Contractors operating under a limited company payment structure need to prepare
financial accounts.
This article discusses why you need to prepare them, what the process is,
together with a brief overview of their content.
Why do accounts?
Company law requires that every UK limited company prepares a set of annual
accounts which comply with the format specified in the Companies Act.
Also, HMRC insist upon a copy, with a corporation tax return and
computation, to assess the corporation tax on the company.
Who does them?
Most contractors use a specialist firm of chartered accountants for all their
accounting services including the production of the annual accounts.
Alternatively, you could do them yourself and file them directly with Companies
House. Although this will save some money, the time, trouble and effort
required to prepare accounts in the correct format acceptable to Companies
House and HMRC is probably not worthwhile for you.
When are they due?
Companies House require your accounts to be submitted within ten months of your
accounting date.
This is extended to a maximum of 22 months after the company’s date of
incorporation for the first accounting period.
HMRC require the company’s corporation tax liability to be paid
nine months following the accounting reference date and it is therefore
advisable to have the accounts prepared as soon as possible, in order to avoid
the possibility of late payment.
Late submission of the accounts can result in penalties being charged for a
minimum of £100 by Companies House and HMRC.
What do the accounts consist of?
The two main statements in the accounts are:
-
Profit and Loss Account.
This shows all company income and business
expenses incurred by the company during the accounting year. The difference
between income and expenses incurred is the profit before taxation on which
corporation tax is deducted, leaving the profit after tax, which is available
for distribution to the shareholders, either by dividends or capital
distribution on a winding up of the company.
-
Balance Sheet.
The balance sheet shows the company’s assets and liabilities and is simply a
“snapshot” of the company’s position at a point in time, being the company year
end. E.g. In a computer consultancy company, the assets will usually consist of
computer and office equipment (shown under fixed assets), bank account balance
and amounts receivable (shown under current assets), amounts due for VAT, PAYE,
director’s account, etc. (shown under current liabilities) and shareholders
funds, which is the accumulated profit carried forward and share capital of the
company.
What effect does IR35 have?
If your company is in receipt of any IR35 caught income, then a calculation
must be carried out to ensure that the appropriate level of salary is included
in the accounts. If all income is caught by IR35, then the director’s salary
will be high and the profit (after director’s salary and other expenses) will
be very low. No dividends are likely to be included in the accounts in these
circumstances.
David Colom
Principal
D J Colom & Co Chartered Accountants
David Colom qualified as a Chartered Accountant in the City of London in 1981 and is the founder and principal of D J Colom & Co Chartered Accountants established in 1989.
Started specialising in serving IT contractors in 1993 and is now one of the longest standing suoppliers of accountancy services to computer contractors.
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If the accounts include income which is outside the scope of IR35, then the
accounts are likely to show a small director’s salary, leaving a far greater
profit for charging to corporation tax. The after tax profits would then be
distributed by dividend or carried forward within shareholders funds/profit and
loss account.
Updated: Thursday, January 06, 2011
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