Comes but once a year: You and your Annual Accounts
Many contractors operating their own limited company must regard the annual accounts with much the same trepidation with which they view the Christmas turkey - it's a big job that you are obliged to take on, where you know that while success will be taken for granted, the consequences of failure can be severe.
Part of the problem is in the name. Your 'annual' accounts are not a standalone job undertaken once a year - they are the culmination of all your day-to-day financial recording and reporting. If you have been conscientious and organised for the other eleven months, you will find that the final task of bringing together all the information required for your annual accounts is considerably simplified.
That basic principle to one side, there are working practices you can adopt to cut the chore down to size.
Know the Terrain
The full annual accounts consists of several parts, including:
- Company information (the list of key officials - i.e. you - and details of fixed assets);
- Report of Directors (requiring director-level sign-off, this section gives information about your company's directors - again, you);
- Profit and Loss Account (possibly in both a detailed and an abbreviated format);
- Balance Sheet (a snapshot of the business as it stands on the Accounting Reference Date, or ARD);
- Notes to the accounts.
An accountant's report may also be included.
Let Your Accountant Do The Walking
While you may feel, particularly if your limited company is in its early days of trading, that the annual accounts should be your responsibility, you are strongly recommended to leave the bulk of the work to your accountant. Following the Companies Act regulations and one of the many online tools, it's relatively easy to come up with a valid submission. However, while these resources can tell you what you must do, they cannot give advice on what you can or should do to maximise the potential of the tax system to work for you. An accountant with a good understanding of the areas of flexibility within the regulations and the available allowances will be able to look at your business and tailor a bespoke solution.
Checks and Balances
Handing the annual accounts to your accountant isn't to say you should wash your hands of the task. You are required to sign off on the accounts before they are submitted, and if there are any errors or omissions it will be you that is held responsible. Know the relevant deadline for submission (for private companies this is nine months after the ARD, normally the end of your company's financial year) and start planning well in advance to collect together all the information that will be needed. Arrange with your accountant to put aside time to review the accounts together, and make sure that you understand and can vouch for each element. Some of the content will be technical, but all of it is important - ensure your accountant gives you a plain-language explanation of each of the notes to your accounts, for example.
Some representative checks might include:
- ensuring that the description of the company given in the Report of Directors matches with the details that HMRC already hold - any inconsistencies can provide grounds for an investigation;
- ensuring that the income and expenditure shown on the Profit and Loss Account is consistent with your invoices and costs, including salaries, for the year;
- making sure that all your company's assets, including the contents of any bank or building society, are detailed on the Balance Sheet;
- ensuring that the relevant signatures have been completed - note that the Report of Directors and the Balance Sheet require directorial sign-off.
It is crucial that every element of the accounts is verified - that they give a 'true and fair view' of the state of the company's business, in the wording of the Companies Act. The penalties for submitting accounts that do not comply with the Act (and note that this includes non-compliance through 'recklessness', i.e. not taking the proper care to understand the regulations, as well as through deliberate deceit) can include heavy fines.
Knowing What Goes Where
Once you and your accountant have finished your fine-toothed comb review of the documentation, it is time to get it sent off. HMRC need the full accounts, including the detailed Profit and Loss Account, along with your tax return. In addition, you will need to send a copy of the abbreviated accounts (usually just the Report of Directors and the Balance Sheet) to Companies House.
Annual accounts look daunting - they have many components, are complex and have to be scrupulously accurate as they will be subjected to detailed examination. However, with good preparation, a competent accountant and attention to detail in the checking process, there is no reason why this annual challenge need become a dreaded chore.