There are both various and regular requirements that a limited liability company – and you as a director – must meet, relating to payroll, VAT and similar processes.
But here exclusively for ContractorUK, let me consider the annual compliance cycle – the preparation of annual accounts and the company’s tax return, writes Chris James, head of limited liability company accounting at Workwell.
In almost all cases these days, submissions of these are done electronically by your accountant, as part of their annual service to your business.
End of accounting period
A public limited company has a period end date, called the accounting reference date (ARD), which is assigned to it when it is incorporated.
If a company is formed in mid-October, for example, its default ARD will be October 31 and its first set of accounts will run from the date of incorporation to that date. This means that the first set of accounts covers just over 12 months. Subsequent series would last for a year (and an additional day in a leap year).
If you wish, you can modify your ARD. This may be because you want your company’s accounts to span a calendar year, or to align your “year-end” with another company’s (common in company groups).
You can also choose to set up accounts for a period other than one year, covering a period of six to 18 months.
But in order to prevent companies from “hiding” their financial information, you can only file accounts older than one year once every five years (without special permission and very rare). Conversely, you can file “short” accounts as often as you wish, as this means that information is filed with Companies House more regularly than normal.
Much of the record keeping these days is electronic, and it’s a good idea to use online accounting software that’s connected to your bank, to minimize your data entry.
Your accountant may be able to help you with the bookkeeping if you’re too busy or unsure about doing it yourself. Receipts, invoices and other financial documents must be kept, whether in paper or electronic form, for six years in case of questions from HMRC.
The underlying records are converted by your accountant into the different elements that make up the accounts. A complete set of accounts will include certain permanent information, such as your head office address. This complete set of accounts includes the ‘profit and loss account’, the ‘balance sheet’ and notes – which explain some of the figures in the main accounts in more detail.
Profit and loss account
The income statement (or performance statement) is a tally of all revenues and costs that have passed through the business.
The account therefore tells the “story” of the company during this period. Revenues and costs should be measured at their cost to your business. For example, if you are subject to VAT, sales are shown at the net price and not the gross sale price on your invoice. This is because the VAT you collect is passed on to HMRC – it does not belong to you or the business. Similarly, the costs should be presented in the same way. So if you were charged VAT but were able to recover it, the cost of that item should be shown without VAT included.
The total of all these revenue and cost items will be your profit or loss for the period.
This profit or loss will be adjusted for tax and a tax charge will be recorded at the bottom of the income statement.
Certain items that are adjusted to include entertainment expenses, the timing of special payments like pension contributions, and allowable amounts to reflect the reduction in value of assets the company owns, like computer equipment. This could mean that the tax burden is not exactly the profit in the accounts multiplied by the corporate tax rate (currently 19%).
A tax declaration for the company (a ‘CT600’) will be established, as well as a calculation of the tax due. Usually the same amount will appear on your balance sheet as an amount due to HMRC, because at the balance sheet date the amount has not yet been paid. So, along with some other balance sheet items, it appears as an amount owed by the business to someone else.
Balance sheet (or position statement)
This document provides a “snapshot” of the business at the end of the financial year – the ARD.
It lists assets, such as IT equipment, money in the bank, money owed to the business, and liabilities – such as amounts owed to HMRC, cost bills not yet paid, a loan from a bank or a director, at this precise moment. .
Known as the “upper half” of the balance sheet, this total balance should equal the total of the money invested in the business by the shareholders (normally the entrepreneur), plus the profits made since incorporation, minus the amounts returned to shareholders through dividends. .
These are known as “shareholder funds”. If the company is making losses or dividends exceed available profits, this figure may be negative – you will need the advice of your accountant as this position should not be allowed to continue.
Accounts must be filed in public records, so that they can be inspected for the public good. These registers are now electronic. Small businesses only need to file summary information, and frankly, that doesn’t really paint the full picture of a business’ financial condition.
Bigger companies have to file a lot more details, because the potential audience for each of them is wider.
For entrepreneurs filing under the rules for small businesses (known as FRS102 or FRS105), only a balance sheet and very few others need to be sent to Companies House. Your full accounts, however, will be needed by HMRC and should be useful to you in terms of planning for the future and comparing your business with others.
Be aware that if accounts are not filed on time, Companies House may charge penalties, and if corporation tax is due but not paid on time, interest will start to accrue. These costs typically start nine months after the ARD is passed, although, as we have seen during the covid pandemic, rules are sometimes relaxed or penalties removed. But generally the CT600 deadline is 12 months from the ARD, and HMRC can charge penalties for late submission.
In general terms, when it comes to accounting for a limited liability company, the best thing you can do as an entrepreneur-director is to maintain your accounting records and stay in regular contact with your accountant, especially if you expect something extraordinary. -ordinary of your company!