Income and Corporation Taxes Act 1988

414 Close companies. U.K.

(1) M1 For the purposes of the Tax Acts, a “close company” is one which is under the control of five or fewer participators, or of participators who are directors, except that the expression does not apply—

(a) to a company not resident in the United Kingdom;

(b) to a registered industrial and provident society within the meaning of section 486(12) or to a building society;

(c) to a company controlled by or on behalf of the Crown, and not otherwise a close company; or

(d) to a company falling within section 415 or subsection (5) below.

[F1 (2) Subject to section 415 and subsection (5) below, a company resident in the United Kingdom (but not falling within subsection (1)(b) above) is also a close company if five or fewer participators, or participators who are directors, together possess or are entitled to acquire—

(a) such rights as would, in the event of the winding-up of the company (“the relevant company”) on the basis set out in subsection (2A) below, entitle them to receive the greater part of the assets of the relevant company which would then be available for distribution among the participators, or

(b) such rights as would in that event so entitle them if any rights which any of them or any other person has as a loan creditor (in relation to the relevant company or any other company) were disregarded.

(2A) In the notional winding-up of the relevant company, the part of the assets available for distribution among the participators which any person is entitled to receive is the aggregate of—

(a) any part of those assets which he would be entitled to receive in the event of the winding-up of the company, and

(b) any part of those assets which he would be entitled to receive if—

(i) any other company which is a participator in the relevant company and is entitled to receive any assets in the notional winding-up were also wound up on the basis set out in this subsection, and

(ii) the part of the assets of the relevant company to which the other company is entitled were distributed among the participators in the other company in proportion to their respective entitlement to the assets of the other company available for distribution among the participators.

(2B) In the application of subsection (2A) above to the notional winding-up of the other company and to any further notional winding-up required by paragraph (b) of that subsection (or by any further application of that paragraph), references to “the relevant company” shall have effect as references to the company concerned.

(2C) In ascertaining under subsection (2) above whether five or fewer participators, or participators who are directors, together possess or are entitled to acquire rights such as are mentioned in paragraph (a) or (b) of that subsection—

(a) a person shall be treated as a participator in or director of the relevant company if he is a participator in or director of any other company which would be entitled to receive assets in the notional winding-up of the relevant company on the basis set out in subsection (2A) above, and

(b) except in the application of subsection (2A) above, no account shall be taken of a participator which is a company unless the company possesses or is entitled to acquire the rights in a fiduciary or representative capacity.

(2D) Subsections (4) to (6) of section 416 apply for the purposes of subsections (2) and (2A) above as they apply for the purposes of subsection (2) of that sections.]

(3) M2 In ascertaining under subsection (2)above whether any amount could be apportioned among five or fewer participators or among participators who are directors, account shall, in cases where an original apportionment and any sub-apportionment are involved, be taken only of persons among whom that amount could finally be apportioned as the result of the whole process of original apportionment and sub-apportionment and those persons shall be treated as participators or directors if they are participators or directors of any company in the case of which either an original apportionment or any sub-apportionment could be madeF2 .

(4) M3 For the purposes of this section—

(a) a company is to be treated as controlled by or on behalf of the Crown if, but only if, it is under the control of the Crown or of persons acting on behalf of the Crown, independently of any other person, and

(b) where a company is so controlled, it shall not be treated as being otherwise a close company unless it can be treated as a close company as being under the control of persons acting independently of the Crown.

(5) M4 A company is not to be treated as a close company—

(a) if—

(i) it is controlled by a company which is not a close company, or by two or more companies none of which is a close company; and

(ii) it cannot be treated as a close company except by taking as one of the five or fewer participators requisite for its being so treated a company which is not a close company;

(b) if it cannot be treated as a close company except by virtue of [F3 paragraph (a) of subsection (2) above or paragraph (c) of section 416(2) and it would not be a close company if the references in those paragraphs] to participators did not include loan creditors who are companies other than close companies.

(6) References in subsection (5) above to a close company shall be treated as applying to any company which, if resident in the United Kingdom, would be a close company.

(7) M5 If shares in any company (“the first company”) are held on trust for an exempt approved scheme as defined in section 592, then, unless the scheme is established wholly or mainly for the benefit of persons who are, or are dependants of, directors or employees or past directors or employees of—

(a) the first company; or

(b) an associated company of the first company; or

(c) a company which is under the control of any director or associate of a director of the first company or of two or more persons each of whom is such a director or associate; or

(d) a close company;

the persons holding the shares shall, for the purposes of subsection (5) above, be deemed to be the beneficial owners of the shares and, in that capacity, to be a company which is not a close company.

Textual Amendments

F1 1989 s. 104(1) from 1 April 1989. Previously "(2) Subject to section 415 and subsection (5) below, a company resident in the United Kingdom (but not falling within subsection (1)(b) above) is a close company if-(a) on the assumtion that it is so, or (b) on the assumption that it and any other such company or companies are so, more than half of any any amount falling to be apportioned under section 423 in the case of the company (including any sum which has been apportioned to it, or could on either of those assumptions be apportioned to it, under that section) could be apportioned among five or fewer participators, or among participators who are directors.".

F2 Repealed by 1989 ss. 104(2) and 187 and Sch. 17 Part V from 1 April 1989

F3 1989 s.104(3)from 1April 1989.Previously

“paragraph (c) of section 416(2) and it would not be a close company if the reference in that paragraph”.

Modifications etc. (not altering text)

C1 S. 414 modified by Finance Act 1996 (c. 8), Sch. 13 para. 9A(4) (as inserted (with effect in accordance with s. 104(5) of the 2002 amending Act) by Finance Act 2002 (c. 23), s. 104(3))

C2 S. 414 modified by Finance Act 1996 (c. 8), Sch. 9 para. 2(5) (as inserted (with effect in accordance with s. 82(2) of the 2002 amending Act) by Finance Act 2002 (c. 23), Sch. 25 para. 22(4))

C3 S. 414 applied (with modifications) (6.4.2005 with effect in accordance with s. 883(1) of the affecting Act) by Income Tax (Trading and Other Income) Act 2005 (c. 5), ss. 453, 456(7) (with Sch. 2)

C4 See 1979(C) s.155(1)—definition applied for purposes of capital gains.

Marginal Citations

M1 Source—1970 s.282(1)

M2 Source—1970 s.282(2); 1972 Sch.17 1

M3 Source—1970 s.282(3)

M4 1970 s.282(4), (5); 1972 Sch.17 1

M5 Source—1971 s.25(6)