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HMRC internal manual

Enquiry Manual

Close Companies: Directors: General

Subject to any special provisions in the Articles, the business of a company is managed by the directors, who may exercise all such powers of the company as are not to be exercised in a general meeting by the shareholders. Usually with a close company the controlling shareholders will be the same people as the directors, who exercise all powers.

Since a close company effectively acts through its director shareholders, it is a comparatively easy matter for them to divert company profits. Your enquiry concerns the accuracy of the company tax return but, from the full enquiry perspective, you will be looking at a business and the people running it, just as in an unincorporated case, to address the risk that the accounting records are fundamentally incorrect.

You will want to carry out checks against independent records where possible in order to ascertain if there are errors in the accounts. This will include looking at the company and its directors together to check that all income of the business has been reported, and that company funds have not been otherwise extracted by the directors.

Where you are undertaking a full enquiry into the return of a close company, your risk assessment should cover the affairs of all directors, including where appropriate their families.

Bear in mind however that the company and the directors who run it are separate legal entities. This can cause complications that you need to plan for at the outset. For example, you may want to check the directors’ private financial records to reconcile the known sources of income of the directors and the company but you have no automatic right to see these records and they might not be offered voluntarily. Guidance on extending you enquiry to cover the directors’ private financial affairs is at EM8508.