Keeping good financial records is key to understanding your business and it helps hugely in the preparation of your accounts, making your mandatory filings with Companies House easier, and reducing the accountant's fee too.
You must file accounts
You're legally obliged to file accounts each year with Companies House. You're also legally obliged to account to HMRC for your company's financial and tax position.
The two processes and obligations are quite separate – although in some circumstances, you may be able to joint file your accounts to both entities at the same time. (Public limited companies follow a different timetable.)
For Companies House, you must file these accounts after your year end – meaning the end of the financial year in which your company operates.
When you first set up your private limited company, your financial year starts on the day of your incorporation. Your financial year will end on your 'accounting reference date'.
For all newly formed private limited companies, their accounting reference date will be the last day of the month in which the anniversary of their incorporation falls.
For example, Farillio was incorporated on 22 February 2017, so our accounting reference date was 28 February 2018 and it falls on the same date each year after that.
You can change that date to one that's more convenient, afterward, as we later did. (We'll cover how to do that in this section as well.)
When you first start out, your accounts for that financial year must be filed with Companies House within 21 calendar months after your incorporation date.
After that, in subsequent years, your accounts for each financial year must be filed with Companies House within 9 calendar months after your accounting reference date has passed.
(If that deadline date falls on a weekend or a public holiday, you should file them beforehand, though you can deliver by hand or file (some) accounts electronically on the deadline day. Time extensions are only given in exceptional circumstances.)
All businesses have a duty to report on their accounting position, including dormant (not trading) ones. Failure to comply could result in the Companies House registrar striking your company off the list – and if that happens, the Crown takes ownership of its assets.
Not only that, but you and any fellow directors could be criminally prosecuted for failing to submit legally essential data on time, and you will also face fines. So, it's important to know what's required of you and when you need to take action.
You must also share those accounts with your shareholders.
If accounts are filed late, Companies House raises automatic late filing penalties. For a private limited company, these are:
- up to 1 month late: £150
- 1–3 months late: £375
- 3–6 months late: £750, and
- more than 6 months late: £1,500
If you're late for more than a year in a row, Companies House doubles these penalties.
What those accounting records must show
Your records must accurately evidence:
- all money that you have received into your business
- all money that you have spent in the course of running your business
- the assets that your business holds
- the liabilities (typically debts owed) to which your business is subject
So you should make sure you've got good profit and loss and balance sheet records. All good software solutions and/or accountants will help you to pull these together and keep them up to date.
Also, if your company’s business involves dealing in goods, the records must evidence your stock, and from whom and to whom you may have bought and/or sold those goods during the past financial year.
Depending on the stage and which your business is at and it's size, you'll have a couple of options from which to choose when you submit your accounts.
That's the first step of several that you'll need to take if you want to be confident that you're on the right side of your financial reporting obligations under UK law.
We'll examine each of those steps below – starting with your options for the format of your accounting report...
Determine whether your accounts are micro-entity eligible, abridged or full
This is relevant from the start of setting up your limited company.
Small companies currently have the following 3 options for filing their accounts:
- to file micro-entity accounts
- to file abridged accounts
- to file full accounts
Let's look at the criteria for each of these and what they mean for you.
If you meet these criteria, you can file a far lighter set of accounts than those required from all other companies. You can find more on the format of those accounts here.
Many businesses that qualify as a micro-entity in one year – perhaps their first year or two of trading, may cease to be eligible for these benefits over time. So keep an eye on this – a good accountant will do so for you as you start to grow.
Under the current legal thresholds, 'micro-entities' have:
- turnover of £632,000 or less
- a balance sheet total that does not exceed £316,000, and
- no more than 10 employees on average during the relevant financial year
Though not as light as the micro-entity reporting position, abridged accounts are still a less burdensome format of accounts that new small companies are often able to use instead of submitting full accounts, if they do not (or they no longer) fit the micro-entity classification.
According to the current legal thresholds, to qualify for these reporting arrangements, a small business must be able to evidence at least 2 of the following criteria:
- turnover of £10.2 million or less
- a balance sheet total that does not exceed £5.1 million
- no more than 50 employees on average during the relevant financial year
Exactly what those accounts must contain, and the materials that should accompany them, is explained in far more detail here.
Filing full accounts with Companies House and HMRC
If you fall outside of the above criteria for abridged accounts, then you'll need to file full accounts.
What your accounts must contain and whether you qualify for exemption from the audit requirements is explained in more detail here.
If your company has never traded...
Finally, a quick word on dormant company accounts.
If your business has never traded, you can file these super light financial reports with Companies House – though you'll still be bound by the same time frames for reporting as everyone else.
Approving your accounts
So, you know your dates, you know your obligations, and you've hopefully got a clear idea of what format of accounts you can submit.
The next step is to produce those accounts and get them approved.
Your accounts must be approved each year by your board of directors.
You shareholders do not need to approve your accounts, unless your articles of association require it – cross-check these just in case. Unless you've modified your articles of association to provide for this approval, you will not be required to seek shareholder approval.
But, once finalised and approved by your board, you're legally required to promptly distribute copies of your accounts to your shareholders.
1. Final form accounts
In the appropriate format, prepared and signed off by the relevant director responsible for overseeing their production and accuracy.
Proposing the accounts for board approval (and attaching them).
3. Cross-check on your articles of association
To ensure that the board has the power to approve the accounts without needing shareholder approval.
Resolving to approve the accounts and recording that approval.
5. Instructions to the relevant person(s) to sign and submit those accounts by the relevant deadline
There's a signing protocol that must be followed to ensure that the accounts are properly approved and signed off by the board, so that Companies House is able to accept them. The various steps you should take are listed here.
Order of steps
Follow the sequence of steps indicated in the list of actions above.
We highly recommend that all accounts are finalised with the assistance of an accountant, unless you have accountancy expertise already within your business.
Make sure that you follow the signing protocol and that you prepare and submit your accounts in good time.
To change your accounting reference date
When you first set up your new company, you are automatically provided with an accounting reference date, which we've talked about in a bit of detail in the above section already.
This date may not be all that convenient for you and you are entitled to change it to a date that better meets your preferences.
You can extend or shorten the period, provided you comply with the necessary filing process and none of the legal limitations affect you.
There are some rules around the choices you have for alternative dates. You can find out more on these here.
- you can't change your accounting reference date if the due date has already passed
- you can shorten your accounting period (and so submit your accounts earlier than required) as often as you please
- you can't normally extend the your accounting period beyond 18 months from the start date of the last financial year, and
- you can only extend once in any 5 year period, except in very exceptional circumstances.
Proposing the change to the accounting reference date.
Resolving to approve the change of date.
3. Instructions to the relevant person(s) to complete and file with Companies House, Form AA01
This contains the relevant instructions for the registry to action this change.
You can file online or by paper and post.
There's no fee.
4. To update, as relevant, any staff or your accountants in relation to the change
Order of steps
Simply follow the order of the elements listed above – it's pretty straightforward.
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