UK companies from an accounting perspective - Q&A

Transcription

1 FOCUS INTERNATIONAL UK companies from an accounting perspective - Q&A Nicola Morgan-Schulz, Manager of Jordans Accounting Services, answers your questions on accounting and tax requirements of a UK company. When is the financial year end of a UK company? When the company is incorporated, it will be assigned a financial year end. This is also known as the Accounting Reference Date (ARD). The ARD will depend on when the company was formed, and is set one year to the end of the month in which the company was incorporated. For example: If the incorporation date is 15 March 2016, the Companies House assigned ARD will be 31 March Therefore, UK companies can have an ARD of any date. Can I change the financial year end/ Accounting Reference Date (ARD) of the company? Yes, the ARD allocated by Companies House can be changed. In fact, if the company is part of a wider group, Jordans Accounting Services recommend that the ARD is changed and brought in line with the ARD of the group. This makes inter-company reconciliations and consolidated group accounts easier to complete. The ARD can be changed at point of incorporation or by a filing at Companies House. How often do UK companies have to file their accounts? A company should keep up-to-date books and records, however this doesn t mean monthly or quarterly bookkeeping should be completed. A UK company is required, as a minimum, to file annual financial statements in statutory format with Companies House. Statutory Format means annual financial statements either in line with UK Generally Accepted Accounting Principles (UKGAAP) or International Financial Reporting Standards (IFRS). Companies with financial year ending on or after 31 December 2015 should now apply Financial Reporting Standard (FRS) 102. This is bringing UK accounts more in line with IFRS regarding presentation and accounting treatment. Are the annual accounts the same as the Annual Return? No, the annual accounts are not to be confused with the Annual Return. The Annual Return is a separate form containing the company s statutory date, and not the financial information. The Annual Return is being replaced by the Confirmation Statement on 30 June What tax does a UK Company have to pay? All companies pay UK corporation tax on net profits and gains. Companies may also be required to report on different UK taxes dependant on their trade and activities. If a company operates a VAT-able trade within the EU, they can register

2 for Value Added Tax (VAT), however this isn t mandatory until their UK turnover exceeds 83,000 in a 12 month period. UK companies are not automatically assigned a VAT number in incorporation. If a UK company has employees, it should register for Pay As You Earn (PAYE). This allows the company to complete a payroll for its employees and deduct tax on their behalf for payment on a monthly basis to the tax authorities. These deductions cover UK income tax and National Insurance (NI) contributions. How much is UK corporation tax? UK corporation tax is currently set at 20%. However, the rate is set to fall to 19% in April 2017 and 17% from April How do companies pay corporation tax? When a company is incorporated it is automatically registered with Her Majesty s Revenue & Customs (HMRC), the UK tax authority. Within a few days of incorporation, the company will receive correspondence from HMRC confirming the registration, providing the company s Unique Tax Reference (UTR) and confirming the dates that tax returns should be made up to and the filing dates. The company must submit annual corporation tax returns (CT600) along with an electronic copy of the financial statements (HTML) online to HMRC. Tax returns must be submitted within 12 months of the ARD. If a tax liability is due, this must be paid within 9 months and 1 day of the ARD. Are any companies exempt from filing tax returns? If a company is to remain dormant, the CT41G which is sent after incorporation can be completed, stating this and then HMRC will write to confirm tax returns are not required until a trade starts. Certain types of companies can also apply for exemption from filing a tax return. These are generally not-for-profit organisations and property management companies. My company is registered for VAT. How does this process work? VAT Returns are generally completed and filed quarterly. They should disclose all sales and purchases subject to VAT, even if they are zero rated. The return should be filed within 1 month and 7 days of the quarter end. VAT liabilities calculated should be paid within 1 month and 7 days of the quarter end. Once VAT registered an EORI (Economic Operator Registration and Identification) can be applied for. This provides the company with a unique reference which can be used by any customs authority in the EU. How much VAT does a UK company need to pay? The standard rate of VAT is currently set at 20%. However there are varying rates and exemptions depending on the services and goods provided and who they are being supplied to. My company employs other people, so how does PAYE work? UK companies can pay their employees weekly, fortnightly, monthly or annually. For each payroll run, e.g. if monthly, every month a Real Time Information (RTI) submission must be made to HMRC. The RTI will summarise the total tax payable to HMRC, broken down into income tax, employees NI contributions, employers NI contribution and any statutory payments (such as maternity or paternity pay, sick pay, etc). If employees also receive benefits an annual declaration must also be made called a P11d. This form details the additional taxable benefits the employee receives and the tax payable on those benefits by the employer. Benefits include such things as a company car or the company paying for private medical insurance for the employee. Do I need to provide my employees with a pension? Yes, all UK companies are now required to offer its employees a work place pension. This is known as Auto- Enrolment. However there are exceptions for some companies and we d be happy to advise further on these. Companies are currently being issued with a staging date by which their pension scheme should be set up and offered to employees. The regulations stipulate how much the employee and employer should input into the pension based on the employees earnings. Do UK companies require an audit to be carried out? No, not all companies. UK audit limits increased for companies with a year-end beginning from 1 January The limits set apply to company turnover, assets and number of employees. If a company meets 2 of the 3 limits in place, an audit will be required. How can Jordans Accounting Services help with my UK company? Advice before incorporation on UK companies, tax treatment and audit. Tax advice on VAT registration Act as the company s tax agent for corporation tax, VAT and/or PAYE. Responding to HMRC s initial corporation tax forms (CT41) Registering company for VAT and completing ongoing VAT returns Registering the company for PAYE and completing the monthly payroll thereafter Completing company s financial statements for filing with Companies House Calculating companies corporation tax liability and filing the return with HMRC Regular bookkeeping and/or management accounts We can also refer any legal matters to our sister company Jordan s corporate law such as: Drafting of employment contracts Assistance with creating new classes of shares Nicola Morgan-Schulz Accounting Services Manager Jordans Trust Company Limited T +44 (0) E nmorgan-schulz@jordanstrustcompany. com Disclaimer The information provided in this publication are put forward for further consideration only and are not intended to be acted upon without independent professional advice. Neither Jordans Trust Company Limited nor its associated group companies, nor any employees or directors of these companies can accept any responsibility or liability for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or not taken in reliance on the contents of this publication.

3 FOCUS INTERNATIONAL The benefits of management accounts Annual financial statements, a statutory requirement for UK companies, provide a snapshot of the company s financial position at the year-end date. Whilst this is important information, it can be difficult for companies to make real-time decisions in a fast-moving and competitive business environment when they are using retrospective information that may be out of date and no longer relevant. For this reason, receiving regular management accounts can be a sensible business decision. Unlike statutory accounts, that have a preparation window of 9 months before submission to Companies House, management accounts take up-to-date business information and use this to produce meaningful reports and illustrate key performance data. For growing companies this can be invaluable. Monitoring performance As a business it can be tempting to focus on gross profit (the difference between sales and purchases) as a measure of performance. Whilst extremely important, this does not take into account other accounting concepts like depreciation, amortisation and accruals. Consequently businesses can end up with very different results than expected. Management accounts allow businesses to respond to difficulties as they arise; proactively identifying issues and suggesting solutions. Other examples of management information that can be included in management accounts to assist the directors in managing the business include, revenue and gross profit by client, revenue by client type, product line or salesperson. Motivation Giving managers and staff clearly defined performance objectives can increase motivation and buy-in to the company. Incentives and bonuses can also be set around achieving certain levels of output, economy or profit. Cash-flow Ensuring the business remains liquid is crucial to long-term success. Too often start-ups and other companies fail due simply to inadequate cash-flow management. Wages, tax bills and other liabilities, if not properly budgeted for, can decrease working capital and cause difficulties in an otherwise profitable business model. Having management accounts in place allows for better control in this area.

4 ... management accounts take up-to-date business information and use this to produce meaningful reports and illustrate key performance data. For growing companies this can be invaluable. Producing and monitoring monthly reports on monies owed by customers is an effective means of improving debt collection and cash-flow. Loans, finance and credit applications Banks and lenders may require up to date accounts and future projections of your company s performance in order for you to obtain credit or finance. Again, they may not be satisfied with seeing statutory financial statements particularly if they are several months out of date. Similarly, suppliers sometimes look for evidence of strong financial performance in order to manage their own exposure to risk. Having good, up-to-date management accounts available can be a useful reassurance. Dividends For tax reasons, some business owners elect to be paid in dividends rather than a salary. The amount that can be paid in dividends will be determined by the amount of distributable reserves available in the business. The difficulty with this situation is that without management accounts, companies need to rely on historical information contained in the accounts and are likely to under or overestimate the reserves figure. Selling the business Should you wish to sell your business, investors may wish to see management accounts. This can provide a useful tool for valuation purposes. Non-UK Companies Some jurisdictions such as the British Virgin Islands or the Seychelles do not have statutory requirements to submit annual accounts. They do however require adequate accounting records to be kept. Having management accounts in place fulfils this requirement. How can Jordans help? We can provide management accounts packs to your business on a 6-month, 3-month or monthly basis, as well as commentary and analysis to help your business move forward. This would be tailored to the specific needs of your business and the nature of your industry. If you would like to find out more about what Jordans can do for your business, please get in touch. Owen Sanders Management Accountant Jordans Trust Company Limited T +44 (0) E osanders@jordanstrustcompany.com Disclaimer The information provided in this publication are put forward for further consideration only and are not intended to be acted upon without independent professional advice. Neither Jordans Trust Company Limited nor its associated group companies, nor any employees or directors of these companies can accept any responsibility or liability for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or not taken in reliance on the contents of this publication.

5 FOCUS INTERNATIONAL Incentivising your staff In today s employment market there is a lot of competition to attract the best person for your business and retain them in your employment. Employers will compete on salary but also on additional benefits that they will offer their workers. From an employee perspective, they may see any benefits as a good thing as they are getting them for free but this is not always the case. Most benefits provided come with a cost to both employee and employer. In this article I would like to pick out some of the more common benefits and show how much their provision costs the employee and employer. 1. Cash bonuses Whether contractual or not, any cash bonus incentive will be taxed on the employee through their payroll and attract National Insurance (NI) and Income Tax. For an employer, when considering what level of bonus to provide, it must be remembered that the cost to the business is gross bonus plus employers NI of 13.8%. So a 2,000 bonus will cost the company 2,276. However, you can also look on the bright side. This is an allowable expense reducing your taxable profit and therefore your overall tax liability for the year. 2. Employer pensions Company pensions are now becoming commonplace in UK industries especially with the new regulations in force for UK employers to ensure they provide employees with a workplace pension through auto-enrolment. This has started to reduce the perceived benefit to the potential new employee as it is becoming a standard that they should receive a pension. However, it can still be used to incentivise staff especially those in the higher earnings brackets who already pay high amounts of tax and have a lot of disposable income. Instead of a bonus, these employees may prefer a one off contribution to their pension. This contribution for them is made out of pre-tax earnings, so the contribution is deducted before income tax (but not NI contributions) is applied to their salary. The employer s cost is equal to the contribution provided and again is an allowable deduction for taxable profits. The main consideration when offering this sort of incentive is to ensure the employee has enough of the annual allowance remaining for the year for them to actually benefit. 3. Share Incentive Schemes Share incentive schemes are becoming a more popular way to incentivise employees. This is due to newer schemes created by the government to help UK businesses grow and, in turn, grow the UK economy.

6 There are two types of scheme: One is a non-tax advantaged scheme, the other a tax advantaged scheme. The purpose of these schemes is to provide employees with an option to buy shares in their employer s company or group in which they can realise either regular dividends or capital gains on the growth in value of the shares purchased. There are three key points in time which are required for a share scheme: Grant of Option - This is the date on which the employee is given the right to purchase the shares. At this date the company will have a market value for the shares and based on this they will set a price at which the employee can purchase the shares in the future. This price is usually the current market value or discounted market value. Sale of shares purchased under the scheme - At this point the employee should reap the rewards and realise a profit on the sale of their shares either back to the company or to a third party. In the table below, I ve highlighted the key points and possible tax for the employee: For the company there would be costs of setting up the scheme and valuing the shares which are an allowable expense. Then if the employee decides to exercise their option the company will have a further allowable deduction for tax purposes which equates to the growth in the value of the shares between exercise and grant. In choosing what scheme to opt for there are a number of factors to consider, as not all schemes will be available to all employees or companies. These factors include number of hours worked by the employee, value of shares to be granted under the option, type of company and so on. When looking at these schemes you need both legal and tax advice. This is where the Jordans Group, with its unique set of companies, can assist. In one meeting you can discuss both tax and legal issues on potential schemes for your company. Nicola Morgan-Schulz Accounting Services Manager Jordans Trust Company Limited T +44 (0) E nmorgan-schulz@jordanstrustcompany. com Exercise of the Option - This is the point at which the employee decides to take the option to buy some shares in the company at the agreed price. Note that an employee may choose not to exercise the option and it may lapse. Although the employee has to use his or her money to buy the shares this is still an incentive as the employee should gain at some point in the future, usually when they decide to sell their shares. Non tax advantaged scheme Tax advantaged scheme Grant Exercise Sale No tax No tax Income Tax on growth between exercise price and current market value No Income Tax if issued at market value Capital Gains Tax (CGT) on growth between market value at exercise and market value at sale CGT on growth between value at Grant and market value at Sale Disclaimer The information provided in this publication are put forward for further consideration only and are not intended to be acted upon without independent professional advice. Neither Jordans Trust Company Limited nor its associated group companies, nor any employees or directors of these companies can accept any responsibility or liability for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or not taken in reliance on the contents of this publication.

7 FOCUS INTERNATIONAL Liquidation vs Winding You may be considering closing your business on wind down to retirement or you may want to challenge yourself in a new business, trade or industry. Whatever the reason, you have a number of different options when closing down your company and these should be considered carefully to ensure you are keeping the shareholders best interests at heart. Liquidation This is the formal process of winding up your company. To go into liquidation you need to find and appoint a qualified liquidator. activity is to turn the company s value into cash which can then be distributed to the shareholders before the company is dissolved. By taking a company into formal liquidation you are ensuring that the distributions of cash (or sometimes assets) to the shareholders can be treated as capital distribution. For UK shareholders this means less tax. Pre-liquidation distributions (dividends) will be taxed as income. Gross dividend Tax free dividend CGT Annual exemption 1 Dividend tax levels as of 2016/17 are 0% on the first 5,000, 7.5% on income between 5,000 and 32,000, 32.5% on dividends between 32,001 and 43,000 and 38.1% thereafter. In contrast capital distributions will attract capital gains tax at the 2016/17 rates of 10% up to 32,000 and 20% thereafter (after applying any remaining annual exemption of 11,100). To illustrate this, let s look at a dividend distribution of 200,000 when taxed as income or as capital. Income 200,000 (5,000) Capital 200,000 (11,100) Once a liquidator is appointed they essentially take over the running of the company and become the beneficial owner of the company s assets. Their duty is to wind down and stop any trading activities of the company, settle all the outstanding liabilities, such as trade creditors, loans, and sell all the company s assets. The result of this 195, ,900 Up to 2,700 Up to 2,200 Over 29,180 TOTAL TAX 63,512 34,080

8 As you can see, the tax on a large distribution such as this is nearly half when it has been completed through a formal liquidation. Other factors to consider when looking at liquidation is how much this will cost the company in liquidator fees. Generally fees can start from 3,000-4,000 but this will depend on the company and any complexities which may exist. Informal Winding Up If your company is quite small in value and you believe the tax benefits of a formal liquidation may be outweighed by the cost of hiring a liquidator, you do have another option. This is provided by s1000 or s1003 of the Companies Act In this scenario it would be your responsibility to cease to trade, settle all liabilities and sell or transfer any company assets. You will then be left with your distributable reserves that will be paid to the shareholders. This distribution may also be treated as capital rather than income if the following conditions are met: the company has commenced the procedure in s1000 CA 2006 or; the company intends to make or has made an application under s1003 CA 2006 and; the company makes a distribution in respect of share capital in anticipation of its dissolution. However, the amount that can be treated as capital for tax purposes is 25,000. If this cap is exceeded the excess will be taxed as income. Other Considerations As of April 2016 anti-avoidance legislation came into force to stop entrepreneurs from repeatedly benefiting from capital distributions on dissolution of a company. If within the next two years after a company is dissolved, the same shareholder(s) set up a similar business in the same industry but in a new company, HMRC may look back at previous capital distributions and reclassify them as income, therefore collecting the difference between the tax paid and the tax payable had the distribution been taxed as income. Additional tax due would also attract interest. At Jordans we can help you in various ways. We can assist in finding and putting you in contact with a suitable liquidator complete all tax and accounts required by the liquidator complete and file all the relevant forms involved in a voluntary winding up, alongside the necessary accounts and tax filing assist in completing UK personal tax returns to disclose any distributions made by the company to the UK resident shareholders. We are happy to discuss any aspects of this article further with you. Contact us to find out how we can help your business. Nicola Morgan-Schulz Accounting Services Manager Jordans Trust Company Limited T +44 (0) E nmorgan-schulz@jordanstrustcompany. 1 Assuming the exemption has not been used against other capital gains in the year Disclaimer The information provided in this publication are put forward for further consideration only and are not intended to be acted upon without independent professional advice. Neither Jordans Trust Company Limited nor its associated group companies, nor any employees or directors of these companies can accept any responsibility or liability for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or not taken in reliance on the contents of this publication.