An Easy Guide to Accounting for Small Businesses in the UK

The question for all small business owners ask is: What Are My Accounting Responsibilities? If you are considering or have already made a limited company formation in the UK you are no doubt aware that you have a legal responsibility to submit your annual accounts to the Inland Revenue. The best course of action however, is to pass this crucial duty on to an experienced accountant, who can do this on your behalf.

Instructing An Accountant In The Early Stages

It is not uncommon for some small business owners to go against the idea of instructing an accountant, particularly in the early stages. And there is also a percentage of company directors who feel that the only purpose accountants serve is to fill in tax forms. Yet the fact of the matter, is that if you instruct a competent accountant, he or she will save you money, time, and stress.

Most people shy away from the thought of having to plow their way through a huge amount of paperwork and countless receipts – not to mention having to look at and work out complicated tax structures and calculations, all of which have to be conducted correctly and in adherence with the Inland Revenue regulations.

Doing your annual accounts is fine if you are experienced in book keeping or accounting and are just operating as a sole trader. In the case of the latter, the procedure is very simple. Conversely, you have an LLP (limited liability partnership), or limited company, then your filing and accounting procedures are more complex. To that end, as a company director, you have to be fully confident that you can undertake this obligation, as if you are not, then you could be faced with having to pay stiff penalties.

Ltd Company Accounting

In the case of a limited company formation, there must be a completely accurate record of all income going into the business, receipts for all expenses; and a fully disclosed record of all liabilities and assets which should be easily traceable. The company’s yearly accounts have to be what is considered ‘true and fair,’ and you must maintain all your financial records for at least 6 years from the related accounting period’s end.

In a nutshell, your financial records should reflect and provide details of:

  • All money received & spent
  • All assets the business owns
  • All debts owned by, or owed to the business
  • End of financial year business product inventory
  • Stock-takings utilised to calculate the stock-inventory
  • All goods the business has purchased & sold
  • The person/company the items were sold to & purchased from (retailers are except form this)

The above records are needed for the preparation of a yearly accounts, filing tax returns for the company, and paying corporation tax on all income classed as taxable income. Further, your company will need to file a VAT return and pay quarterly VAT bills, if your annual income is in excess of £85,000 (pertaining to tax years 2017 to 2018, 2018 to 2019, and 2019 to 2020).

Statutory Accounts For Ltd Companies

Many people do not realise that even if your company is not trading, company accounts must still be submitted every year. Further, the yearly accounts need to be filed at Companies House inside a period of nine months from the accounting reference date. Statutory accounts need to comply with the International Financial Reporting Standards, and must incorporate:

  • A document (which shows the amount of all that is owed to, and owned by the company on the final day of the financial year it uses)
  • An account showing profit & loss (comprising the company’s annual profit/loss, running costs & company sales
  • Any notes which are relevant to the accounts

An Auditor’s Report

Unless your company is eligible for an audit exemption, you will need to file an Auditor’s Report. You will however, only need to provide shortened accounts (notes and a balance sheet) for Companies House, if your company’s income is under £6.5 million per annum. It is nonetheless, mandatory to provide complete statutory accounts for the Inland Revenue and shareholders.

If your company is not active, then it is still a legal requirement to prepare your accounts for Companies House (this should comprise notes and a statement of the balance of funds). It is not necessary to file accounts with HMRC unless a company becomes inactive after a period of activity.

Corporation Tax and Company Tax Returns

You will need to file your company’s tax returns and pay corporate tax at the time of your accounting period. This normally starts when your business activities begin and finishes on the company’s anniversary date. Filing must be done within a twelve-month period after your company’s financial year ends. The Inland revenue necessitates that this is done online. You also have to ensure that you submit form CT600, your complete statutory accounts, and corporate tax calculations. Other data that must be provided includes: loans that have been taken out, assets that have made gains, any losses that you want to include from the former tax year, and any data regarding capital allowances.

HMRC Late Filing Penalties

The corporation tax deadline stands at 9 months plus 1 day from the end of your company’s financial year, although your tax payment must be submitted prior to filing your tax return. Fines for can range between £150 to £1,500 if you submit your yearly accounts to Companies House late for the first time. If you repeat this the following year, these figures double. And if you do not file on time, and do not ameliorate the situation, then you could face a personal prosecution with a draconian fine of as much as £5,000. Moreover, the Inland Revenue can fine you between £100 to ten percent of the sum owed. If you do this three consecutive times, you will have to pay at least a £500 penalty.

Tackling Tax Returns the Best Way Possible

Having read about all the complexities, mandatory procedures and unwelcome penalties, you have probably come to the conclusion that finding a suitable accountant, is by far, the best way forward.

Tips on Finding the Right Accountant For Your Needs

The first thing to consider is the type of business you operate, and look for a accountant within that field. If they specialise in the same industry, that will be a big plus. Naturally, it would be unwise to contact a large accountancy practice which specialises in big corporations, as not only would it be prohibitively expensive, they would not have expertise in your field. There are many reasonably priced independent accountants whose main filed is helping small businesses.

Try to look for:

  • An accountant who you can have a good rapport with
  • Someone who you find trustworthy
  • An accountant who has good client reviews
  • Someone who had been recommended by another small business
  • An accountant who you have independently researched

What Qualifications Should the Accountant Have?

The best recommendation is to only consult an accountant who is a member of a recognised government association for Chartered/Management accountants. By consulting the later, it is guaranteed that his or her training and accounting knowledge (such as recent changes in regulations), is current. Should require a company audit as well, you must ensure that they are also officially listed an auditor. While deciding on who to consult, be sure to consider doing the following:

  • Do some research on a number of suitable accountants, and find out their standard fees and other charges by asking for quotes
  • A lot of accountants offer flexible fee options, so be sure to ask for the list. Also, you should decide whether you prefer to pay an unfixed fee once the accounts are completed, or if you would rather opt for paying a fixed fee every month.
  • Be mindful that pay as you go style services enable you to keep tabs on the services you are being billed for, and that if you’re not monitoring what is being done, the charges can swiftly build up.
  • Try to maintain an up to date company expense record, and some basic bookkeeping duties to help save on the accountant’s charges

Making an Initial Appointment

You will find that most accountants do not charge for a preliminary meeting to discuss your needs and ask questions. Prepare a list of what you want to ask before you go and take along various documents such as a copy of your company registration and bank details.

This is a very important meeting, as you may find that you do not have any rapport with the accountant, or that he or she does not fully answer your questions. In which case, you can book a meeting with another one. Bearing in mind that you may be using their services for many years, you want to feel happy about your choice, and able to call upon them whenever you need to.

If you find several suitable accountants through internet searches, once you have received details of their fees, and are satisfied with the same, then you could always make appointments with all of them. The choice is yours!

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