Guide to Preparing Accounts for a Small Business in the UK

The directors of every limited company in the UK have a legal responsibility to prepare annual accounts based on the company’s financial records. It is a requirement of both Companies House and HMRC that financial records are maintained, annual accounts prepared and relevant extracts of these accounts submitted to regulators by the due date. Failure to meet these reporting requirements can result in penalties and, in extreme circumstances, a limited company may be struck off the UK register of companies and its directors banned from running any company in the future.

For accountants, understanding your clients business and their approach to maintaining financial records is crucial to achieving the deadlines set for submitting accounts and paying any tax owed by a company.

This blog provides information on how to get your clients who are small businesses (limited companies) ready for the statutory reporting cycle and how to engage them in the process.

What is a small limited company and what is a micro-entity?

Some definitions are helpful in understanding the statutory reporting requirements for small businesses.

The government specifies the reporting requirements for a limited company based on its turnover, balance sheet and the number of people it employees. If a director receives a salary from a company they own, they are included in the number of employees. As you would expect, reporting requirements for larger companies are wide and may require a statutory audit. For small companies, financial reporting requirements are reduced with only limited information required by Companies House.

A limited company is ‘small’ if it meets two of the following criteria:

• annual turnover is £10.2 million or less
• the total balance sheet is £5.1 million or less
• 50 employees or less.

Small companies are exempt from audit and send only abridged accounts to Companies House for publication on the public register.

Micro-entities are the smallest companies defined by the government and must meet two of the following criteria:

• annual turnover of £632,000 or less
• the total balance sheet is £316,000 or less
• 10 employees or less.

If a company is a micro entity, it can:

• prepare simple accounts that meet statutory minimum requirements
• send only a balance sheet with less detailed information to be published by Companies House along with some footnotes
• benefit from the same exemption from audit available to small companies.

Whether a company is small or a micro-entity, certain procedures must be followed each year to ensure the government’s statutory reporting requirements are met. The following paragraphs highlight some of the more important action accountants and their clients can take to ensure effective reporting by a company.

What is included in the annual accounts and what are the deadlines for submission?

Annual reporting requirements are specified by the government and are a statutory requirement which must be met by a limited company. The directors of a company are responsible for ensuring reporting requirements are met and for providing copies of the statutory accounts and other information to company shareholders, Companies House and HMRC.

The statutory accounts for a small limited company or a micro-entity must include the following information:

• a ‘balance sheet’ (known as the Statement of Financial Position) which shows the value of everything the company owns and the money it owes and is owed on the last day of the financial year (also known as ‘accounting period’)
• a ‘profit and loss account’ (known as the Income Statement) which shows the company’s sales, expenses and the profit or loss it has made over the financial year
• footnotes to the accounts.

If a company is ‘small’ then a directors report must also be prepared.

The balance sheet must have the name of a director printed on it and must be signed by a director. There is no statutory requirement for a small limited company or a micro-entity to have a statutory audit or to submit an auditor’s report. A micro-entity is allowed to file reduced information to be published by Companies House, involving only the balance sheet and footnotes. These are known as ‘filleted accounts’.

After the end of a financial year a limited company must submit the following information to Companies House and HMRC.

The accounting period for filing a corporation tax return with HMRC is usually the same as the accounting period covered by the company’s annual accounts. The accounting period for a tax return cannot be longer than 12 months. If a company has an extended accounting period of more than 12 months, then two corporation tax returns will be required to cover the whole accounting period. If the accounts cover less than 12 months the corporation tax return covers the applicable period so will also be shorter than 12 months.

What are the penalties if a filing deadline is missed?

If the deadline for filing accounts with Companies House is missed, the following penalties apply. The penalty is doubled if accounts are late two years in a row.

If the corporation tax return is six months late, HMRC will calculate the Corporation Tax due using a ‘tax determination’. There is no right of appeal against a tax determination. When the Corporation Tax due is eventually paid and the tax return filed, HMRC will recalculate the interest and penalties to pay.

If a corporation tax return is late three times in a row, the £100 penalties are increased to £500 each.

Getting clients ready to prepare their annual accounts

Given the statutory reporting requirements and heavy penalties for even the smallest ‘micro-entities’, it is important accountants get their clients ready to prepare the annual accounts as efficiently as possible. There are some simple steps accountants can take to ensure their clients manage this process each year.

Ensure effective record keeping

Most small businesses use accounting software to maintain financial records. However, keeping software up to date can be a challenge even with the support of a bookkeeper or accountant. Encourage your clients to issue sales invoices as soon as possible after a service is provided or at the point of selling goods or other supplies. Expenses should be recorded at least monthly, and more often if possible, to ensure the financial position of the company is up to date.

Each month, all bank accounts and credit card accounts should be fully reconciled, with any anomalies or missing information resolved as soon as possible.  If a business is registered for VAT, the returns need to be filed quarterly and any tax paid over to HMRC when due. A company with employees must file information with HMRC each month about its payroll, the deductions made from employees and pay employment taxes to HMRC when due.

Enlisting the services of a bookkeeper for a few hours every month will make the process of maintaining financial records and producing annual accounts as painless as possible. It will also help directors maintain an overview of how their business is performing to allow any corrective action needed to be taken in a timely way.

Communicating the information contained in the annual accounts to your clients

When accountants prepare the annual accounts for a director to approve, providing a simple description of the accounts and financial performance of the business will ensure clients are fully engaged in the reporting process. It also provides an opportunity to discuss any additional services a client may need such as business investment or tax advice.

Clients may not appreciate that the Statement of Financial Position (or ‘balance sheet’) provides a longer term view of the performance of a business. Explaining the difference between Fixed and Current Assets, Long Term and Current Liabilities and the overall financial position of the business through its accumulated profits and reserves can help shape the future financial plans for the business.

The Income Statement (or ‘profit and loss account’) shows the financial performance of a business for an accounting period. The statement is important as it enables shareholders to understand whether a profit or loss has been made in the period and how much they can pay themselves in dividends. If a company does not make a profit in the year and does not have access to accumulated profits from prior years, it cannot legally pay any dividends to its shareholders.

Statutory accounts are also important to external users of accounts, such as lenders or potential investors. They can see how the company is performing based on its most up to date trading results and whether these are in line with the company’s plans.

Providing a simple, ‘plain English’ guide to your clients statutory accounts will show an accountant understands a business and is able to provide timely advice on plans for future growth or investment. At the most basic level, an accountant should summarise:

• Year on year variations in sales and expenses
• Increase or decrease in assets and liabilities
• Explanation of profit or loss reported
• Cash flow
• Collectability of debts and the need to make any provision for bad debts
• The future sustainability of the business based on its reserves and balances.

How Initor Global can help your Practice

At Initor Global we can support your Practice through the preparation of annual accounts, company tax returns, bookkeeping, payroll, VAT returns and annual self-assessment returns. To discuss your outsourced accounting needs in more detail, you can contact us on hello@initor-global.co.uk or visit our website at initor-global.co.uk.