What is a controlled private company?
A company is a controlled private company in relation to an individual if:
- the company is a designated private company, and
- the individual passes the private companies control test, or
- the individual passes the source test.
When deciding whether an individual passes the control or source tests reference must be had to the associates of the individual.
Control test for a private company
The control test, in conjunction with the associates rule, is used to determine the level of control a stakeholder exercises in relation to a designated private company. Effective control of a private company generally rests with those persons who hold voting powers or governing director powers. This reflects the absolute power held by these people as they can retain profits within the structure, or reduce or eliminate profits by paying themselves higher wages or directors fees. They can also issue more shares to themselves, thus diluting the voting power of minority shareholdings. Control can rest with one person, a couple, or multiple stakeholders.
Factors for establishing whether a private company is a controlled private company with respect to an individual
Controlled private companies
The legislation includes the following criteria:
- the sum of the direct voting interests in the company that the person and the person's associates have is 50% or more,
- the person, alone or with associates, is beneficially entitled to 15% or more of the capital or dividends of the company,
- the company is sufficiently influenced by the person, an associate of the person or two or more entities covered by the preceding factors, or
- the person (alone or with associates) is in a position to exercise control over the company.
Treatment if no controller established
Where a person fails to pass any of the above criteria, the company will not be a controlled private company with respect to that individual. If no individual in respect of a designated private company meets any of the above criteria, no attribution percentage can therefore be made to any person (whether receiving Income Support payments or not). The asset and income assessment should then default to the net asset backing method of assessment that applied prior to 1 January 2002.
Treatment of non-controlling minority attributable stakeholder
However where one or more individuals is exerting control over a company, non-controlling minority shareholders should not be held to be attributable stakeholders of the company. Therefore no asset value should be maintained against them, unless the pensioner qualifies as a genuine investor in which case these provisions should apply.
Example of a non-controlled private company
A company consisting of 100 issued ordinary shares has 10 shareholders holding 10 shares each. None of the shareholders are associates and no individual has governing director type powers, nor are they able to exert control over the company in any other way. In this instance, none of the above factors for establishing whether a private company is a controlled private company with respect to an individual have been satisfied. Therefore if any of these shareholders were to claim payment, the company would not be a controlled private company in respect to any individual and policy would then apply to assess the shareholder under the net asset backing method rules.