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CLOSE COMPANIES

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To ascertain a participators interest include the interest of his associates' 4. CLOSE COMPANIES ... 2) Ascertain if exception applies. a) Identify principal members ... – PowerPoint PPT presentation

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Title: CLOSE COMPANIES


1
CLOSE COMPANIES
Theory and Practice of Tax B C33TB2 Lecture 12a
2
CLOSE COMPANIES
  • IntroductionA company which is controlled by a
    small number of people. This would enable them to
    take advantage of corporate status to avoid tax.
    Special rules relate to close companies to
    prevent this happening

3
CLOSE COMPANIES
  • DefinitionsA close company is one which is
    under the control of either
  • a) five or fewer participators, or
  • b) any number of its participators who are
    directors
  • Participator is someone who has a share in the
    capital or income of the company. Mostly this is
    shareholder. To ascertain a participators
    interest include the interest of his associates

4
CLOSE COMPANIES
  • Definitions (cont)Control is having ability to
    exercise control over the companys affairs.This
    will most commonly be through ownership of more
    than 50 of the share capital
  • Associates includea) relatives parents
    remoter ancestors children remoter issue
    spouses siblingsb) business partnersc)
    trustees of settlements set up by participator,
    or his relatives

5
CLOSE COMPANIES
  • Definitions (cont)Director is any persona)
    who occupies position of director, orb) whose
    directions are followed by other directors, orc)
    who is a manager of the company and controls at
    least 20 of the ordinary share capital

6
CLOSE COMPANIES
  • IllustrationZ Ltd Share Capital 2,400
    sharesShareholders
    Shares A
    201 B
    200 C
    200 D
    Ltd 200
    E
    200 F
    200
    1,201 Others(20)
    1,199 Total
    2,400Is Z Ltd
    a close companya) Assume all are independentb)
    E is As grandson

7
CLOSE COMPANIES
  • Answera) Control by 6 personsNot a close
    companyb) 5 Largest shareholders A grandson E
    401
    BCDF 200 each 800

    1,201 This is more than 50 of 2,400
    Close company

8
CLOSE COMPANIES
  • Exceptions to close company statusCompany under
    the control of 5 or fewer participants etc will
    not be a close companya) if it is not resident
    in the UKb) where there is a substantial public
    interest
  • Substantial public interest occurs wherea)
    shares carrying not less than35 of the voting
    power are held by the public,b) principal
    members do not hold more than 85 of the voting
    power andc) shares have been quoted and dealt in
    on a recognised stock exchange in the previous 12
    months

9
Exceptions to close company status
  • DefinitionsPublicExcludesa) directors (and
    associates) and companies controlled by themb)
    associated companiesc) principal members
  • Includesa) open companiesb) pension and
    superannuaton funds, whether or not they are
    principal membersc) strangers

10
Exceptions to close company status
  • Definitions (cont)Principal members5 largest
    shareholdings (including associates) provided
    each has more than 5 of the voting power
  • Public and principal membersOnly open companies
    and pension and superannuation funds can be both
    public and principal members

11
Exceptions to close company status
  • ExampleIs A Ltd a close company?Principle
    Shareholders Shares Dir/ Public
    members
    Prin mem J Ltd (open)
    45
    K dir 15

    L dir 13

    H dir 11
    G
    dir 4.5
    F
    4.5
    others
    7
    Total 100

12
Exceptions to close company status
  • Approach1) Apply test to establish if close
    company (control by participants etc)
  • 2) Ascertain if exception applies
  • a) Identify principal members
  • b) In order to identify members of public
    note those that cannot be members of public
  • c) Remainder (plus those that can be both
    principal members and members of the public) are
    members of public
  • d)Apply tests of 35 and85 and stock
    exchange

13
Exceptions to close company status
  • Answer1) Control J Ltd 45
    K 15
    60Two participants have control
  • Does exception apply?
  • 2)a) PM 5 largest gt5. Not G and F
  • b) identify PM and dir
  • c) public F, others and open company (J
    Ltd)
  • d) public owns over 35 prin mem do
    not own more than 85 therefor if quoted
    and dealings on recognised stock exchange
    exception applies and company is not close

14
Exceptions to close company status
  • ExampleIs A Ltd a close company?Principle
    Shareholders Shares Dir/ Public
    members
    Prin mem 45 J Ltd (open)
    45 x 45
    15 K dir 15
    x 13
    L dir 13
    x 11
    H dir 11 x
    G dir
    4.5 x
    F
    4.5 4.5
    others
    7 7
    84 Total 100
    56.5


15
CONSEQUENCIES OF CLOSE COMPANY STATUS
  • Reason for legislation To bring transfers from
    the company within the tax net. The legislation
    covers benefits in kind and loans
  • 1 Benefits in kind treated as distributions
    Benefits provided to participators and their
    associates which are not taxable under Schedule E
    are treated as distributionsa) the cost to the
    company is disallowed when computing profitsb)
    the cost is the amount that would have been a
    benefit for an 8,500 employeec) person
    receiving benefit is treated as having received a
    dividend of the same amount

16
Benefits in kind treated as distributions
  • Example.Close Ltd lends electrical equipment
    costing 3,000 to a participator who is neither a
    director or an employee. If the participator had
    been an employee, the benefit would have been 20
    of 3,000. What are the consequences?
  • Solution Participator is treated as having
    received a net dividend of 600. Company cannot
    claim capital allowances for the equipment and is
    treated as having paid a dividend of 600.

17
  • 2 LOANS TO PARTICIPATORS
  • a) If such loans are made, the company must make
    a payment to Inland Revenue of 25 of the loan
    (Due 9 months after the end of the CAP (in
    quarterly instalments if the company is large)
    but need not be made if loan is repaid before the
    tax is due).
  • b) This will be repaid when the loan is repaid or
    if it is written off
  • c) If the loan is written off the participant is
    deemed to have received a dividend of the amount
    written

18
LOANS TO PARTICIPATORS
  • Excluded from loan provisionsRules do not apply
    if
  • a) loans made in the ordinary course of business
    or
  • b) loans do not exceed 15,000 per borrower and
    are made to employees or directors whoi) works
    full-time for the company ANDii) do not own,
    with associates, more than 5 of ordinary share
    capital of the company

19
CLOSE INVESTMENT HOLDING COMPANIES
  • A Close company which is NOTA trading company
    andA member of a trading group.
  • CONSEQUENCESA CIC is not entitled to the small
    companies rate of Corporation Tax or to tapering
    relief
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