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Finance Act 1965

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Part IInterpretation Generally

" Close company " and " associated company "

1(1)For purposes of Part IV a " close company" is one which is under the control of five or fewer participators or of participators who are directors, except that the expression does not apply—

(a)to a company not resident in the United Kingdom; or

(b)to a registered industrial and provident society within the meaning of section 442 of the Income Tax Act 1952, or to a building society within the meaning of section 445 of that Act or any other company to which section 445 applies ; or

(c)to a company controlled by or on behalf of the Crown, and

not otherwise a close company; or

(d)to a company falling within sub-paragraph (4) below.

(2)Subject to sub-paragraph (4) below, a company resident in the United Kingdom (but not falling within sub-paragraph (1)(b) above) is also a close company if, on the assumption that it is so or on the assumption that it and any other such company or companies are so, more than half of any amount falling under Part IV of this Act to be apportioned for purposes of surtax in the case of the company could be apportioned among five or fewer participators or among participators who are directors.

(3)A company is not to be treated as being at any time a close company if shares in the company carrying not less than thirty-five per cent. of the voting power in the company (and not being shares entitled to a fixed rate of dividend, whether with or without a further right to participate in profits) have been allotted unconditionally to, or acquired unconditionally by, and are at that time beneficially held by, the public, and any such shares have within the preceding twelve months been the subject of dealings on a recognised stock exchange, and the shares have within those twelve months been quoted in the official list of a recognised stock exchange ; but for this purpose shares shall not be deemed to be allotted to, or acquired or held by, the public if they are allotted to, or acquired or held by—

(a)any director or associate of a director of the company ; or

(b)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

(c)any associated company of the company. In this sub-paragraph " share " includes " stock ".

(4)A company is not to be treated as a close company in any case where—

(a)by reason of beneficial ownership of shares in the company the control of it is in the hands of a company which is not a close company or of two or more companies none of which is a close company; and

(b)it could only be treated as a close company as being under the control of five or fewer participators, and it cannot be so treated except by taking as one of the participators a company which is not a close company;

but so that references in this sub-paragraph to a close company shall be construed as applying to any company which, if resident in the United Kingdom, would be a close company.

(5)For the purposes of this paragraph a company is to be treated as controlled by or on behalf of the Crown if, but only if, it is under the control of the Crown or of persons acting on behalf of the Crown, independently of any other person ; and where a company is so controlled, it shall not be treated as being otherwise a close company, unless it can be treated as a close company as being under the control of persons acting independently of the Crown.

2For purposes of the provisions of this Act relating to close companies, 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, one of the two has control of the other or both are under the control of the same person or persons.

" Control"

3(1)For purposes of this Schedule a person shall be taken to have control of a company—

(a)if he exercises, or is able to exercise, or is entitled to acquire, control, whether direct or indirect, over the company's affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire, the greater part of the share capital or voting power in the company; or

(b)if he possesses or is entitled to acquire, either—

(i)the greater part of the issued share capital of the company ; or

(ii)such part of that capital as would, if the whole of the income of the company were in fact distributed to the members, entitle him to receive the greater part of the amount so distributed ; or

(iii)such redeemable share capital as would entitle him to receive on its redemption the greater part of the assets which, in the event of a winding up, would be available for distribution among members ; or

(c)if in the event of a winding up he would be entitled to the greater part of the assets available for distribution among members. Where two or more persons together satisfy any of the conditions in paragraphs (a) to (c) above, they shall be taken to have control of the company.

(2)In sub-paragraph (1) above "member" includes any person having a share or interest in the capital or income of the company, and for purposes of that sub-paragraph a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire ; but for the purposes of sub-paragraph (1)(b)(iii) and (c) any such loan creditor as is mentioned in paragraph 4(1)(b) below may be treated as a member (and the references to share capital as including loan capital).

(3)For purposes of sub-paragraph (1) above there shall be attributed to any person any rights or powers of a nominee for him, that is to say, any rights or powers which another person possesses on his behalf or may be required to exercise on his direction or behalf.

(4)For purposes of sub-paragraph (1) above there may also be attributed to any person all the rights and powers of any company of which he has, or he and associates of his have, control or any two or more such companies, or of any associate of his or of any two or more associates of his, including those attributed to a company or associate under sub-paragraph (3) above but not those attributed to an associate under this sub-paragraph ; and such attributions shall be made under this sub-paragraph as will result in the company being treated as under the control of five or fewer participators, if it can be so treated.

" Participator " and " associate "

4(1)For purposes of Part IV a "participator" is, in relation to any company, a person having a share or interest in the capital or income of the company and, without prejudice to the generality of the preceding words, includes—

(a)any person who possesses or is entitled to acquire share capital or voting rights in the company;

(b)any person who is a loan creditor of the company otherwise than in respect of any loan capital or debt issued or incurred by the company for money lent by him to the company in the ordinary course of a business of banking carried on by him;

(c)any person who possesses or is entitled to acquire a right to receive or participate in distributions of the company (as defined in Part I of Schedule 11 to this Act) or any amounts payable by the company (in cash or in kind) to loan creditors by way of premium on redemption ;

(d)any person who is entitled to secure that income or assets (whether present or future) of the company will be applied directly or indirectly for his benefit.

(2)In sub-paragraph (1) above references to being entitled to do anything apply where a person is presently entitled to do it at a future date or will at a future date be entitled to do it; and " loan creditor" means a creditor in respect of any redeemable loan capital issued by the company or in respect of any debt incurred by the company, being a debt—

(a)for money borrowed or capital assets acquired by the company; or

(b)for any right to receive income created in favour of the company; or

(c)for consideration the value of which to the company was (at the time when the debt was incurred) substantially less than the amount of the debt (including any premium thereon).

5For purposes of the provisions of this Act relating to close companies, including this Schedule, " associate " means, in relation to a participator.—

(a)a person in any of the following relationships to the participator, that is to say, husband or wife, parent or remoter forebear, child or remoter issue, brother or sister, and partner;

(b)the trustee or trustees of any settlement in relation to which the participator is, or any such relative of his (living or dead) as is mentioned in sub-paragraph (a) above is or was, a settlor (" settlement " and " settlor " here having the same meaning as in Chapter III of Part XVIII of the Income Tax Act 1952, and " relative " including a husband or wife);

(c)where the participator is interested in any shares or obligations of the company which are subject to any trust or are part of the estate of a deceased person, any other person interested therein;

and has a corresponding meaning in relation to a person other than a participator.

" Director " and " whole-time service director "

6(1)For purposes of the provisions of this Act relating to close companies, including this Schedule, " director" and " whole-time service director" have the meanings assigned to them by this paragraph.

(2)" Director" includes any person occupying the position of director by whatever name called, any person in accordance with whose directions or instructions the directors are accustomed to act and any person who—

(a)is a manager of the company or otherwise concerned in the management of the company's trade or business ; and

(b)is remunerated out of the funds of that trade or business; and

(c)is, either on his own or with one or more associates, the beneficial owner of, or able, directly or through the medium of other companies or by any other indirect means, to control twenty per cent. or over of the ordinary share capital of the company (" ordinary share capital" here meaning all the issued share capital, by whatever name called, other than capital the holders whereof have a right to a dividend at a fixed rate or a rate fluctuating in accordance with the standard rate of income tax, but have no other right to share in the profits of the company).

(3)" Whole-time service director" means a director who is required to devote substantially the whole of his time to the service of the company in a managerial or technical capacity, and is not, either on his own or with one or more associates, the beneficial owner of, or able, directly or through the medium of other companies or by any other indirect means, to control, more than five per cent. of the ordinary share capital of the company (" ordinary share capital" here having the same meaning as in sub-paragraph (2)(c) above):

Provided that a person is not to be treated as a whole-time service director if, on an amount equal to the whole distributable income of the company (computed without regard to the restriction on deductions for directors' remuneration) falling under Part IV of this Act to be apportioned for purposes of surtax, more than five per cent. of that amount could be apportioned to him together with his associates (if any).

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