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Accounting and auditing requirements for individuals
in business
Self-employed individuals, ie where the business is not incorporated
as a limited liability company or a limited liability partnership,
must maintain proper accounting records showing details of
income and expenditure. If there are any employees then they
must be paid via the PAYE (Pay As You Earn) tax system and
income tax and national insurance contributions deducted at
source. Tax returns will be by self-assessment to HMRC on
an annual basis. This form of filing tax returns is mandatory
for the self-employed.
All businesses should maintain basic accounting records, recording
receipts (revenue), expenses, PAYE records and VAT returns.
These are not only confined to details of revenue and costs
but also (in the case of limited companies) details of company
meetings and the requirement to file accounts with Companies
House.
For a limited company or a limited liability partnership,
it is a legal requirement to file an annual return to Companies
House. This is in addition to the requirement to file returns
relating to Income Tax, Corporation Tax or VAT to HM Revenue
& Customs (HMRC).
Businesses that are not incorporated do not have to submit
annual returns to Companies House and indeed there are relaxed
rules and accounting exemptions for small and medium-sized
companies (SMEs) and limited liability partnerships.
These smaller enterprises can file abbreviated accounts and
there is no requirement in law to appoint an auditor. In general,
a small company is regarded as a company that has less than
50 employees and a turnover of less than GBP6.5m. A medium-sized
company will usually have between 50 and 249 employees and
a turnover not exceeding GBP25.9m.
To qualify to file abbreviated accounts, small companies
and limited liability partnerships must meet at least two
of three key criteria:
- annual turnover must not exceed GBP6.5m (pre-April, 2008
GBP5.6m);
- balance sheet total must not exceed GBP3.26m (GBP2.8m);
- the average number of employees must be no more than
50
These figures apply to the financial year starting from April,
2008 onwards. Slightly lower limits apply for businesses starting
before April, 2008 (shown in parentheses above).
Medium-sized companies (excludes limited liability partnerships)
have to adhere to similar conditions, namely:
- annual turnover must not exceed GBP25.9m (pre-April,
2008 GBP22.8m);
- balance sheet total must not exceed GBP12.9m (GBP11.4m);
- the average number of employees must be no more than 250
The aforementioned criteria also apply to the auditing of
accounts. There is no legal requirement for businesses to
have their accounts audited if they match the criteria outlined
above.
Where a company qualifies for audit exemption, unaudited
accounts submitted to Companies House must include an abbreviated
balance sheet with accompanying notes. These notes must state
why the company is entitled to an audit exemption and confirm
that the accounts have been prepared in accordance with statutory
requirements governing small and medium-sized businesses.
Self-employed individuals/sole traders are under no legal
obligation to have accounts audited. The primary concern should
be ensuring compliance with VAT and tax reporting requirements.
The fiscal (tax) year in the UK runs from 6th April to 5th
April the following year. There are different rules governing
the submission of accounts or tax returns, depending on whether
a business is trading as a small or medium-sized company (or
limited liability partnership) or as a sole trader. In the
last-named option, the reporting rules that cover the submission
of personal tax returns will apply. This entails completing
and filing a self-assessment tax return. Generally, a tax
return pertaining to the tax year ended 5th April, 2010 will
have to be submitted no later than 31st January, 2011 and
any tax due paid by the same deadline.
Companies pay Corporation Tax on taxable profits for a defined
accounting period. This period will normally be 12 months
and though it may coincide with the company’s own financial
year, this is not always the case.
Corporation Tax must be paid before accounts are filed with
Companies House. Payment should normally be made nine months
after the end of the company’s trading period for which Corporation
Tax will be liable and accounts must be filed within nine
months of the end of that period; an extra month is allowed
for companies with subsidiaries..
There are penalties for late payment and late filing of accounts
and a company must have earlier notified HMRC that they are
active and liable to pay Corporation Tax.
Additional reporting requirements for individuals
in business
Limited companies must inform Companies
House of any changes to directors and to their status (eg
if an individual is declared bankrupt) and any other changes
that affect the structure of a company or its statutory directors.
There are a number of other legal obligations with regard
to record keeping and reporting. These include logging accidents
at work under the auspices of the Health & Safety at Work
Act – this legal requirement applies whether a sole trader
or a large limited company.
There are also measures in place that require statutory reporting
by companies in areas of compliance with environmental regulations
and the disposal of hazardous substances (eg chemicals).
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