Close companies and investment companies

Having looked at the general rules for companies, we now look at the specific
rules for investment companies and close companies.
Companies with investment business are any companies that make investments,
for example in shares, and collect the income from them. Expenses of managing
those investments are generally deductible for corporation tax purposes.
A close company may have any type of business, but it needs special tax
treatment because it is under the control of a few people who might try to take
profits out of it in non-taxable forms.
In the next chapter, we will go on to look at groups and consortia.

Study guide

    Intellectual level
4 Corporation tax liabilities in situations involving further overseas and group aspects and in relation to special types of company, and the application of additional exemptions and reliefs
(b) The scope of corporation tax: 3
(i) Identify and calculate corporation tax for companies with investment business.


Close companies:

•              Apply the definition of a close company to given situations

•              Conclude on the tax implications of a company being a close company or a close investment holding company

Exam guide

You may be asked about how a company with investment business can deduct management expenses. Questions involving planning for families may include a consideration of close companies. The rules for treating benefits as distributions are fairly straightforward, but you must be careful not to overlook the disallowance of the expenses in the corporation tax computation. The tax charge for loans to participators is a significant cost of making any such loan, even though it is recovered when the loan is repaid or written off.



The topics in this chapter are new.

                                1 Companies with investment business   12/12


A company that generates income from investments can usually deduct the expenses of managing their investments for corporation tax purposes.

A company with investment business is any company whose business consists wholly or partly in making investments.

The principal overhead of the investment business will be the costs of running the business which are called management expenses. These are generally deductible in computing taxable profits. An unrelieved excess of such expenses in one accounting period may be carried forward as management expenses of the following accounting period and, if still unrelieved, to future accounting periods.

Excessive directors’ remuneration is not deductible for tax purposes. Capital expenditure is excluded from deduction as a management expense and HMRC may also refuse a deduction for any amounts which are not in fact expenses of management. Capital allowances on plant and machinery used for the investment business are allowed as a management expense if they cannot be relieved in any other way.

Non-trading loan relationships expenses and losses are dealt with under the loan relationship rules, not as a management expense.

Question Investment companies
TC Ltd, a non-close company with wholly investment business, has the following results for the year ended 31 March 2016.


Rental income 150,000
Building society interest 8,000
Chargeable gains 100,000
Management expenses

Property management



            General 50,000
Capital allowances

On property



            General 1,000
Qualifying charitable donations

Unrelieved management expenses carried forward at 1 April 2015 amounted to £60,500.

Compute the corporation tax payable.



 £  £
Rents  150,000
Less: capital allowances  800
                         property management expenses  40,000
Property income   109,200
Interest income   8,000
Chargeable gains  100,000
Less: general management expenses   50,000
                         general capital allowances   1,000
                        management expenses brought forward  60,500
Total profits   105,700
Less qualifying charitable donations   (47,000)
Taxable total profits    58,700
Corporation tax payable £58,700  20%  £11,740



2   Close companies

2.1 Close company definitions

12/11, 12/12, 12/13, 6/14, 6/15 

Owner-managed and family-owned companies could easily be used for tax avoidance. Special rules apply to these ‘close’ companies to counteract this. Broadly, a close company is one that is under the control of either five or fewer shareholders or any number of its shareholding directors. Shareholders and shareholding directors are known as ‘participators’.

Direct relatives, business partners and certain trusts set up by the participator (or their direct relatives or business partners) are known as ‘associates’. The rights and powers of associates are attributed to participators when determining control.

Thus if the five largest shareholders of X Ltd own 9% of the shares each, and they have no associates, the company will not be close. If, however, the wife and son of Mr A, one of the five largest shareholders, each hold 3% the company will be close as Mr A is deemed to hold (9 + 3 + 3) = 15%, so that the holdings of the five largest shareholders is (4  9 + 15) = 51%.

A company which is controlled by a close company will also itself be a close company. A company which is not resident in the UK cannot be a close company. A close investment-holding company is a close company which is not a trading company and is not a member of a trading group.

Exam focus         Identifying a close company was tested in December 2013 Question 2 Forti Ltd group. The examiner point              commented that ‘This was intended to be a relatively straightforward requirement, which then required some thought if a very good mark were to be obtained. However, the majority of candidates simply did not know the rules, such that the performance in this part of the question was poor. On the whole, candidates focussed on the owners of the company and knew the rules had something to do with five shareholders and any number of directors. However, the key to the rules is who controls the company as opposed to who owns it.’

2.2 Loans to participators


The rules on loans and benefits from close companies are intended to deter shareholders from using the obvious ways of extracting value from their company without paying tax.

When a close company makes a loan to one of its participators or an associate it must make a tax payment to HMRC equal to 25% of the loan. This may be referred to as ‘penalty tax’. If the loan is repaid, HMRC will repay this tax charge.

For companies which are not large, the tax charge is due for payment nine months and one day after the end of the accounting period. The tax charge is subject to the quarterly payments on account regime if the company is large. If the loan is repaid before the tax charge is due to be paid then the requirement to pay the penalty tax charge is cancelled. Interest runs from the due date until the earlier of payment of the tax and repayment of the loan. The loan must be notified on the company’s tax return.

A loan for these purposes includes:

  • A debt owed to the company
  • A debt incurred by a participator or his associate and assigned to the company
  • An advance of money
  • A director’s overdrawn current account

Certain loans are excluded from these provisions. These are:

  • Money owed for goods or services supplied in the ordinary course of the company’s trade unless the credit period exceeds:
    • Six months, or, if less
    • The normal credit period given to the company’s other customers.
  • Loans to directors and employees providing they do not exceed £15,000 in total per borrower and:
    • The borrower works full-time for the close company, and
    • He does not have a material interest (entitlement to over 5% of the assets available for distribution on a winding up) in the close company.

If at the time a loan was made the borrower did not have a material interest but he later acquires one, the company is regarded as making a loan to him at that date.

When all or part of the loan is repaid by the participator to the company, or the company writes off all or part of the loan, then the company can reclaim all or a corresponding part of the tax charge paid over to HMRC. If the loan is repaid or written of on or after the due date for paying the tax charge, the tax is not repayable until nine months and one day after the end of the accounting period of repayment or write off of the loan.

HMRC pay interest up to the time they repay the tax. If the loan is repaid/written off before nine months from the end of the accounting period in which the loan is made, interest runs from the end of those nine months. Otherwise, it runs from the date when the tax is repayable.

If a loan made during an accounting period is to be repaid during the next accounting period, repayment before the due date for payment of the corporation tax will avoid the need for the penalty tax charge to be paid. Later repayment will defer the refund date for a year.
Exam focus point

Although tax is charged on the company when a loan is made to a participator, the loan is not at that stage treated as the participator’s income. If the loan is later written off:

  • The amount written off is treated as the participator’s income and is included within his total income grossed up accordingly. It is taxed as if it were a dividend received by him (the net dividend equalling the loan written off), so a basic rate taxpayer has no more tax to pay, but a higher or additional rate taxpayer must pay more tax
  • If the participator is a director or employee, there is no taxable benefit because the above tax charge applies instead



C Ltd, a close company which prepares accounts to 31 July each year, lends £50,000 to a shareholder in July 2014. C Ltd is required to account for a tax charge of £12,500 to HMRC. In July 2015 the shareholder repays £20,000. In January 2016 C Ltd writes off the remaining £30,000. Compute the amount of penalty tax recovered by C Ltd following the repayment in July 2015 and the write off in January 2016.



  • The penalty tax recovered after the repayment is  £12,500 = £5,000.
  • The penalty tax recovered after the write off is £7,500.


2.3 Benefits treated as distributions

Benefits given by a close company to participators and their associates and which are not taxable earnings, for example where the participator does not work for the company, are treated as distributions. The amount of the deemed distribution is the amount that would otherwise be taxed as earnings. The actual cost is a disallowable expense for corporation tax purposes and no capital allowances can be claimed by the company on the provision of assets which are treated as distributions.



A close company provides a new car for a participator who is not a director or employee in May 2015. The taxable benefit in 2015/16 under the income tax legislation would be valued at £3,500. No fuel is provided. What are the tax consequences?



The participator is taxed as if he had received a net dividend of £3,500 in 2015/16. The company cannot deduct capital allowances on the car or any running costs in computing its taxable profits.


Chapter roundup

A company that generates income from investments can usually deduct the expenses of managing their investments for corporation tax purposes.
The rules on loans and benefits from close companies are intended to deter shareholders from using the obvious ways of extracting value from their company without paying tax.

Quick quiz

  • How may a company obtain relief for management expenses?
  • What is a close company?
  • What are the immediate consequences of a loan by a close company to a participator?
  • What are the tax consequences of the repayment by a participator of the whole of a loan made by a close company?
  • What items are treated as distributions by close companies?

Answers to quick quiz

  • Management expenses are deductible when computing taxable profits. Any unrelieved management expenses may be carried forward to be relieved in a similar fashion in the following accounting period.
  • A close company is one that is under the control of either five or fewer shareholders or any number of shareholding directors.
  • When a close company makes a loan to one of its participators it must make a payment to HMRC equal to 25% of the loan.
  • When all of a loan is repaid by the participator, the close company can reclaim all of the tax charge paid over to HMRC.
  • Benefits given to participators or their associates which are not taxed under the benefits legislation.



Number Level Marks Time
Q28 Introductory 15 29 mins
Q39 Examination 25 49 mins

Question 39 has been analysed to show you how to approach paper P6 exams.               

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