A close company is a UK company under the control of five or fewer participators, or of participators who are directors however many there are. Most owner-managed companies in the United Kingdom meet that test comfortably, which is why the term appears in tax guidance far more often than company owners have heard of it. It matters because three separate charges apply only to close companies.
The test, and who counts
Control is measured by share capital, voting power, entitlement to income on a distribution and entitlement to assets on a winding up, and a participator's rights include those of their associates: spouse, civil partner, parents, children, siblings and business partners. That attribution is what makes the test so easy to meet. A company owned equally by six unrelated people is not close on the first limb; the same company owned by three couples is, because each couple counts as one. A company controlled by its directors is close whatever the number.
What being close actually costs
Three things follow. Loans to participators fall within section 455, which is the charge on an overdrawn director's loan account. Benefits provided to a participator who is not an employee or director are treated as distributions rather than as deductible costs. And, historically, close investment holding companies are denied the small profits rate and marginal relief entirely, which means an investment company controlled by a few people pays the main rate on all its profits regardless of size.
Who is not close
Companies not resident in the United Kingdom are outside the rules. So are companies controlled by one or more open companies, and companies where shares carrying at least 35% of the voting power are held by the public and dealt in on a recognised stock exchange. For the overwhelming majority of companies reading this, none of those exceptions applies, and the practical answer is that if you and a handful of people control it, it is close.
Questions people ask about what is a close company
What is a close company?
A UK-resident company under the control of five or fewer participators, or of participators who are directors regardless of number, with a participator's rights including those of close relatives and business partners.
Is my limited company a close company?
Almost certainly, if it is UK resident and controlled by you and a small number of others. The attribution of associates' rights means most owner-managed and family companies meet the test even where they look more widely held.
Why does it matter whether a company is close?
Because the section 455 charge on loans to participators, the distribution treatment of benefits to non-employee participators, and the denial of marginal relief to close investment holding companies all apply only to close companies.