Iain Rankin explains why it is important to tread carefully when borrowing money from a closely-controlled company.
The majority of UK businesses are close companies, owned by director-shareholders. A close company is a company owned and controlled by five or fewer individual participators or controlled by any number of participators who are also directors.
A participator is broadly somebody who has a share or interest in the capital or income of a company such as having share capital, voting rights or a right to capital on winding up of the company. This can be a shareholder, director or a loan creditor.
HMRC and close companies
Rules relating to loans from close companies are designed to prevent participators from enjoying tax-free funds disguised as loans from the company.