September 2nd, 2011
Venture Capital Trusts
Venture Capital Trusts (VCTs) are complementary to the Enterprise Investment Scheme (EIS). Both are designed to encourage private individuals to invest in smaller high-risk unquoted trading companies affected by the equity gap.
While the EIS requires an investment to be made directly into the shares of the company, VCTs operate by indirect investment through a mediated fund. In effect they are very like the investment trusts that are obtainable on the stock exchange, albeit in a high-risk environment.
What is a VCT?
VCTs themselves are quoted companies which are required to hold at least 70% of their investments in shares or securities that they have subscribed for in qualifying unquoted companies. VCTs have a certain time period in which to meet the percentage test. If a VCT sells a holding and breaches the test, the VCT is allowed a six month period to
VCTs themselves are quoted companies which are required to hold at least 70% of their investments in shares or securities that they have subscribed for in qualifying unquoted companies. VCTs have a certain time period in which to meet the percentage test. If a VCT sells a holding and breaches the test, the VCT is allowed a six month period to reinvest cash received into another qualifying investment.
Other conditions are:
From 22 April 2009 the time limits concerning the employment of money invested are relaxed.
VCTs are exempt from tax on their capital gains and there is no relief for capital losses.
Reliefs available to investors
Income tax relief of 30% is currently available on subscriptions for VCT shares up to a limit per tax year of £200,000.
To qualify for income tax relief the shares must be held for a minimum of five years.
Investors are exempt from tax on any dividends received from a VCT although the credits are not repayable.
Capital gains arising on disposal of the shares are also exempt and, for this relief, there is no minimum period of ownership. There is no relief for any capital losses.
The definition of a qualifying company for VCT purposes is very similar to that applying for EIS. The company:
must be unquoted, although shares on the Authorised Investment Market (AIM) are deemed unquoted for this purpose. They may become quoted later.
must not deal in land, leased assets or financial, legal or accountancy services. In addition it must not be a trade that has a large capital aspect to it, such as property development, farming, hotels or nursing homes.
VCT shares must be traded on an EU regulated market rather than being restricted to an official UK list
the rules governing the amount of a VCT investments which must be held as equity, and the types of shares qualifying will change companies will be excluded from qualifying for VCT purposes where it would be regarded as an ‘enterprise in difficulty’ under the European Commission’s guidelines.
September 2nd, 2011
Input VAT matters
Only registered traders can reclaim VAT on purchases providing:
- the expense is incurred for business purposes and
- there is a valid VAT invoice for the purchase.
Only VAT registered businesses can issue valid VAT invoices. VAT cannot be reclaimed on any goods or services purchased from a business that is not VAT registered. Proforma invoices should not be used as a basis for input tax recovery as this can accidentally lead to a duplicate VAT recovery claim.
Most types of supply on which VAT recovery is sought must be supported by a valid VAT invoice. This generally needs to be addressed to the trader claiming the input tax. A very limited list of supplies do not require a VAT invoice to be held to support a claim, providing the total expenditure for each taxable supply is £25 or less (VAT inclusive). The most practical examples of these are car park charges and certain toll charges.
The following common items however never attract input VAT and so no VAT is reclaimable – stamps, train, air and bus tickets, on street car parking meters and office grocery purchases like tea, coffee and milk!
This is often an area of contention between taxpayers and HMRC as VAT is not automatically recoverable simply because it has been incurred by a VAT registered person.
In assessing whether the use to which goods or services are put amounts to business use (for the purpose of establishing the right to deduct input tax), consideration must be given as to whether the expenditure relates directly to the function and operation of the business or merely provides an incidental benefit to it.
Private and non-business use
In many businesses, personal and business finances can be closely linked and input tax may be claimed incorrectly on expenditure which is partly or wholly for private or non-business purposes.
Typical examples of where claims are likely to be made but which do not satisfy the ‘purpose of the business’ test include:
expenditure related to domestic accommodation
pursuit of personal interests such as sporting and leisure orientated activities
expenditure for the personal benefit of company directors/proprietors and
expenditure in connection with non-business activities.
Where expenditure has a mixed business and private purpose, the related VAT should generally be apportioned and only the business element claimed. Special rules apply to recover input tax claimed on assets and stock (commonly referred to in VAT as goods) when goods initially intended for business use are then put to an alternative use.
VAT is not reclaimable on many forms of business entertainment but VAT on employee entertainment is recoverable. The definition of business entertainment is broadly interpreted to mean hospitality of any kind which therefore includes the following example situations:
travel expenses incurred by non employees but reimbursed by the business, such as self employed workers and consultants
hospitality elements of trade shows and public relations events.
A VAT supply takes place whenever goods change hands, so in theory any goods given away result in an amount of VAT due. The rule on business gifts is that no output tax will be due, provided that the VAT exclusive cost of the gifts made does not exceed £50 within any 12 month period to the same person.
Where the limit is exceeded, output tax is due on the full amount. If a trader is giving away bought-in goods, HMRC will usually accept that he can disallow the tax when he buys the goods, which may be more convenient than having to pay output tax every time he gives one away.
Routine commercial transactions which might be affected include such things as:long service awards
prizes or incentives for sales staff.
Cars and motoring expenses
Input tax errors often occur in relation to the purchase or lease of cars and to motoring expenses in general. Some key issues are:
Input VAT is generally not recoverable on the purchase of a motor car because it is not usually exclusively for business use. This prohibition does not apply to commercial vehicles and vans, provided there is some business use.
Where a car is leased rather than purchased, 50% of the VAT on the leasing charge is not claimed for the same reason.
Where a business supplies fuel or mileage allowances for cars, adjustments need to be made to ensure that only the business element of VAT is recovered. There are a number of different methods which can be used, so do get in touch if this is relevant to you.
Output VAT issues
Selling on credit in the current economic climate may carry increased risk. Even where credit control procedures are strong there will inevitably be bad debts. As a supplier, output VAT must normally be accounted for when the sale is initially made, even if the debt is never paid, so there is a risk of being doubly out of pocket.
VAT regulations do not permit the issue of a credit note to cancel output tax simply because the customer will not pay! Instead, where a customer does not pay, a claim to recover the VAT on the sale as bad debt relief can be made six months after the due date for payment of the invoice.
A trader supplies and invoices goods on 19 October 2010 for payment by 18 November 2010 (ie a normal 30 day credit period). The earliest opportunity for relief if the debt is not settled would be 18 May 2011. The relief would be included in the return into which this date fell, depending on the return cycle of the business.
The amount of the claim
The taxpayer can only claim relief for the output tax originally charged and paid over to HMRC, no matter whether the rate of VAT has subsequently changed. In the above example the standard VAT rate charged would have been 17.5% (not the current 20%) so a claim can be made for only 17.5%. The claim is entered as additional input VAT – treating the uncollected VAT as an additional business expense – rather than by reducing output VAT on sales.
A customer is automatically required to repay any input VAT claimed on a debt remaining unpaid six months after the date of the supply (or the date on which payment is due if later). Mistakes in this area are so common that visiting HMRC officers have developed a programme enabling them to review Sage accounting packages and to list purchase ledger balances over 6 months old for disallowance.
Preventing the problem?
Small businesses may be able to register under the Cash Accounting Scheme, which means you will only have to account for VAT when payment is actually received.
August 6th, 2011
The Construction Industry Scheme (CIS) sets out special rules for tax and national insurance (NI) for those working in the construction industry. Businesses in the construction industry are known as ‘contractors’ and ‘subcontractors’. They may be companies, partnerships or self employed individuals.
The CIS applies to construction work and also jobs such as alterations, repairs, decorating and demolition.
Contractors and subcontractors
Contractors include construction companies and building firms and also government departments and local authorities. Any other business spending more than £1 million a year on construction is classed as a contractor for the purposes of the CIS.
Subcontractors are those businesses that carry out work for contractors. Many businesses act as both contractors and subcontractors.
Contractors have to make a monthly return to HMRC:
? confirming that the employment status of subcontractors has been considered
? confirming that the verification process has been correctly dealt with
? detailing payments made to all subcontractors and
? detailing any deductions of tax made from those payments.
The monthly return can be sent either manually or electronically and relates to each tax month (ie running from the 6th of one month to the 5th of the next). The deadline for submission is 14 days after the end of the tax month. Even if no subcontractors have been paid during a month, contractors still have to make a nil return. All contractors are obliged to file monthly even if they are entitled to pay their PAYE quarterly. There is no requirement to make an annual return of payments made which applied under the previous scheme.
Subcontractors must give contractors their name, unique taxpayer reference and national insurance number (or company registration number) when they enter into a contract. So long as the contractor is satisfied that the subcontractor is genuinely self-employed the ‘verification’ procedure (explained below) must be followed.
Employed or self-employed?
A key part of the new CIS is that the contractor has to make a monthly declaration that they have considered the status of the subcontractors and are satisfied that none of those listed on the return are employees. HMRC can impose a penalty of up to £3,000 if contractors negligently or deliberately provide incorrect information.
Remember that employment status is not a matter of choice. The circumstances of the engagement determine how it is treated.
The issue of the status of workers within the construction industry is not a new matter and over the last few years HMRC have been making substantial efforts to re-classify as many subcontractors as possible as employees. The courts have considered many cases over the years and take into account a variety of different factors in deciding whether or not a worker is employed or self-employed. The tests which are applied include:
? the right of control over how, what, where and when the work is done; the more control that a contractor can exercise, the more likely it is that the worker is an employee
? whether the worker provides a personal service or whether a substitute could be provided to do that work
? whether any equipment is necessary to do the job, and if so, who provides it
? the basis of payment – whether an hourly/weekly rate is paid, whether there is any overtime, sick or holiday pay and whether or not invoices are raised for the work done
? whether the worker is part and parcel of the organisation or whether they are conducting a task which is self-contained in its own right
? what the intention of the parties is – whether there is any written statement that there is no intention of an employment relationship
? whether there is a mutuality of obligation; that is, an ongoing understanding that the contractor will offer work and the worker accept it
? whether the workers have any financial risk.
As can be seen from the above, there are a number of factors which must be considered and the decision as to whether somebody should be classified as employed or self-employed is not a simple one.
Clearly, HMRC would like subcontractors to be classed as employees, as this generally means that more tax and national insurance is due. However, just because the HMRC think that somebody should be re-classified does not necessarily mean that they are correct.
HMRC have developed software known as the employment status indicator tool, which is available on their website, to address this matter but the software appears to be heavily weighted towards re-classifying subcontractors as employees. It should not be relied on and professional advice should be taken if this is a major issue for your business.
‘False self-employment’ in the construction industry
The government has been looking at the best way to address the issue of what they believe is ‘false self-employment’ in the construction industry. They have concluded, for income tax and national insurance purposes, that they will introduce legislation which deems workers within the construction industry to be in receipt of employment income unless one of three simple, clear and easy to apply criteria is met. These criteria take the form of three questions which ask whether the worker provides:
? their own equipment (other than customary to the trade)
? their own materials
? additional workers to complete the job.
The worker will have to satisfy at least one of these criteria to be regarded as self-employed. The government have been consulting on this issue and the rules are proposed at this time.
The contractor has to contact HMRC to check whether to pay a subcontractor gross or net. Not every subcontractor will need verifying (see below). Usually it will only be new ones. The verification procedure will establish which of the following payment options apply:
? gross payment
? a standard rate deduction of 20%
? a deduction made at the higher rate of 30% if the subcontractor has not registered with HMRC or cannot provide accurate details to the contractor and HMRC cannot verify them.
HMRC will give the contractor a verification number for the subcontractors which will be matched with HMRC’s own computer. The number will be the same for each subcontractor verified at any particular time. There will be special suffixes for the numbers issued in respect of subcontractors who cannot be verified. The numbers are also shown on contractors’ monthly returns and the payslips issued to the subcontractors.
Clearly, these numbers are a fundamental part of the system and contractors have to ensure that they have a fool-proof system in place for obtaining and retaining them. It will also be very important to give precise details to HMRC because, if their computer does not recognise the subcontractor, the higher rate deduction will have to be made.
Who needs verifying with HMRC?
If a contractor is paying a subcontractor they will not have to verify them if:
? they have already included them on any monthly return in that tax year; or
? the two previous tax years.
Contractors have to provide a monthly ‘payslip’ to all subcontractors paid, showing the total amount of the payments and how much tax, if any, has been deducted from those payments. The contractor has to provide this for each tax month as a minimum. Contractors are allowed to choose the style of the ‘payslips’ themselves but certain specific information has to be provided including the:
? contractor’s name
? contractor’s employers’ tax reference
? tax month to which the payment relates
? subcontractor’s name, unique tax reference or specific subcontractor reference
? the gross amount of the payment
? cost of any materials which have reduced the gross payment
? amount of any tax deductions made and
? verification number where deduction has been made at the higher rate of 30%.
If contractors include such payments as part of their normal payroll system, it needs to be clear that although payslips are being generated for those individuals, they are not employees and have clearly been classed as self-employee
Are tax deduction made from the whole payment?
Not necessarily. The following items should be excluded when entering the gross amount of payment on the monthly return:
? VAT charged by the subcontractor if the subcontractor is registered for VAT
? any Construction Industry Training Board levy.
The following items should be deducted from the gross amount of payment when working out the amount of payment from which the deduction should be made:
? what the subcontractor actually paid for materials including VAT paid if the subcontractor is not registered for VAT, consumable stores, fuel (except fuel for travelling) and plant hire used in the construction operations
? the cost of manufacture or prefabrication of materials used in the construction operations.
Any travelling expenses (including fuel costs) and subsistence paid to the subcontractor should be included in the gross amount of payment and the amount from which the deduction is made.
The whole system is backed up by a series of penalties. These cover situations in which an incorrect monthly return is sent in negligently or fraudulently, failure to provide CIS records for HMRC to inspect and incorrect declarations about employment status. However, it is expected that two further penalties are likely to be much more common on a day to day basis for:
? failure to send in the monthly return there will be a penalty of £100 per 50 subcontractors (or part thereof) per month
? failure to provide a subcontractor with a ‘payslip’, a penalty of up to £300, plus a further penalty of up to £60 per day for continuing failure.
Paying over the deductions
Contractors have to pay over all deductions made from subcontractors in any given tax month by the 19th following the end of the tax month to which the deductions relate. If payment is being made electronically, the date will be the 22nd, or the next earlier banking day when the 22nd is a weekend or holiday. If the contractor is a company which itself has deductions made from its payments as a subcontractor, then the deductions made may be set against the company’s liabilities for PAYE, NI and any CIS deductions it is due to pay over.
What about subcontractors?
Subcontractors who were registered with HMRC before the introduction of the new CIS will have been transferred over to the new system.
However, if a subcontractor first starts working in the construction industry on a self-employed basis after 5 April 2007, or had a temporary registration card that has expired, they will need to register for the new CIS.
To register, a subcontractor needs to contact HMRC by phone or over the internet and they will conduct identity checks. The rules for subcontractors to be paid gross are broadly equivalent to the previous rules. There is a business test, a turnover test and a compliance test similar to the previous regime.
Subcontractors not registered with the HMRC will suffer the higher rate deduction from any payments made to them by contractors.
July 28th, 2011
To put your business on a proper footing with HM Revenue & Customs (HMRC) and other authorities, you need to make sure that it has the right legal structure. It’s worth thinking carefully about which structure best suits the way that you do business, as this will affect the tax and National Insurance that you pay, the records and accounts that you have to keep and your financial liability if the business runs into trouble.
There are several structures to choose from, depending on your situation.
To be a sole trader, a partner, or a member of a limited liability partnership as an individual rather than a company, you must be self-employed – and registered as such with HM Revenue & Customs (HMRC).
This does not mean that you can’t also do other work as an employee, but the work you do for your own business must be done on a self-employed basis.
If you are not sure whether your work counts as self-employment, ask yourself these questions:
- Do you present your clients with invoices for the work that you do for them?
- Do you carry out work for a number of clients?
- Are you responsible for the losses of your business as well as taking the profits?
- Can you hire other people on your own terms to do the work that you have taken on?
- Do you have control over what work has to be done, how the work has to be done and the time and place where the work has to be done?
- Have you invested your own money in your business or partnership?
- Do you provide any major items of equipment which are a fundamental requirement of the work you carry out?
- Do you have to correct unsatisfactory work in your own time and at your own expense?
If you can answer ‘yes’ to most of these questions then you are probably self-employed already, and should let HMRC know this immediately if you have not already done so.
You may be fined £100 if you fail to register within three months of becoming self-employed. There is no fee for registration.
If you answer ‘no’ to most of the questions above, you will normally be an employee.
Being a sole trader is the simplest way to run a business – it does not involve paying any registration fees, keeping records and accounts is straightforward, and you get to keep all the profits.
However, you are personally liable for any debts that your business runs up, which make this a risky option for businesses that need a lot of investment.
You need to register as self-employed with HM Revenue & Customs (HMRC) and will probably have to notify HMRC that you will have to submit Self Assessment Tax Returns
- As you are self-employed, your profits are taxed as income.
- You also need to pay fixed-rate Class 2 and Class 4 National Insurance contributions on your profits.
Class 2 is normally paid by direct debit and is a fixed weekly amount. Class 4 is variable and a percentage based on profits.
In a partnership, two or more people share the risks, costs and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.
Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved – although the business can still continue.
A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.
Each partner needs to register as self-employed and will be responsible for compiling Self Assessment Tax Return.
The partnership itself is also required to file a Self Assessment Tax return
It’s a good idea to draw up a written partnership agreement.
As partners are self-employed, they are taxed on their share of the profits. Each partner also needs to pay Class 2 and Class 4 National Insurance contributions.
Creditors can claim a partner’s personal assets to pay off any debts – even those debts caused by other partners. In England, Wales and Northern Ireland, partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the whole debt. They are not severally liable, which would mean each partner is responsible for paying off the entire debt.
Partners in Scotland are both jointly and severally liable.
However, if a partner leaves the partnership, the remaining partners may be liable for the entire debt of the partnership. Also, a creditor may choose to pursue any of the partners for the full debt owed in the case of insolvency.
Limited liability partnership
A limited liability partnership (LLP) is similar to an ordinary partnership – in that a number of individuals or limited companies share in the risks, costs, responsibilities and profits of the business.
The difference is that liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. This means that members have some protection if the business runs into trouble.
Each member needs to register as self-employed
There must be a minimum of two designated members – the law places extra responsibilities on them. If the LLP reduces in number and there are fewer than two designated members then every member is deemed to be a designated member.
LLPs must register at Companies House.
It’s a good idea to draw up a written agreement between the members.
The LLP itself and each individual member must make annual self-assessment returns to HM Revenue & Customs (HMRC).
All LLPs must file accounts with Companies House.
Members of a partnership pay tax and National Insurance contributions on their share of the profits.
The profits of a member of an LLP are taxable as profits of a trade, profession or vocation and members remain self-employed and subject to Class 2 and Class 4 National Insurance contributions.
Limited liability companies
Limited companies exist in their own right. This means the company’s finances are separate from the personal finances of their owners.
Shareholders may be individuals or other companies. They are not responsible for the company’s debts unless they have given guarantees – for example, a bank loan. However, they may lose the money they have invested in the company if it fails.
Must be registered (incorporated) at Companies House.
Must have at least one director (two if it’s a plc) who may also be shareholders. Directors must be at least 16 years of age. At least one director must be an individual, rather than a company.
Private companies are not obliged to appoint a company secretary but if one is appointed this must be notified to Companies House. Plcs must have a qualified company secretary.
A director or board of directors make the management decisions.
Accounts must be filed with Companies House before the filing deadline to avoid a late filing penalty.
Accounts must be audited each year unless the company is exempt.
When you file your annual return for the first time a letter will be issued to the Registered Office containing the company’s authentication code and instructions for use of Companies House web filing services. You should follow the instructions in the letter.
Directors are responsible for notifying Companies House of changes in the structure and management of the business.
If a company has any taxable income or profits, it must tell HM Revenue & Customs (HMRC) that it exists and is liable to corporation tax.
Companies liable to corporation tax must make an annual return to HMRC.
Company directors are an office holder of the company and therefore regarded as an employed earner for National Insurance. As such, company directors must pay both income tax and Class 1 National Insurance contributions on their director’s earnings. However, while regular employees’ Class 1 NICs are calculated on their monthly or weekly earnings separately, directors’ NICs are calculated on an annual cumulative basis.
Shareholders are not personally responsible for the company’s debts, but directors may be asked to give personal guarantees of loans to the company.
Overview of legal structures
independence, ease of set up and running, and all the profits go to you.
lack of support, unlimited liability and you are personally responsible for any debts your business runs up.
ease of set up and running, and the range of skills and experience different partners can bring to the business.
problems can occur when there are disagreements between partners, unlimited liability and you are personally responsible for any debts that the business runs up.
Limited liability partnership (LLP)
retain the flexibility of a partnership, personal liability is limited. At least two members must be ‘designated members’ – the law places extra responsibilities on them.
the formation is more complex and costly and problems can occur when there are disagreements between the members. If the number of partners is reduced, and there are fewer than two designated members, then every member is deemed to be a designated member.
Limited liability company
your personal financial risk is restricted by how much you invest and any guarantees you give in order to obtain financing.
this type of company brings a range of extra legal duties, including the maintenance of the company’s public records, eg for the purpose of the filing of accounts.
July 28th, 2011
Work related training:
If an employer pays for staff training, or reimburses an employee training costs, any benefit to the employee is not subject to tax.
An employee is generally unable to claim training costs as deduction for their own tax if the employer does not reimburse his costs.
Recent case law indicates that training costs will be deductible in the employee’s hands if training is part and parcel of the employee’s job specification.
The term “work-related” is defined very widely; it can include anything from a first aid course to a motivational team building activity course.
Other (non work related) training costs:
Training not related to the employees’ duties are taxable as benefits in kind for higher paid employees or taxable as earnings if employer reimburses employee (all employees).
July 28th, 2011
Directors owe a duty of care to the company’s creditors. If a company continues to trade when it is insolvent, its directors can be held personally accountable if their actions cause financial loss to any of the company’s creditors.
You will also be liable under any personal guarantees.
What do I do if my company is in financial difficulty?
Directors must use their judgement and known facts to establish whether the company is, or is about to become or is insolvent
They must establish whether or not a problem is only on a short-term basis and will be rectified by trading on, or means terminal failure, or something in the middle ground. Directors must be cautious, they should not do anything (writing cheques, committing the company to any action, paying creditors, taking deposits etc) without seeking professional advice.
In many situations one of the direct or indirect causes of insolvency is management failure. This may be accompanied by a lack of control, poor record keeping and a lack of accurate financial information.
Accurate and up-to-date accounts are vital in determining a company’s solvency.
How do I tell if my company is insolvent?
A company is insolvent on a cash-flow basis if it is unable to pay its debts as they fall due, or fails to satisfy a judgment debt. There is a second balance sheet test for solvency which asks.
The cash-flow test
Many companies will fail the cash-flow test on a short-term basis at some time in their existence. Temporary cash flow problems may be caused by
- The failure of a customer to settle a debt on time.
- Overtrading (having too much cash tied up in stock and debtors).
- As a course of a delay in refinancing.
- Not making the required sales to break even.
- Having to make unscheduled payments.
Short-term cash flow problems can be corrected by trading on or after rearranging overdrafts or loan finance.
The balance-sheet test
Very simply do the business liabilities exceed the business assets, taking into account the value of assets with the company in a distressed financial position and providing for all contingent costs, losses and provisions.
If a company does fail its balance sheet test, the directors must act to protect the interests of its creditors to avoid any allegations being made of wrongful trading under the Insolvency Act.
If the company is insolvent directors should take the following steps:
- Obtain and document professional advice and their actions and responses.
- Ensure that the company’s accounts are up to date with a full list of assets, debtors and creditors
- Consider whether any part of the company is worth saving.
- Discuss whether it will be possible to make a formal or informal arrangement with creditors.
- If the company cannot be saved the directors should put it into liquidation.
The accounts should be prepared on a break-up basis which means the fixed and current assets are valued to their net-realisable value.
To avoid personal liability for their actions when a company is in financial difficulties its directors should be careful not to:
- Dispose of company assets at undervalue.
- Show one creditor preference to the detriment of another.
- Accept customer deposits or payments on account if completion is uncertain.
Most important of all if a company is insolvent directors need a licensed insolvency practitioner
July 28th, 2011
All limited companies and limited liability partnerships (LLPs) must file copies of their financial accounts at Companies House. Every company and LLP has an accounting reference date, which determines the date that its financial year ends. This is also the date that determines when accounts are due for delivery to Companies House.
All limited companies and LLPs must also provide copies of their audited accounts to Companies House, within a specified period of time – the filing deadline – following the end of its financial year, also known as the accounting reference date.
This requirement to file annual accounts applies to all companies and LLPs, including small companies such as flat management companies.
This guide explains how a late filing penalty is imposed on a business if its accounts are not filed in time, how you can avoid these penalties, what happens when a penalty has been imposed and how to appeal.
Late filing penalties explained
All limited companies – public and private – and limited liability partnerships (LLPs) must file their annual accounts and reports on time. If they fail to do so, they face an automatic fine. The time allowed for filing depends on whether the accounts are the first or subsequent ones and whether it is a private limited or public limited company.
Filing first accounts
For private companies and LLPs, if the first accounts cover more than 12 months, they must be delivered to Companies House within 21 months of the date of incorporation, or three months from the end of the accounting reference period, whichever comes later. If the accounts are for 12 months or less, they must be delivered within nine months of the end of the accounting reference period.
For public limited companies, if the first accounts cover more than 12 months, they must be delivered to Companies House within 18 months of the date of incorporation.
In subsequent years, private companies and LLPs have nine months from the end of the accounting reference period to file the accounts, and public limited companies have six months. If the accounting reference period is changed, the filing time may be reduced.
Late filing penalties
The amount of penalty charged depends on when the accounts are filed.
|Length of delay (from the date the accounts are due)
||Penalty for LTD and LLPs
||Penalty for PLC’s
|Not more than one month
|More than one month and less than three months
|More than three months and less than six months
|More than six months
The penalties are doubled for late filing in two successive financial years beginning on or after 6 April 2008 (for companies) or 1 October 2008 (for LLPs).
Fines on directors and designated members of LLPs
Failure to file accounts is a criminal offence which can result in directors, companies or designated members of LLPs being fined personally. The Registrar may also strike the company or LLP off the public record. If a late filing penalty is not paid, it can result in enforcement proceedings.
How to avoid a late filing penalty
It’s important to allow enough time for your accounts to reach Companies House within the period allowed. If the filing deadline expires on a Sunday or bank holiday, you need to take this into account. To help you file on time:
- make a diary note of the filing deadline to remind you in good time
- read the filing reminders Companies House send to your registered office
- tell your accountants and remind them as appropriate to prepare and deliver your accounts on time
First-class post does not guarantee next-day delivery, so it is worth thinking about using guaranteed delivery methods such as couriers. The most secure and cost-efficient way of filing company documents is to use the Companies House WebFiling service.
If there is a special reason why your accounts may be filed late, you can apply to extend the period allowed, but an extension will only be granted if the reasons are exceptional.
What happens when a penalty has been imposed?
If you deliver accounts for a company or limited liability partnership (LLP) late, Companies House automatically issue a penalty notice to the registered office address. This gives details of the penalty, including the last date for filing, the date of filing of the accounts and the amount of the penalty. It also includes information about how to pay the penalty.
If you don’t pay the penalty, Companies House will ask debt collectors to take action. If you still fail to pay, they will take action in the County Court or Sheriff Court, where you will be given the chance to file a defence. You may want to avoid legal action, because Companies House will seek to recover their legal costs if the court finds against you.
Restoring a company or LLP to the register
If you restore a company or LLP to the register after it has been struck off and dissolved it will not have to pay penalties for the period it was dissolved. However, you will still need to pay any penalties:
- outstanding on accounts from before it was dissolved
- for accounts delivered on restoration if they were overdue at the date the business was dissolved
Late filing penalty appeals
You can always appeal against a penalty, but it will only be successful if you can show that the circumstances are exceptional, because the Registrar has very limited discretion on collecting a penalty. An example of exceptional circumstances could be a fire destroying the financial records of the company or limited liability partnership (LLP) a few days before the filing deadline.
The following situations are outside the Registrar’s discretion and cannot be considered for an appeal:
- your company is dormant
- you cannot afford to pay
- your accountant was ill
- you relied on your accountant
- these are your first accounts
- you are not familiar with the filing requirements
- your company or its directors have financial difficulties (including bankruptcy)
- your accounts were delayed or lost in the post
- the directors live or were travelling overseas
- another director is responsible for preparing the accounts
If you still want to appeal, you must do so in writing to the address shown on the front page of the penalty notice. You will normally get a reply within ten working days, and any recovery action will be suspended while the appeal is considered.
If your appeal is rejected, you can write to the senior appeals manager in the Late Filing Penalties Department at the appropriate Companies House office (shown on the penalty notice). If the senior appeals manager upholds the penalty, you can ask for the Independent Adjudicators to review your case, but you should not contact them until you have heard from the senior appeals manager
Paying by instalments
If you have difficulty in paying the penalty in a lump sum, you can usually pay in four monthly instalments – in exceptional circumstances you can pay in up to ten instalments, depending on the amount you have to pay. You must ask in writing to pay in instalments, explaining the reasons why you can’t pay the penalty outright.
July 28th, 2011
Company administration: the basics
For all companies, there are regular administrative tasks that need to be completed to keep the information about your company held at Companies House up to date.
This guide considers who is legally responsible for getting the tasks done, what you must send to Companies House and where you may risk a penalty or other legal sanctions if you don’t do things in the right way (or on time).
Meetings and company records
There are various types of formal meeting that a company needs to consider, each with different notice periods and responsibilities.
Annual general meetings (AGMs) – under the Companies Act 2006, most private companies are no longer required to hold an AGM. Private companies can positively opt to do so if they wish. Shareholders can also demand an AGM if at least 5 per cent wish to hold one. In such circumstances, private companies will need to give 14 days’ notice.
However, all public companies and any private companies with traded shares are still required to hold an AGM. Under these circumstances the company must hold an AGM and give 21 days’ notice before the AGM is due to take place.
Companies are also no longer required to send out annual accounts prior to an AGM. Under new rules, they must now be sent to members by the time they are filed with the Registrar of Companies.
Other meetings – for most limited companies the notice period is 14 days. For unlimited companies, it is seven days. For limited companies with traded shares (public and private) the notice period is 21 days unless the company offers all shareholding members the opportunity to vote electronically and it has passed a resolution to reduce the period of notice to no less than 14 days.
When important decisions have been taken at meetings, Companies House has to be notified within 15 days.
Minutes must be kept of directors’ and general meetings.
These tasks are usually carried out by the company secretary; Private companies are not obliged to appoint or retain a company secretary, the onus then falls on the directors. However, public companies are required to appoint a company secretary.
Keeping official records for the company
Companies must keep official records of:
shareholders and the shares they own, ie a register of shareholders
directors and secretaries, ie a register of directors and secretaries
the usual residential addresses of the directors
directors’ other commercial interests
loans or other obligations that affect the company’s financial health
who, other than the registered owner, has an ‘interest’ in the shares – if it’s a public company
Making records accessible
Some people must be sent particular company records; others are entitled to look at them. The following is a brief summary of the key rules that you must follow:
Anyone can ask to inspect your company’s register of members. However, since 1 October 2007, a company may ask the requester to provide their name and address, the purpose of the request and whether they intend to share the information with anyone else. If you think the request is not for a proper purpose, you have five days to go to a court to get permission not to allow the inspection.
No one may inspect the register of directors’ usual residential addresses – unless under a court order.
Anyone can ask to inspect your company’s register of directors and its register of company charges, ie mortgages, if any.
Members of your company are entitled to inspect and have copies of the minutes of the general meetings.
Only directors are entitled to see minutes of directors meetings – but others may ask for copies of a particular meeting.
Filing yearly accounts and the company’s annual return with Companies House
Directors are personally responsible for submitting yearly accounts and the company’s annual return to the Registrar of Companies.
A letter is issued to the company’s Registered Office each year just before your annual return is due. If you file, or would like to file, online via the Companies House website, the letter provides all the necessary information to enable you to do so.
However, if you want to file on paper, telephone the number provided on the letter and a paper form will be issued. It is a record of general information about your company, e.g. the address of your registered office, details of your directors, secretary, shareholders and share capital.
Companies House WebFiling service is quick and secure.
Also the cost of filing an annual return online is £14
Your company’s annual accounts must also be filed. If you do not submit accounts to Companies House on time you will be liable to a late filing penalty.
Protect your corporate identity
The Companies House PROOF (PROtected Online Filing) scheme provides additional security when delivering your directors’ details and registered office address electronically.
Company directors hold an important position in a company. They have power to make purchases and enter into credit arrangements on behalf of the company. Similarly, the registered office address is important because it is the address to which all official communications is sent.
Records held at Companies House are sometimes used to check the legitimacy of a company and its directors before credit or loans are made. Therefore, it is important that the records are correct. Companies are vulnerable to fraud if people fraudulently enter themselves on record as company directors or file a bogus registered office address.
To combat fraudsters posing as legitimate directors, Companies House offers companies a free, secure, online system for notifying changes to directors and the registered office address. If you opt to notify electronically, Companies House will not accept notices from your company in any other format.
You can register for the scheme using the company authentication code to access the WebFiling service. Before opting in, you must agree to the terms and conditions which state that any future changes will only be accepted by Companies House using the secure electronic method.
This service is voluntary, you may opt out at any time and Companies House will revert to accepting notices from your company delivered electronically or on paper forms.
Penalties for late returns and informing Companies House
About 150,000 companies are penalized each year because they file their accounts late. The penalties range from £150 to £1,500 for a private company and £750 to £7,500 for a public company. These penalties are doubled if accounts are filed late in two successive years.
Directors and secretaries may be prosecuted if the annual return is delivered late or not at all. A conviction would mean a criminal record, and usually a fine of up to £5,000.
If no return or accounts are filed at all, Companies House may also strike the company off the register.
Other events you have to tell Companies House about
Companies have to inform Companies House about changes to important company information. For example, you must notify Companies House if:
you have changed your accounting reference date
you have appointed a new officer
an officer has departed
an officer’s personal details have changed
you have made a share issue
You should also inform Companies House if any important decisions are made at a company meeting or if the company incurs any financial charges that affect its assets.
If you want Companies House to change your registered office, you must file a request using form AD01