If you are an entrepreneur with specialist knowledge in accounting or finance, you probably have no second thoughts when it comes to carrying out your company accounting tasks in-house. However, for most entrepreneurs and company directors without previous accounting experience, it is a different story as the thought of having to carry out business accounting tasks personally can be quite intimidating.
As a sole trader, you might still be able to carry out your accounting tasks yourself because your accounting requirements may not be too complex. However, limited companies and LLPs (limited liability partnerships) may have more complicated accounting obligations, failure of which could lead to penalties from the HMRC and the Companies House.
As such, it is usually in the best interest of organisations of this structure to enlist the services of a company accountant.
The rest of this article will briefly outline the legal accounting expectations for limited companies in the UK, penalties for failure to adhere to these, and best practices for finding a company accountant.
- Accounting for limited companies
- Statutory accounts for limited companies
- HMRC late filing penalties
- Selecting an accountant for your company
Accounting for limited companies
The Companies House is the regulatory body which oversees the financial activities of all limited companies in the UK. Companies House regulations state that limited companies must accurately record all of their assets, business expenses, income, and liabilities while providing full disclosure and traceability. Limited companies are also required to keep financial records for at least 6 years after the associated financial year, and annual financial accounts must be ‘true and fair’.
Accounting records should demonstrate the following information when requested:
- Income received
- Expenses made
- Assets owned
- Debts owed by or owed to the company
- Inventory showing company stock for that financial year
- Stocktakings used to calculate remaining inventory
- Transactions showing the purchase and receipt of company goods
- Suppliers and corporate customers supplying and purchasing company goods.
The records above form the basis on which the tax returns, full annual accounts, and corporation tax are submitted.
If the turnover for the financial year exceeds the VAT threshold (Value Added Tax) (presently £85,000 as at 2017/2018), the director will also have to collect VAT, pay and submit VAT returns each quarter.
Statutory accounts for limited companies
Whether your company is dormant or not, your statutory accounts must be filed annually. These accounts are useful for providing shareholders with a basis for measuring business performance, as well as record keeping for the Companies House. Your company accounts must be filed with the Companies House each year, on the anniversary of the last day of the month of your company registration. You can register your company via a formations company.
Regulatory bodies define the standards to which statutory accounts must conform, and based on these standards, statutory accounts should contain:
- A profit and loss account (offers a summary of company expenses, revenue and costs incurred within the period specified).
- Balance sheet (offering a “snapshot” of the assets, liabilities and capital owned by the business at any point in time).
- Any account-related notes.
- A directors report outlining the company prospects and highlighting any dividends paid to shareholders
- Auditor’s Report (assuming the company does not qualify for an audit exemption).
For small companies, abbreviated accounts can be filed at the Companies House, showing just a balance sheet including any relevant notes. However, the HMRC as well as shareholders, will still require full accounts to be provided.
If your company is dormant, there is still a requirement by the Companies House for you to provide accounts comprising of a balance sheet and any relevant notes. In cases however, where the company has reached a state of dormancy as a result of a lack of activity, there is no requirement to provide statutory accounts to the HMRC.
Company Tax Returns & Corporation Tax
The deadline to pay your company corporation tax and to file your tax returns depends on the accounting period unique to the company.
In general, you have up to 12 months following the preceding financial year to file tax returns for your company. The tax return should have your full accounts, any additional tax computations and a CT600 form.
Tax returns should also include information related to gains on any asset your company holds, capital allowances, losses carried over from the previous financial year and any loans you have taken as director.
HMRC Late filing penalties
Based on the information you have provided, the HMRC calculates the amount of corporation tax owed by your company, and this is due 9 months and a day following the end of your company’s financial year. It is very important to note that the tax must be paid before the tax return is filed.
Directors with some accounting knowledge and experience may be able to avoid late-filing HMRC penalties without external help, but directors without specialist knowledge may need the services of an accountant or tax adviser to file accounts on time.
Late filing of accounts can incur penalties from the Companies House which could range between anything from £150 to £1500, and these figures could double if accounts are filed late for 2 consecutive years. In addition to this, not attempting to rectify late accounts could lead to a possible £5,000 fine.
For late tax returns, HMRC could impose penalties from a minimum of £100 to 10% of your outstanding tax. If your tax returns are late three consecutive times, Tax returns that are late three times, you could incur a fine of at least £500.
Finding a suitable accountant for your business
When trying to find a suitable accountant for your business, it is always best to start by looking for accountants who specialise in your niche, and who understand the type of service that you provide. It is also a good idea to take your company size into account – if you run a small independent business, you might be best placed with a small, independent business, otherwise, you may be laden with hefty accounting fees.
The popularity of an accountant may not necessarily translate to greater effectiveness, especially in a situation where you are a new client and unsure of the accountants quality of work. It might be worth asking your friends in similar niches for their recommendation, as this might be a better indicator of an accountant’s ability to do the job. That being said, you will still need to carry your due diligence on any professional whom you want to hire to file your company accounts.
It is not a mandatory requirement for an accountant to obtain chartered status in order to practice, – an accountant with a chartered status may be as effective as one without. However, you might feel more at peace by choosing an accountant who has attained additional training certifications offered by any of the official bodies as listed below:
- Chartered Institute of Management Accountants (CIMA)
- Institute of Chartered Accounts in England and Wales (ICAEW)
- The Association of Chartered Certified Accountants (ACCA)
- The Institute of Chartered Certified Accountants of Scotland (ICAS)
One benefit of using a Chartered Accountant is the certainty that your accountant is closely monitored and kept abreast of new training and best practices in the field. If your company happens to require an audit, however, you will be required to enlist the services of a CA also qualified to carry out audits.
In your quest for a suitable company accountant, it is important to do your due diligence and compare the pricing of different accountants to help you in your decision-making. Being proactive about obtaining quotes from a variety of accountants will save you a lot of money in the future.
You will need to take into account whether you want to pay a monthly fixed fee or invoiced based on the work done, or before or after the work is done. Fee structure varies among accountants, so check what payment options your prospective accountant provides. An on-demand payment service could provide you with an easy way to keep track of the itemised services you are purchasing, however, these might work out more expensive in the long run.
Taking control of simple accounting tasks and recording your expenses meticulously are good ways to reduce the time spent preparing your accounts and save yourself some money.
Meet in person
When you have selected a prospective accountant, fix a date where you both can meet in person to offer yourself the opportunity to ask any questions that you have. During this meeting, ensure that you understand your obligations, and what information you are required to provide, and that you are satisfied with the service being offered. Also, this offers you an opportunity to know whom you are dealing with, enabling your decision-making.
As an entrepreneur, if you do not have any specialist financial or accounting experience, it is more cost effective for you in the long run, to hire an accountant to file your company accounts. That being said, it is important to do your due diligence and carry out proper research on any accountants you plan on working with. Having a competent, knowledgeable accountant can be a key contributor to the success of your business as you spend less time worrying about taxation and more time on generating revenue.