A contractor's guide to limited company accounting

There are both various and regular requirements that a limited company -- and you as its director -- must meet, around payroll, VAT and similar processes. 

But here exclusively for ContractorUK, let me consider the annual compliance cycle – the preparation of yearly accounts and the company tax return, writes Chris James, head of limited company accounting at Workwell.

In almost all cases nowadays, the submissions of those are made electronically by your accountant, as part of their annual service to your business.

Accounting period-end

A limited company has a period end date, known as an Accounting Reference Date (ARD), which is assigned to it when it is formed.

If a company is formed mid-October, for example, it’s default ARD will be October 31st, and its first set of accounts will run from the date of incorporation to that date. This will mean the first set of accounts covers a little over 12 months. Subsequent sets would be a year-long (and an extra day in a leap year). 

If you wish, you can change your ARD. This might be because you want your company accounts to cover a calendar year, or to align your ‘year end’ with another company’s (which is common in groups of companies).

You can also choose to prepare accounts to a period that is not a year, covering a period from six to 18 months’ long.

But in order to stop companies from ‘hiding’ their financial information, you can only file accounts more than a year-long once every five years (without special, and very rare permission). Conversely, you can file ‘short’ accounts as often as you like, as this will mean information is filed at Companies House more regularly than normal.

Record-keeping

A great deal of record-keeping nowadays is electronic, and it’s sensible to use online bookkeeping software connected to your bank, to minimise your data-entry. 

Your accountant may be able to help you with bookkeeping if you’re too busy or not confident in doing it yourself. Receipts, invoices and other financial documents should be retained, whether on paper or electronic, for six years in case of questions from HMRC.

Accounts

The underlying records are converted by your accountant into the various elements that make up the accounts. A full set of accounts will include some standing information, such as your registered office address. This full set of accounts includes the ‘Profit and Loss Account,’ the ‘Balance Sheet,’ and notes -- which explain further some of the figures in the main accounts.

Profit and Loss Account

The P&L account (or Performance Statement) is a tallying up of all the income and costs that have gone through the company.

The account therefore tells the ‘story’ of the business during that period. The income and costs should be measured at their cost to your business. For example, if you are registered for VAT, sales are shown at the net price, not the gross sales price on your invoice. This is because the VAT you collect is passed on to HMRC – it’s doesn’t belong to you or the company. Similarly, costs should be shown in a similar way. So if you were charged VAT but were able to reclaim it, the cost of that item should be shown without the VAT included.

Taxation

The total of all these income and cost items will be your profit or loss for the period. 

This profit or loss will be adjusted for tax, and a tax charge put through at the bottom of the P&L account.

Some items that are adjusted for include entertaining expenses, the timing of special payments like pension contributions, and amounts allowed to reflect the reduction in value of assets that the business owns, such as computer equipment. This might mean that the tax charge is not exactly the profit in the accounts multiplied by the corporation tax rate (currently 19%). 

A tax return for the company (a ‘CT600’) will be prepared, alongside a calculation of the tax due. Usually the same amount will be shown in your balance sheet as an amount owed to HMRC, because at the date of the balance sheet, the amount has not yet been paid over.  So, along with some other items in the balance sheet, it’s shown as an amount due from the company to someone else.

Balance Sheet (or Position Statement)

This document offers a ‘snapshot’ of the company at the end date of the financial period – the ARD.

It lists the assets, such as IT equipment, money in the bank, money owed to the company and liabilities -- such as amounts owed to HMRC, cost invoices not yet paid, a loan from a bank or director, at that moment in time.

Known as the ‘top half’ of the balance sheet, this total balance should equal the total of the money invested into the company by the shareholders (normally the contractor), plus the profits made since incorporation, less the amounts returned to shareholders via dividends.

These are known as ‘shareholders’ funds’. If the company is making losses, or dividends exceed the available profits, then this figure may be negative -- you will need advice from your accountant as this position should not be allowed to continue.

Filing accounts

Accounts have to be filed on the public record, so they can be inspected for the public good.  These registers are now electronic. Small companies have to file only summary information, and frankly, these don’t really give a full picture of the financial position of a business.

Bigger businesses have to file much more detail, because the potential audience for each of them is larger.

For contractors filing under the rules for small businesses, (known as FRS102 or FRS105), only a balance sheet and very little else must be sent to Companies House. Your full accounts, though, will be needed by HMRC and should be helpful to you in terms of planning for the future, and comparing your business to others.

Be aware, if accounts aren’t filed on time, Companies House can charge penalties, and if company tax is due but is not paid on time, interest will start to accrue. These costs generally start nine months after the ARD has been passed, although as we saw during the covid pandemic, sometimes the rules are relaxed or penalties waived. But usually, the CT600 deadline is 12 months from the ARD, and HMRC can charge penalties for late submission.

Final thought

In general terms when it comes to limited company accounting, the best thing you can do as a contractor-director is to maintain your bookkeeping records, and stay in regular contact with your accountant, especially if you’re expecting anything out-of-the-ordinary from your business!