 months and one day from end of the CAP.
The company can reclaim the penalty when the loan is repaid or when the company writes off the loan.
The penalty will be repaid by HMRC 9 months and one day after the end of the accounting period in which the loan was either repaid or written off.
By concession the penalty can be avoided in the following circumstances:
1) The shareholder repays the loan within the 9 month payment period.
2) The shareholder meets the following three conditions:
- owns ≤ 5% of the shares
- Employee of company
- Loan ≤ £15,000
Illustration
Jake Ltd. is a UK resident company.
Jake owns 100% of the share capital in Jake Ltd. and is a director of the company.
Jake Ltd. is giving Jake a £14,000 interest free loan.
What will the tax implications be?
Solution
Jake is a shareholder and an employee of the company, therefore this will be taxed as the beneficial loan benefit on Jake.
Beneficial loan benefit
£14,000*2.25% = £315The company will have to pay Class 1 A NIC on the benefit as well as a penalty.
Class 1 A NIC
£315*13.8% = £44Penalty
33.75%*£14,000 = £4,725This penalty is payable on the usual corporation tax payment date (e.g.) 9 months and 1 day after the CAP end.
It will be refunded by HMRC 9 months and one day after the end of the accounting period in which the loan was either repaid by Jake or written off.
If the loan is written off then the amount of the loan is treated as a distribution to Jake and he will be taxed on it as if it were a dividend. He will also have to pay Class 1 NIC on the deemed dividend.