Professional, Practical, Proven 19 - Corporation Tax 5 Close companies & Self Assessment
Schedule Monday Chapter Ref. Topic Areas Week 23 rd Dec – 12 th Jan 2020 Christmas Break 13 th Jan 8 Capital Allowances Wk/Lecture 13 20 th Jan Wk/Lecture 14 9 Basis Periods 27 th Jan Wk/Lecture 15 10 Corporation Tax – Introduction 3 rd Feb 10 Corporation Tax – Capital Allowances Wk/Lecture 16 10 th Feb Wk/Lecture 17 10 Losses 17 th Feb Wk/Lecture 18 11 Chargeable Gains 24 th Feb 11 Close companies and Self-Assessment Wk/Lecture 19 2 nd Mar – 8 th Mar Reading Week 2 9 th Mar 12 VAT - Introduction Wk/Lecture 20 16 th Mar Wk/Lecture 21 13 VAT – Detailed computation 23 rd Mar 14 CIS & NIC Wk/Lecture 22 30 th Mar 6 Revision - CGT Wk/Lecture 23 6 th Apr Wk/Lecture 24 N/A Revision - Income tax 13 th Apr N/A Revision - Corporation tax Wk/Lecture 25 20 th Apr Wk/Lecture 26 N/A Revision – Admin and VAT 27 th Apr Week 27 4 th May Week 28 2 11 th May Examinations
Schedule 3
Close companies and company self assessment Close companies • Definition • Exceptions • Consequences of close company status • Benefits • Loans • Self assessment • Notification of chargeability • Corporation tax return and records • Payment of corporation tax • 4
Close company A close company is one whose affairs can be controlled and • manipulated by a small group of people, possibly for tax avoidance purposes. Most companies in the UK are close companies. • Certain anti-avoidance legislation exists in relation to close • companies. 5
Definition A close company is a UK resident company which satisfies certain • conditions The main instance of a close company which is under the control • of: a) Five of fewer participators, or b) Any number of participators who are also directors of the company. The rights of a participator’s associates are aggregated with that • participator’s own rights for the purposes of determining whether a company is a close company. 6
Control Persons are deemed to have control over a company, if, taken • together, they: a) Own over 50% of the company’s issued share capital, or b) Have over 50% of the company’s voting power, or c) Would receive over 50% of the company’s income, if it were all distributed, or d) Would receive over 50% of the company’s assets, if the company were wound up. 7
Participator A participator is defined as somebody who has a share or interest • in the capital or income of the company. In many instances, a company’s only participators are its • shareholders, but other persons (e.g. option holders, loan creditors) might also rank as participators. 8
Directors A director, for this purpose, is any person: • a) Who occupies the position of director (whether called a director or not), or b) Whose directions or instructions are normally obeyed by the directors, or c) Who is a manager of the company and (possibly together with associates) controls at least 20% of the company’s ordinary share capital. 9
Associates The main associates of a participator are: • a) The participator’s business partners b) The participator’s relatives c) The trustees of a settlement established by the participator or by his/her relatives For this purpose, a participator’s relatives comprise his or her • spouse (or civil partner), parents and remoter ancestors, children and remoter issue, brothers and sisters. 10
Close company Example: A company’s issued share capital consists of 1,000 £1 ordinary shares, held as follows: No of shares No of shares David 200 Helen 50 Emma 50 Ian 30 Frederick 100 Jacqueline 40 George 50 Others (1 share each) 480 None of the shareholders are associated in any way and no shareholder is also a director. 11
Close company Example: a) Is the company a close company? b) Would the company be a close company: i. If David were Jacqueline’s brother, or ii. If Emma married Ian, or iii. If David were Jacqueline’s brother and Emma married Ian? 12
Close company Solution a) The five largest shareholders own 45% of the share capital, so the company is not under the control of five or fewer participators. The company is also not under the control of its directors. Therefore the company is not a close company. David 200 Frederick 100 Emma 50 George 50 Helen 50 Total 450 13
David (+Jacq) 200 + 40 Frederick 100 Emma 50 George 50 Helen 50 David 200 Total 490 Frederick 100 Emma (+ Ian) 50 + 30 Close company George 50 Helen 50 Total 480 Solution i. If David were Jacqueline’s brother, her 4% holding would be aggregated with his and the five largest shareholders would control 49% (45% + 4%) of the company. The company would not be a close company ii. If Emma married Ian, his 3% would be aggregated with hers and the five largest shareholders would control 48% (45% + 3%) of the share capital. The company would still not be a close company. iii. If David were Jacqueline’s brother and Emma married Ian, the five largest shareholders would control 52% (45% + 4% + 3%) of the share capital. The company would then be a close company. 14
Consequences
Consequences of close company status There are two main tax consequences of close company status. • These are: a) Benefits in kind provided by the company to its participators or their associates are generally treated as distributions. b) Loans made to participators or their associates are assessed to tax. 16
Benefits in kind provided to participators Benefits in kind provided by a close company to its participators • (or their associates) are generally regarded as distributions. The taxation effects of this are as follows: a) The cost to the company of providing the benefit is disallowed when computing its corporation tax liability b) The company is deemed to have made a distribution equal to the amount of the benefit in kind which would have been assessed to income tax if the benefit had been received by an employee c) The person receiving the benefit is taxed as if he or she had received a dividend of the same amount as the deemed distribution. 17
Benefits in kind provided to participators Example On 31 August 2019, a close company provides one of its shareholders with a holiday costing £3,600. This is charged as an expense in the company’s income statement for the year to 31 March 2020. The shareholder concerned is not a director or employee of the company. Required: Explain the tax treatment of this item. Solution The £3,600 is disallowed in the company’s tax computation for the year to 31 March 2020. The company is deemed to have made a distribution of £3,600 and the recipient of the holiday is taxed as if he/she had received a dividend of £3,600. 18
Loans made to participators If a close company makes a loan to a participator (or associate), • the tax consequences are as follows: a) The company is required to pay an amount of tax which is calculated at 32.5% of the amount of the loan ( 25% prior to 6 April 2016 ). This tax is known as a S455 tax and is payable nine months and one day after the end of the accounting period in which the loan is made. However, no tax is payable in relation to any part of the loan which is repaid to the company before the date on which the tax falls due. b) The tax paid when the loan was made is repaid to the company if the participant repays the loan or if the loan is written off. The tax repayment is made nine months and one day after the end of the accounting period in which the loan is repaid or written off. 19
Loans made to participators c) Anti-avoidance legislation has been introduced with effect from March 2013, to close a loophole which was used by companies to avoid paying the S.455 tax. Loans were repaid before the deadline and then taken out again shortly after the deadline. If repayments of more than £5,000 are made against a loan and the loan is redrawn within a 30 day period, the company will remain liable for the S.455 tax. Where the loan to the participator is £15,000 or more, the time limit of 30 days does not apply. Here, if the loan is repaid with the intention of redrawing the loan again, the S.455 tax will still be charged. 20
Loans made to participators d) If the loan is written off, wholly or in part, the participator is deemed to have received income equal to this amount. e) Certain loans are excluded from the treatment described above. These include loans made to a participator in the normal course of the company’s business and loans not exceeding £15,000 made to a participator who is full-time employee or director of the company, so long as that participator (with associates) has no more than a 5% interest in the company. If the company has made loans to participators during the year and they remain outstanding at the end of the period, the company must inform HMRC of these loans by submitting a Form CT600A to HMRC. 21
Loans made to participators Example On 1 May 2019, a close company which prepares accounts to 31 March each year lends £30,000 to John, who is one of its directors. No interest is charged on this loan. John owns 18% of the company’s ordinary share capital. Required: Explain the tax treatment of this loan if: a) John repays the loan in full on 15 February 2021. b) John repays £11,500 of the loan on 15 February 2021 and the remaining £18,500 is written off by the company on the same day. 22
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