Planning for the end of the accounting year

An accountant at work

Each year a company has to prepare its annual accounts, also known as statutory accounts, and pay tax on profit made. Our small business accountants explain the process.

What is an accounting year and is this different from a ‘financial year’?

When you first set up your company and recorded its first taxable revenue, you indirectly defined the accounting year of your company.

The accounting year usually starts from the actual month the company is set up, and it may be different from the ‘other’ important accounting period: the financial year. The financial year for Limited Companies refers to the one that the government follows and dictates budgetary policy changes. In the UK, the financial year runs from April 1st of each year. This is not to be confused with the ‘fiscal’ year for personal taxes which runs from April 6th to April 5th of the following year.

Financial year vs Accounting year end
The UK Government sets the financial year. It runs from April 1st to March 31st the following year. This is when the government’s policy changes and new tax rates start. On the other hand, the accounting year end is the date chosen by the directors of a limited company to prepare its accounts for each year. An accounting year may be different to the financial year, or it could also run on the same period as financial year.

When you first launched your company, your accountants might have aligned your accounting year with the financial year. This meant they either shortened or lengthened your first accounting year and submitted the accounts on March 31st to coincide with the financial year. From that point on your accounting year would run from April 1st to March 31st.

Irrespective of you have chosen to coincide your account year with the financial year or not, your ‘year end accounting date’ will require you to submit relevant documents to Companies House and HMRC, and to pay tax (on profits) accordingly. Most small business owners often leave this process to specialist small business accountants like our team here at Berley. If you would like to know more about different accounting periods, see this page.

What year-end accounting documents do you need?

The government requires all business entities to file a report on their company’s financial activities and pay any tax due on the profits made. To do this you need to produce two sets of documents:

1. The company’s statutory accounts

The statutory accounts must be filed to Companies House within nine months after the end of your company’s accounting year via online submission or hand-delivery. You must also file these accounts to HMRC 12 months after the accounting period of your Corporate Tax ends.

Your statutory accounts should contain:

  • A ‘balance sheet’, which shows the value of everything the company owns, owes and is owed on the last day of the financial year. This must be printed with a director’s name and signed by the same director.
  • A ‘profit and loss account’, which shows the company’s sales, running costs and the profit or loss it has made over the financial year.
  • Notes about the accounts, usually made by your accountants.
  • A director’s report (unless you’re a ‘micro-entity’).
  • An auditor’s report (this depends on the size of your company; you can click on the article Company audit exemptions to find out more).

There are two ways to make sure this process is efficient, saving you valuable time and money. The first way is to use approved online accounting software like Xero. The second way is to work with a trusted accountant who can help to prepare these accounts for you.

It must be said that your accountant should also discuss tax planning and/or identify areas of improvement. If you have a substantial tax bill to pay, your accountant should also include that in your cash flow forecast so you won’t be caught off guard. If you are looking for an accountant with years of experience in helping entrepreneurs like you in London, please contact our small business accountants in London on 020 7636 9094.

2. company’s tax return – CT600

Your company tax return, the CT600, must be submitted within 12 months of the end of your accounting period. This form reports your business income and tax liability – the figure you need to pay HMRC within nine months (and a day) of the end of your accounting year – even though the actual CT600 can come three months later. You can pay this into your HMRC Corporation Tax account through your bank. Failing to do so can result in a fine.

Please note that even if your company makes a loss or has no Corporation Tax to pay, you must still submit a tax return.

It’s my first year of trading, what accounts and tax returns do I need to file?

If you are about to incorporate a limited company, reporting is a little different in your first year of trading. In this case, your statutory accounts are due 21 months after the end of your incorporation date (not accounting period). Thereafter it is the same as any normal company.

What accounts do sole traders need to prepare?

A sole trader is essentially a self-employed person. You report your trading profits through your Self Assessment tax return each year. Your accounting period is therefore the same as the ‘fiscal year’ – April 6th to April 5th the following year.

Naturally, not all sole traders start their business on April 6th and you are free to choose whatever accounting period you like. For example, if you were to start your business in September, you could set the end of your accounting period as of April 5th the following year. From then on your accounting could match the government’s fiscal year. If you choose to have a different accounting year from the fiscal year, you must inform HMRC accordingly in your Self Assessment tax return, so that they can work out your tax.

What tasks should a small business owner focus on at this time?

As a company shareholder and director, you have an obligation to manage the company efficiently and make it a success – this includes being as tax efficient as possible. Ideally, you have an accountant whom you can trust, and you can also choose to outsource your accounting needs to the accountant and their team. Together, they can make sure all of your expenses are properly accounted for, help you with cost control, and supply you with accurate cash flow forecasts, among other things like VAT and payroll.

In the following section, we aim to discuss seven focus areas which are expenses, invoices, bad debts, VAT, stocktake, liabilities, and PAYE and NI.

1. What expenses can a limited company claim?

A limited company can legitimately claim the following items as expenses.

  • Company formation expenses
  • Accountancy fees
  • Salaries and staff costs
  • Rent and utility bills
  • Fixed assets and their disposal
  • General office purchases, such as postage, stationery and other consumables
  • Business travel and accommodation expenses
  • Business mileage if you use your own car
  • Charitable donations
  • Childcare voucher scheme (now withdrawn to new entrants)
  • Tax-free child care scheme
  • Your company’s Christmas party expenses (up to £150+VAT per head)
  • Equipment expenses
  • Pension payments
  • Professional subscriptions (provided they are on HMRC’s approved list)
  • Communication costs – internet services
  • Mobile phone and landline – provided the contract is between the company and the provider
  • Medical insurance (although it becomes a benefit in kind to the employees)

The important thing to remember here is to make sure you keep a record of receipts and invoices paid, just in case HMRC wants to take a look.

The situation is a little different for a sole trader and the government has some good sole trader expense claim guidelines to follow here.

Now that Making Tax Digital is in operation, you should be scanning and saving these receipts as a natural course of business administration. Cloud-based accounting software services such as Xero make this a simple process to manage, enabling you to upload your receipts into your Xero account for easy access by yourself and your accountant.

2. Is your record of income and expenses correct and up-to-date?

For most businesses, this means going back over your invoicing and expenses, including:

  • Direct debits from your bank account
  • Credit card statements
  • Cash withdrawals
  • Cheque payments
  • Trade account purchases (including Amazon)
  • Invoices issued and paid

The important things to ensure here are:

  1. Make sure all your expenses are recorded accurately and you have the receipts (or have them scanned).
  2. Ensure all transactions are valid. Essentially you’re looking for potential incidents of fraud, so conduct regular reviews of your business credit cards. Fraud is now a major issue, happening more often than one would like to think, especially if your workforce can make purchases or use your trade accounts.

3. Do you have any invoices that are not being paid?

Late payment is a serious issue for small business owners. There are clients who just won’t pay or can’t pay (due to insolvency). For year end purposes, it is natural that small business owners do not want to pay tax or VAT on income that you stand no chance of receiving, so get tough on your debtors. Also, talk to your accountant and make sure there is a provision or a write off for bad debt.

4. Is your business VAT registered?

When you first start out in business, you may have decided not to register voluntarily for VAT. However, there are significant advantages to being VAT-registered and as the end of your accounting year approaches, it is a good time to reflect on this.

The biggest benefit of being a VAT-registered company is that the company can reclaim the VAT on many of the business purchases – and the reclaim can make a significant positive difference to your expenses (and cash flow). The process of filing VAT returns does involve a fair amount of paperwork but with the advent of cloud-based accounting software such as Xero, VAT becomes much easier to manage, and at the end of the year, it makes the VAT accounting job much easier for your accountant.

If you are a growing business, at some point you will likely exceed the VAT threshold, so it makes sense to consider the transition sooner than later.

5. Do you hold physical stock?

If you operate a supply or manufacturing business, you are likely to have inventory. In this case, you will need to conduct a stocktake and find out how much they are worth. Any damaged goods will need to be depreciated and any unfinished goods can be valued by applying a percentage completion against the end value of the goods. Please note that this process takes time, so it is best done as early as practical before you submit your return.

Make a complete list of all your assets, if you haven’t already. This would include computer equipment, buildings, machinery, vehicles, etc. You should keep a record of asset disposals and the income received from their disposal too. These figures will be used to calculate an overall depreciation value.

6. What liabilities do you have?

There are two types of liabilities, namely financial and operational.

Financial liabilities happen when you need to get a bank loan or borrow money from family or friends. These are debts against your business. You should be aware of your ability to pay the money back and record when they fall due.

Operational liabilities may include the lease on a vehicle or equipment. Make sure this information is readily available to your accountant.

7. Double check your PAYE and NI

Remember that if there is an error here, it is your firm that is liable. Make sure your employment dates are accurate and the sums paid as salary are correct so that your accountant can double check and make adjustments if necessary.

Berley assists companies with year end accounts

While the above are common areas you (the business owner) would focus on in planning for your accounting year, we are keenly aware that every business is unique in some way, so there may be other aspects of your business that differ or may require slightly different treatment from an accounting perspective. For instance, your company may have income in other overseas tax jurisdictions or benefit from some form of tax credits (such as R&D tax credits). It is best to discuss your circumstances with your accountant.

In addition, most small business owners start by doing the administrative tasks of day-to-day accounting themselves. But as your business grows, the tasks of accounting and also your year end accounting will become more complex. Eventually, these tasks could possibly reach beyond your immediate capabilities or to a point where they significantly interfere with your main role of running the business and making money. At this point you may decide to employ a part-time bookkeeper, although a better option to consider is to outsource your bookkeeping and accounting needs to a qualified accounting firm that can scale their service as your business growth; an accounting firm like Berley Chartered Accountants.

At Berley, we are a London-based firm of chartered accountants specialising in entrepreneurially-minded businesses. Talk to us today on 020 7636 9094 about your year end reporting and outsourcing your accounting. We can also get you set up with cloud-based accounting solutions, such as Xero.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.