Planning to start a new business, or did you already start and are wondering about what all legal steps you have to take? Worried that while handling so many other things, you will miss out on a few of the important ones and land in trouble? You took care of the taxes, the bookkeeping, and most other things, but wait, did you think about the annual accounts? Do you know that they are also a thing and have to be filed by every company on a yearly basis? Do you know that you can land in serious trouble and even get your company’s name struck off if you forget to submit the annual accounts on time? If you do, then it is great, if not then well, worry not. We will give you all the knowledge you need about annual accounts here onwards. Make sure that you are aware of what annual accounts are and what their importance is if you want that new business of yours to run smoothly without any issues in the future.
What are annual accounts?
Every limited company in the United Kingdom, registered under the Companies House has to prepare an annual statement- an overview of the performance of the company, highlighting its transactions, its financial activity during the past year. These accounts are known as the annual accounts or statutory accounts of a company, and it is an important legal responsibility of the director of the company to ensure that these documents are prepared and filed accurately and on time.
What all documents are included in the annual accounts?
The annual accounts are simply a compilation of your financials. The documents include:
- A Balance sheet- an account of the company’s assets and liabilities or more simply, a statement of the company’s wealth
- Profit and loss account- this states the transactions of your company in the accounting period, the running costs as well as the losses incurred or the profits made
- Notes/remarks about the accounts
- A director’s report
- An auditor’s report
- Name and signature of the director on the balance sheet
However, there are certain exemptions, given by the Companies House, to the documents that need to be submitted based on factors like your company size.
Again, it is to be ensured that your annual accounts need to meet either International Financial Reporting Standards or the UK Generally Accepted Accounting Practice.
Who do you need to prepare these accounts for and why?
The annual accounts are prepared for the Companies House as well as Her Majesty’s Revenue and Customs (HMRC) every year. The sole purpose of the annual accounts is to clearly depict the performance of the company in the market in the accounting period as well as to show any changes in its financial position in the last year. It gives a clear picture of the financial situation of the company. Not just this, the annual accounts are used by the HMRC to calculate the Corporation tax that a company owes to it on its taxable profits at the end of every financial year. Again, a copy of the annual accounts is also sent to all the shareholders and investors to keep them aware of how the company is performing.
When are the annual accounts made and submitted?
When a company is first set up and registered, the last day of the month of registration, by default, is allotted to the company as its accounting reference date or ARD. Hence, every financial year for a company ends on this date. Thus, annual accounts for every company are made for the year starting and ending on this accounting reference date. If the date hasn’t been changed separately by you, it remains the same every year.
This very date, again, determines the date for the submission of the annual accounts. It needs to be noted that the time span and the deadlines for the first and subsequent filings for a private and public company are different and should be noted carefully. For a private company, the annual accounts must be filed within nine months of their accounting reference date whereas, for a public company, they must be filed within six months of their ARD.
It is important to know the due date of your annual accounts because a late or delayed payment will not only impose a substantial monetary fine on you but also land the directors of the company in a difficult situation. They just might face legal charges resulting in huge personal fines as well as disqualification from the role of director. So, ensure that you stick to the deadline to avoid any unnecessary trouble that will come if your company gets struck off from the records of the Companies House.
How much penalty is charged?
If due to some reason, you are not able to submit your annual accounts on time to the Companies house, the penalties are imposed in the following manner:
- If you are late by a month, £150 will be imposed as a fine
- If you are late by 1-3 months, a fine of £375 will be imposed
- If you are late by 3-6 months, a fine of £750 will be imposed
- If you are late by more than 6 months, a fine of £1500 will be charged.
You need to ensure that your accounts are not late for two years in a row, lest your penalties be doubled. Again, the penalties mentioned above are for private limited companies. The amounts for a public company are different and can be found out from the concerned authorities.
Once again, it is to be noted that if you have a genuine reason for being late, exemption from penalties can be filed and is completely subject to the authorities’ discretion.
Clearing the common confusion: Annual accounts versus annual returns
It is not uncommon to come across young entrants who confuse annual accounts with annual returns. The annual returns, now known as confirmation statements, are a more detailed account of the performance of a company, its strategies, its products and its position in the market. It does have the financial details that are included in the annual accounts, but it has a lot more than these numbers. While the annual accounts detail the financial figures, the annual returns are more of a non-financial means to ensure that the records kept in the Companies House about your company are correct and up to date. While the annual accounts are used for an overview of your company’s financial situation, the annual returns give a detailed account of your company and are used for the verification of your details in the Companies House.
What are the different types of limited company accounts?
The rules for filing the annual accounts are pretty much the same except for a few of them which depend majorly on the type of company you own. The various types of company accounts and their specific rules are listed below:
- Micro-entity accounts- These are for the smallest of companies, having an annual turnover of less than £632,000, a balance sheet total of less than £316,000 and roughly 10 employees. The annual accounting rules enable these companies to reveal less information than other companies. They have to include only the balance sheet for the last year complete with remarks, wherever needed. The profit and loss accounts, auditor’s reports as well as the director’s note are not necessary documents for these companies.
- Small company accounts- A small company is one which meets two of the following conditions:
- Annual turnover below £6.5 million
- A maximum balance sheet total of £3.26 million
- Less than 50 employees
Small companies need to submit only the abbreviated accounts- balance sheets and notes- to the Companies House but have to submit all the documents to HMRC and for the members.
- Medium-sized company accounts- if a company meets any two of the following conditions, it qualifies for a medium sized company:
- The annual turnover of less than £25.9 million.
- Balance sheet total of not more than £12.9 million.
- A maximum of 250 employees
The annual accounts for such companies include all the documents mentioned earlier for the members. However, for the Companies House, the company may submit abbreviated accounts including the abbreviated profit and loss account instead of the complete data.
- Large company accounts- a large company must meet at least two of the following conditions to be put under this category:
- More than £25.9 million of annual turnover
- Balance sheet total of more than £12.9 million.
- More than 250 employees
- Such a company must submit all the documents above without any exemptions.
- Dormant company accounts- A dormant company is one which has not been in action since its incorporation, i.e., it did not have any transaction since the day it got incorporated. Such a company should file dormant accounts including the company name, registration number, balance sheet, details of the shares issued, audit exemption statement and the director’s details. It is to be noted here that if a company has ever traded in the past, it does not come under this category and hence it should file abbreviated accounts at the Companies House instead. Again, HMRC does not require any accounts from a dormant company.
How to file annual accounts?
You can easily submit your annual accounts to the Companies House as well as to the HMRC through the online portal of the government. Ensure that you stick to the deadline and there won’t be any problem while filing as the portal will guide you through every step of it.
Should you hire an accountant or do the accounts yourself?
The answer to this question is completely subjective. It is completely your wish to decide what to do but make sure that you know the pros and cons of both the options. If you decide to do it yourself, ensure that you have complete knowledge of how to go about things, how to document the figures, what all to include and what all not to include, lest you make a mistake leading to unnecessary penalties and charges. While not hiring an accountant in Ferndale to look after all the paperwork will save you a lot of money, ensure that you are not faced with unnecessary penalty charges which exceed the money you saved from not hiring him. On the other hand, an accountant will ensure that all the documents, the financials, the paperwork are done properly without any mistakes, and no unnecessary chaos is created. Remember that if you decide to do the accounting yourself, you will have to inform the Companies House beforehand.
Annual accounting is an important aspect for any company to run. It is as important as the filing of taxes and ensuring a record of your transactions. It is the legal duty of every company and every director of the company to ensure that the proper submission of annual accounts takes place and on time. And for this, it is essential to know everything about the annual accounts. It is not a good idea to start with the process without knowing every single thing that there is to it lest you get stuck in between, or make a mistake which penalizes you heavily in the future. Also, it is the moral duty of every director to ensure that all the information provided in the documents, in the financials is correct and up to date. Trying to act smart with the government or keeping information from them is a crime and can lead to unwanted actions being taken against the company and its directors and in many cases also lead to the blacklisting of the company. Thus, it is essential to be true and efficient while submitting the annual accounts to keep things running smoothly in your own favour.