ACCA Advanced Taxation (ATX) Practice Exam

How are benefits provided to a participator in a close company taxed if they are not a director or employee?

1. Taxed as regular employment income

2. Counted as capital gains

3. Taxed as a dividend at the appropriate rate

4. Exempt from taxation

The correct answer is: Taxed as a dividend at the appropriate rate

When benefits are provided to a participator in a close company who is neither a director nor an employee, they are treated as distributions of profits, commonly referred to as dividends. This classification is significant because dividends are subjected to taxation at the appropriate dividend tax rates, which may differ from standard income tax rates applied to regular employment income. In the context of taxation, participators are typically shareholders and thus entitled to receive dividends as a return on their investment. The company’s distribution of profits in this manner aligns with how tax law distinguishes between various forms of income. This distinction serves to encourage investment in closely held companies and is part of broader tax administration strategies aimed at efficiency and fairness. Understanding that the treatment of these benefits as dividends ensures that the right tax implications are recognized under the law is crucial for both compliance and financial planning for participators in close companies. Since the taxation of dividends can vary, it's also important to be aware of the prevailing rates that may apply to the individual receiving them.