Corporation Tax in Setup UK for Close Companies and Close Investment-holding Companies

31 Oct

The companies that are owned by a family or managed by an owner are termed as close companies. The type of company that is labelled as a close company is allowed to register a business name UK of any type. However, it has the requirement of the treatment of special tax since it is controlled by a few people. These people can try to take out non-taxable profits.

The blog will discuss the companies that have a business of investment, corporation tax, close companies, loans given to participators, benefits that are considered as distributions, and the close investment-holding companies.

Companies with Business of Investment

A ltd company formation UK that has to register a business name UK of investment is a company whose business constitutes completely or in parts, in investment making. The companies that have a business of investment are the type of companies that are involved in making investments. As an example, consider the case of shares and collecting the income from them. In order to fulfill the purposes of corporation tax, the costs of the management of such investments are, in general, to be subtracted.

The management expenses can be defined as the principle overhead of the business of investment that will be the expense of carrying out the business. These expenses, in general, can be subtracted in the computation of the profits liable to tax. An excess of such expenses of the unrelieved type in one accounting period, can be sent forward as the expenses of management of the next period of accounting. In the case that it still remains unrelieved, then the expenses are sent forward to the upcoming periods of accounting.

For the purposes of tax, the directors’ remuneration in excess is not to be subtracted. The expense of capital is not included in the subtraction in the form of an expense of management and it is also possible that the HMRC does not allow the subtraction for any amounts that are not actually the costs of management. The allowances of capital utilized on machinery and plant, used for the business of investment, are permitted in the form of expense of management if their relieving cannot be done in some other manner.

The dealing of the losses and expenses of non-trading relationships of loan is done under the rules of relationship of loan and not in the form of expense of management. A type of company that makes investment in the form of business can or cannot be under the category of a close investment-holding company.

Which Companies Are Liable to Corporation Tax?

The corporation tax is applicable to the companies that run the business of investment in a normal manner. However, there exists an exception in the case of close investment holding companies. Hence the companies that have the business of investment can make use of the marginal relief or the small profits rate.

Special Rules for the Close Companies

The companies that are owned by a family or managed by an owner are termed as close companies and can easily be utilized to fulfill the purpose of avoidance of tax. There are some specific rules that are applicable to the close companies in order to counteract this. In a broad manner, a close company is an ltd company formation UK if it is in the control of shareholders about five or less in number or equivalent to the number of the shareholder directors. The participators are defined as the shareholder directors or the shareholders themselves. On the other hand, the associates are defined as the business partners, direct relatives and some specific trusts that are set up by the participator or their business partners or direct relatives. The participators, while the determination of control, decide the powers and rights of the associates.

Hence, in the case if a company after ltd UK registration, say X Ltd, has five largest shareholders that are the owners of 9% shares each, and they have no associates, then the company will not be considered as a close company. However, if the son and wife of a person who is one of the five shareholders, each own 3%, the company will be considered as a close since that person will then hold (9+3+3= 15%), hence rendering the holding of the shares of five largest shareholders to be (4*9+15= 51%).

A company after ltd UK registration itself will also be considered as a close company in the case if that company is under the control of a close company.

Loans Acquired by the Participators

The rules applicable on the benefits and loans from close companies have the intention of preventing the shareholders from the utilization of the obvious ways of the extraction of value from their company without making the payment of tax.

In case of a close company that gives a loan to an associate or one of its participators, then it should make a payment of the tax to HMRC that is equivalent to an amount of 25% of the loan. In case of the repayment of loan, the HMRC will have to make the payment of this charge of tax again.

In case of the companies that are not huge, the charge of tax is then due for its payment nine months after the termination of the period of accounting. The charge of tax is to be paid in the form of quarterly payments on account regime in the case of the company being large. If the repayment of the loan is done prior to the charge of tax is due to be paid, then the need to make the payment of the penalty charge of tax is terminated or cancelled. The duration of the interest is from the due date to the earlier of the tax payment and the loan repayment. The notice of the loan must be given on the return of tax of the company.

A loan in order to fulfill these purposes is:

  • A debt suffered by an associate or the participator and has been assigned to the company.
  • A current account that has been overdrawn by the director.
  • A debt that needs to be paid by the company.
  • A money advance payment.

However, some loans are not included in these provisions. These include:

  • Money that is to be paid in return of the goods or the services that are supplied in the ordinary course of the trade of the company till the period of credit is less than six months, or less and the normal period of credit that is provided to the other customers of the company.
  • The loans that are provided to the directors and the employees, under the condition that they are less than 15000 pounds in sum per borrower and the borrower is working for the company on full time basis, and he does not have any interest of the materialistic type in the close company.

There can also be a scenario that when the loan was made, the borrower of the loan had no interest of the materialistic type but somehow, later he develops such interest, then in this case, the company is considered to be making that loan to him on that date.

When the participator makes the payment of the complete or a portion of the loan again to the company, or in the case of the company writing off all the loan or a portion of it, then the company is allowed to make the claim again of the complete charge of tax or a portion of it that was previously paid over to the HMRC.

In case of the loan being written of or paid after the due date for the payment of charge of tax, the tax is not then to be repaid until nine months once the accounting period of repayment comes to an end or the loan is written off.

The HMRC make the payment of the interest till the time they keep paying the tax again and again. In case of the loan being written off or paid again before nine months from the termination of the accounting period in which the loan is made, then the duration of the interest is from the termination of those nine months. On the contrary, it starts running from the date when the tax becomes payable again.

The loan is not considered as the income of the participator at that stage, although the charge of tax is made on the company when a loan is acquired by a participator. In case of the loan being written off later, then the amount that is written off is considered as the income of the participator and is a part of his total income that is summed up accordingly. It is liable to tax by assuming it as a dividend that is acquired by him (the total dividend being equal to the loan that is written off), so, a taxpayer who makes the payment of the tax at a basic rate, has no more payment of tax to be made, but an additional or higher rate payer of tax should pay more or excessive tax. In case of the participator being an employee or a director of the company, then there is no benefit liable to tax since the above charge of tax is applicable instead.

Benefits by Close Company as Distributions

The associates and the participators when receive benefits from a close company, that are not the earnings liable to tax, e.g. in the case where the participator is not the worker of the company, these benefits are considered and treated as distributions. The amount that would otherwise be liable to tax in the form of earnings, is the probable amount of deemed distribution. For the purposes of corporation tax, the actual cost is considered as a disallowable expense.

Companies that Hold Close Investment

The close investment holding companies, are separated out in order to be subject to some special treatment in order to refrain or prevent people from some investments of the substantial type, in order to put their investments in a company and making use of the status of the company to decrement or defer the liabilities of tax.

A CIC or the close investment holding company is defined as a type of close company that is not a company of trade and also is not a member of the group of trade.

A company will be considered as the company for trade for an accounting period in the case if its existence is found entirely or in parts in order to fulfill the purpose of trading. It is not mandatory for a company to run its trade in the period of accounting in order to pass this test but when the trade is carried on or run, it should be run or carried on, on a commercial basis.

A company is said to be a member of a company of trade in the case if it co-ordinates the administration of the companies of trade that is controlled by it.

The companies are considered as the companies of trade for this purpose if they make the dealings of land, securities or shares. In a similar manner, in case of a company that makes an investment in property that is let or is to be let on a basis of commercial nature, then it will not be taken into account in the form of a CIC.

It should be remembered that a CIC always makes the payment of the corporation tax at the main rate, irrespective of its level of profits. However, a CIC that has an association with another company, is still treated as an associated company in order to fulfill the purpose of the reduction of limits for the marginal relief and the small profits rate.

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