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HMRC internal manual

Company Taxation Manual

Close companies: tests: 35% or more voting power held by public

CTA2010/S446 and 447 (formerly ICTA88/S415), CTA2010/S448 (formerly ICTA88/S417 (3), (4)), CTA2010/S449 (formerly ICTA88/S416 (1)), CTA2010/S1137 (formerly ICTA88/S841).

Subject to (a) to (g) below, a company in which 35% or more of the voting power is held by the public is not a close company.

a) General

A company claiming that it is not a close company by virtue of CTA2010/S446 has to show that all the following conditions are satisfied at the relevant time.

     i) Shares (or stock) (exclusive of shares etc, entitled to a fixed dividend or entitled to a fixed dividend with a further right to participate in profits) in the company carrying not less than 35% of the total voting power in the company:

  • have been allotted unconditionally to or acquired unconditionally by and are deemed to be beneficially held by the public (see (b) below), and
  • any such shares, etc, have within the preceding twelve months been the subject of dealings on a recognised stock exchange and have within those twelve months been quoted in the official list of a recognised stock exchange.

 

     ii) The voting power possessed by the principal members (see (d) and (e) below), whether or not the shares are held by the public by virtue of (b) below, does not exceed 85% of the total voting power in the company.

The total voting power for the purpose of (i) and (ii) above is that of all the issued shares (or stock) including that of shares, etc, entitled to a fixed dividend, etc, which are excluded under (i) above in determining the voting power in the hands of the public.

If the company cannot show that (ii) above is satisfied, the remaining conditions are irrelevant.

b) Shares etc beneficially held by the public

Shares etc, are deemed to be beneficially held by the public, provided that they are not excluded by (c) below, if:

     i) they are beneficially held by a company resident in the UK which is not a close company or by a company not resident in the UK which would not be a close company if it were so resident, or

     ii) they are held on trust for a registered pension scheme as defined in FA2004/S150 (2), or

     iii) they are not comprised in a principal member’s holding (see (d) to (f) below),

As regards (i):

  • Where the company holding the shares loses its beneficial interest on commencement of winding-up (see CTM36125) you should not normally contend that a company which was not close before the commencement of that winding-up, thereby becomes a close company.
  • Shares beneficially held by an authorised unit trust (see CTM48200 onwards) are to be regarded as beneficially held by a company which is not a close company unless five or fewer persons hold more than half of the units issued by the trust. In determining the number of units held by a person, there should be attributed to him or her any units held by his or her associates (see CTM60150) or by his or her nominees or by any company (or companies) of which he/she has, or he/she and his associates have, control.

c) Shares etc not to be regarded as beneficially held by the public

The following shares, etc, are not to be regarded as beneficially held by the public:

  • Shares etc, allotted to or acquired by or held by:

     i) any director or associate of a director of the company, or

     ii) any company which is under the control of any such director or associate or of two or more persons each of whom is such a director or associate, or

     iii) any associated company of the company; references to shares held by any person include any shares the rights or powers attached to which could be attributed to that person under CTA2010/S451(4) (formerly ICTA88/S416 (5)) (nominees - see (a) of CTM60140 and the final sub-paragraph of CTM60210).

  • Shares, etc, held as part of any fund the capital or income of which is applicable or applied wholly or mainly for the benefit of, or of the dependants of, the employees or directors or past employees or directors of:
    • the company, or
    • any company within (ii) or (iii) above.

 

Where a company in (ii) or (iii) above loses its beneficial interest in the shares, etc, on commencement of winding-up (see CTM36125) you should not normally accept that a company which was close before the commencement of that winding-up, thereby ceases to be close.

d) Principal member

A person is a principal member of a company if:

  • where there are five or fewer persons each possessing (see (e) below) more than 5% of the voting power in the company - he or she is one of those persons,
  • where there are more than five persons each possessing (see (e) below) more than 5% of the voting power in the company:
    • he or she is one of the five persons who possess the greatest percentages of the voting power, or
    • if, because two or more persons possess equal percentages of the voting power, there are no such five persons, he is one of the six or more persons (so as to include those two or more persons who possess equal percentages) who possess the greatest percentages.

e) Voting power ‘possessed’ by any person

In arriving at the voting power which any person (including a principal member) possesses, there should be attributed to him or her any voting power which would be attributed to him or her for the purposes of CTA2010/S450 (definition of control - see CTM60210) by sub- sections (5) and (6) of that section (nominees, controlled companies and associates - see CTM60140 and the final sub-paragraph of CTM60210).

f) Principal members holding

A principal member’s holding consists of the shares which carry the voting power possessed by him or her as defined by (e) above.

For the purpose of (b)(iii) above, shares held in accordance with (b)(i) or (ii) above are deemed to be beneficially held by the public (provided that they are not excluded by (c) above) even if they are comprised in a principal member’s holding.

g) Definitions

CTA2010/S448(1) (formerly ICTA88/S417 (3))

‘Associate of a director’ has a similar meaning to ‘associate of a participator’. See CTM60150 to CTM60180 substituting ‘director’ for ‘participator’.

CTA2010/S449 (formerly ICTA88/S416 (1))

A company is to be treated as another’s associated company at a given time if at that time or at any time within one year previously:

     i) one of the two has control (see CTM60200 onwards) of the other, or

     ii) both are under the control of the same person or persons.

CTA2010/S1137 (formerly ICTA88/S841)

The following stock exchanges are ‘recognised stock exchanges’:

     A) The International Stock Exchange of the UK and the Republic of Ireland Ltd (the ‘London Stock Exchange’).

     B) Overseas stock exchanges.

Stock exchanges designated as ‘recognised stock exchanges’ by order of the Board. Those shown in the table below have been so designated from the dates shown.

The Athens Stock Exchange 14 Jun 1983
   
The Australian Stock Exchange and any of its stock exchange subsidiaries 22 Sep 1998
The Colombo Stock Exchange 21 Feb 1972
The Copenhagen Stock Exchange 22 Oct 1970
The Helsinki Stock Exchange 22 Oct 1970
The Johannesburg Stock Exchange 22 Oct 1970
The Korea Stock Exchange 10 Oct 1994
The Kuala Lumpur Stock Exchange 10 Oct 1994
The Mexico Stock Exchange 10 Oct 1994
The New Zealand Stock Exchange 22 Sep 1988
The Rio de Janeiro Stock Exchange 17 Aug 1995
The Sao Paolo Stock Exchange 11 Dec 1995
The Singapore Stock Exchange 30 Jun 1997
The Stockholm Stock Exchange 16 Jul 1985
The Stock Exchange of Thailand 10 Oct 1994
The Swiss Stock Exchange (following a merger - previously Zurich, Basle, Geneva exchanges from 30 Jun 1977) 12 May 1997

Any stock exchange in the following countries which is a stock exchange within the meaning of the law of the particular country relating to stock exchanges (or as specified below).

Austria 22 Oct 1970
   
Belgium 22 Oct 1970
Canada (any stock exchange prescribed for purpose of Canadian IT) 22 Oct 1970
France 22 Oct 1970
Germany 5 Aug 1971
Hong Kong (any stock exchange recognised under Section 2A (1) Hong Kong Companies Ordinance) 26 Feb 1971
Italy 3 May 1972
Ireland (Republic of) 22 Oct 1970
Japan 22 Oct 1970
Luxembourg 21 Feb 1972
Netherlands 22 Oct 1970
Norway 22 Oct 1970
Portugal 21 Feb 1972
Spain 5 Aug 1971
USA (any exchange registered with the Securities and Exchange Commission of the United States as a national securities exchange) 22 Oct 1970
USA (The NASDAQ Stock Market as maintained through the facilities of the National Association of Securities Dealers Inc and its subsidiaries) 10 Mar 1992

Where, in determining whether a company is close at a particular date:

  • it is necessary to establish that shares have been the subject of dealings on, and have been quoted in the official list of, a recognised stock exchange, and
  • the stock exchange concerned is within the list of designated stock exchanges but that date is prior to the date on which the Board designated the stock exchange as a ‘recognised stock exchange’, and
  • at the date closeness has to be established the stock exchange is not ’a recognised stock exchange’, or
  • where a company is a close company solely because an overseas stock exchange is regarded as not a recognised stock exchange and liability arises under CTA2010/S456 (formerly ICTA88/S419),

the case should be submitted to CT&VAT (Technical).