Preparing and filing financial statements and tax returns of and conducting an audit for a United Kingdom company. Service offer

As the United Kingdom is not an offshore jurisdiction and UK companies are required to file accounts and returns on a regular basis and pay taxes as prescribed by law, we recommend, before registering such a company, seeking advice from lawyers, accountants and tax specialists regarding the subsequent administration of the company (which we can arrange upon request). We also recommend obtaining prior advice from these specialists in the case of subsequent changes in the company’s operations or before making major transactions.

UK companies are required to maintain accounting records and keep them at their registered office address or a place that the directors think suitable. The records must at all times be open to inspection by the company’s officers.

If a company holds records at a place outside the UK, it must send accounts and returns to and keep them in the UK at least every 6 months. These accounts and returns must disclose the financial position of the company and enable the directors to prepare annual accounts and a tax return that comply with the requirements of the Companies Act 2006 and the International Financial Reporting Standards[1].

It is necessary to keep accounting records that include:

• all money received and spent by the company, including grants and payments from coronavirus (COVID-19) support schemes;
• details of assets owned by the company;
• debts the company owes or is owed;
• stock the company owns at the end of the financial year;
• the stocktakings used to work out the stock figure;
• all goods bought and sold;
• who the company bought and sold them to and from (unless it is a retail business).

It is also necessary to keep any other financial records, information and calculations required to prepare and file the company’s annual accounts and tax return. This includes records of:

• all money spent by the company, for example receipts, petty cash books, orders and delivery notes;
• all money received by the company, for example invoices, contracts, sales books and till rolls; and
• any other relevant documents, for example bank statements and correspondence.

Private companies must keep accounting records for 3 years from the date of their making, and public companies must keep them for 6 years. This period may be longer (for example, if the records show a transaction that covers more than one of the company’s accounting periods, or if the company has bought something that it expects to last beyond the usual record keeping period for such a company, like equipment or machinery).

Failure to comply with the requirement to keep records or to keep them for a required period may make the director (or other officer of the company) fined by HMRC or disqualified. If the provisions of section 386 (“Duty to keep accounting records”) and section 388 (“Where and for how long records to be kept”) of the Companies Act are proved to have been contravened intentionally, the guilty person, on conviction, may even be liable to imprisonment for a term of up to 2 years.

All UK companies are required to annually prepare and file accounts (financial statements) reflecting the financial position of the company and the results of its financial activities for the year (Annual Accounts). This requirement applies to both limited companies (LTD) and limited liability partnerships (LLP) – we mention them specifically as these are the two most common legal forms of doing business in the United Kingdom.

Accounts must normally include:

• a profit and loss account;
• a balance sheet signed by a director on behalf of the board;
• notes to the accounts;
• group accounts (if applicable).

Accounts must also be accompanied by:

• a director’s report signed by the secretary or director and containing an analysis of activities (or a strategy report), unless the UK company qualifies as small;
• an auditor’s report stating the name of the auditor, signed and dated by the auditor (unless the UK company is exempted from audit).

Section 442 of the Companies Act sets the following period for filing accounts:

• for limited companies (LTD) and limited liability partnerships (LLP) – 9 months after the accounting reference date (for the first accounts – not later than 21 months after the incorporation date of the company/partnership);
• for public companies (PLC) – 6 months after the accounting reference date (for the first accounts – not later than 18 months after the incorporation date of the company).

The accounting reference date (ARD) is defined as the last day of the month in which the company was incorporated.

For example, if a company is incorporated on 23 September 2021, its financial year end date is 30 September, and the first accounting reference period is from 23 September 2021 to 30 September 2022. Thereafter, the company will need to file annual accounts at 30 September.

As in many jurisdictions, the first financial year can be extended up to 18 months.

It is also possible to change the end date of the financial year. Such change is permitted once every 5 years.

Late filing of accounts results in liability of the company and its directors (sections 451 to 453 of the Companies Act in the block “Failure to file accounts and reports”). In particular, a company is subject to the following fines:

If a UK company is not eligible for exemption from audit, then its accounts must be audited by an auditor and a corresponding report must be attached to the accounts.

Before the first general meeting of members, the directors themselves may appoint an auditor. Thereafter, auditors are usually appointed by a members’ meeting. The auditor must be a member of a recognized supervisory body and be authorized by that body to act as auditor.

According to section 480 of the Companies Act, companies that qualify as dormant are eligible to file unaudited accounts with Companies House.

A company is considered dormant if there has been no “significant accounting transactions” during the financial year.

For the purposes of company qualifying as dormant, significant transactions do not include the following (i.e. these transactions do not deprive the company of a dormant status):

1. payment of share capital (money paid for shares when the company was incorporated);
2. filing fees paid to Companies House (for example, when filing an Annual Return);
3. penalties for late filing of accounts with Companies House.

According to section 477 of the Companies Act, companies that qualify as small are eligible to file unaudited accounts with Companies House.

Conditions for a company to qualify as small (two or more must be met simultaneously):

1. annual turnover of not more than GBP 10 200 000;
2. balance sheet total of not more than GBP 5 100 000;
3. average number of employees of not more than 50.

Public companies and companies in some regulated industries cannot qualify as small (this is stated in section 478 of the Companies Act).

There are also conditions for qualifying as a micro-entity – two or more must be met simultaneously:

1. annual turnover of not more than GBP 632 000;
2. balance sheet total of not more than GBP 316 000;
3. average number of employees of not more than 10.

Micro-entities are eligible for all exemptions granted to small companies; in addition, they can submit simplified accounts.

To put together a set of documents for preparing the accounts after the end of each financial year, we ask to provide information on the company’s activities in that financial year:

1. bank account statements (in electronic form, if available);
2. contracts and agreements made in the financial year;
3. previously made contracts and agreements which continue in the financial year in question (for example, loan agreements);
4. other underlying documentation related to the activity during this period / disclosing the business of the company in the financial year (invoices, statements of work performed, way bills, etc.).

It is enough to provide copies of the above documents.

Please note that the Companies Act requires all UK companies that have subsidiaries to prepare and file consolidated accounts (group accounts). Exemption from this requirement applies to parent companies that qualify as small (see the conditions above) or that are subsidiaries of other companies (sections 400 and 401 of the Companies Act – “Exemption for company included in UK group accounts of larger group” and “Exemption for company included in non-UK group accounts of larger group”).

Subsidiaries are companies that are more than 50% owned by another entity. There are cases where a company owned 50% or less is considered to be a subsidiary if it is controlled by the parent company. A company controls a subsidiary if the following conditions are met:

• a company has the power to govern the financial and operating policies of a subsidiary;
• a company has the power to appoint or remove the majority of the members of the board of directors of a subsidiary;
• a company has the majority of votes at meetings of the board of directors of a subsidiary.

UK legislation requires local companies and partnerships to complete and file rather many reporting forms. Here are some of them:

• CT600 – tax return to be filed by limited companies (LTD);
• SA400 – form required to register a limited liability partnership (LLP) with HMRC, so that the partnership can later file form SA800;
• SA800 – tax return to be filed by a limited liability partnership (LLP).

There are also separate reporting forms for the partners in a partnership.

All limited companies (one of the most common legal forms in the UK) are required to file CT600 (company tax return) within 12 months of the end of the financial year, but the filing deadline for the first year may differ from the standard deadline.

The company tax return filing deadline is the latest of the following:

• 12 months from the end of the tax period for which the return is drawn up;
• if the relevant accounting period does not exceed 18 months, then 12 months from its end date;
• if the relevant accounting period is more than 18 months, then 30 months from its start date;
• 3 months from the date of receipt of the notice requesting to file the return.

There is a fixed penalty for late filing of a tax return:

If a company has failed to meet the deadlines for filing tax returns for two tax periods in a row (including short periods), the penalty increases to GBP 500 and GBP 1 000 respectively for the third period.

In addition to this, a penalty is also imposed if the return is filed later than 18 months after the end of the tax period:

• if filed earlier than 2 years after the end of the tax period – 10% of tax remaining unpaid after 18 months after the end of the tax period;
• in other cases – 20% of this amount.

The corporate tax rate in the UK is 19%, however, there are various reliefs and benefits (for example, one can deduct business expenses from before-tax profit in the process of preparing the company’s accounts).

Tax must be paid within 9 months of the end of the tax period. Starting from the tax due date, penalties are charged on the unpaid amount, payable together with the tax itself.

In accordance with UK law, partnerships too must file a tax return, as well as partners of partnerships, whether or not they are UK residents or residents of other states.

HMRC automatically registers partnerships incorporated after 2010 and assigns them a tax number (Unique Tax Reference Number / UTR Number). If a partnership, for some reason, was not registered with HMRC, it is necessary to complete and submit form SA400. Upon receipt of this form, the tax authorities assign a tax number to the partnership.

Partnership’s partners are not automatically registered by HMRC, therefore, depending on whether the partner is a legal entity or an individual, either of the following forms must be submitted:

• SA401 – form required for tax registration of a partner who is an individual;
• SA402 – form required for tax registration of a partner that is a legal entity.

Form 64-8 is designed to obtain a partner’s tax number and to register as tax agent, so this form is required to be filed regardless of who the partner is.

Each partnership and each partner must submit the following forms:

• SA100 – tax return for partnership’s partners, which declares the total income received in the UK (both through the partnership and all other income from other sources);
• SA104S – abbreviated tax return regarding the partnership’s income, filed by partners;
• SA109 – form recording the residence of a partner;
• SA700 – tax return of a partner who is a UK non-resident;
• SA800 – tax return that limited liability partnerships are required to file.

There are 2 deadlines for filing returns:

1. by 31 October, if filed in paper form;
2. by 31 January, if filed electronically.

Late filing of the tax return on form SA800 (LLP) is subject to penalties similar to the above penalties for late filing of the tax return on form CT600 (LTD).

On 1 February 2020, the United Kingdom left the European Union (EU), which entailed significant changes in the regulation of value added tax (VAT) matters. Previously, provisions of Directive 2006/112/EC and a number of other EU Directives applied to the United Kingdom. Now these directives have no legal effect for the country, so UK companies can no longer benefit from some of the simplifications provided for EU member states or they have to go through more registration procedures to be able to benefit from them.

The standard VAT rate in the United Kingdom is 20%.

If you wish to analyze how VAT provisions apply to your company for the correct structuring of your business or in the light of changes caused by the United Kingdom leaving the EU, we recommend contacting our tax specialist (we are ready to arrange both oral and written advice at your request).

[1] At the moment, accounts in the UK are prepared based on a modernized version of the Generally Accepted Accounting Practice in the UK (UK GAAP), which incorporates many provisions of the International Financial Reporting Standards (IFRS) and the International Accounting Standards (IAS). UK listed companies use the so-called UK-adopted international accounting standards.

[2] The fees are valid at the date of sending of this offer.

[3] After the UK left the EU (the so-called Brexit), in order to submit VIES returns, it is necessary to additionally register for VAT in the EU member state.