Congratulations! You've taken the bold leap to start your own small business. Now that you have your company up and running, it's essential to be aware of the specific accounting requirements you'll need to meet during your first year of operation.
In the UK, every business, regardless of its size, must comply with certain financial regulations. There are various aspects to this, from maintaining accurate accounts to preparing and filing tax returns, creating balance sheets, and producing annual financial statements.
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This article aims to provide you with a clear understanding of the specific accounting requirements your small business must adhere to in its first year.
Maintaining accurate financial records is crucial for any business, but it's especially important for a new company. It gives you a clear picture of your financial health and helps you make informed decisions.
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By law, all companies in the UK must keep accurate and up-to-date financial records for at least six years. These records should include all sales and income, all business expenses, VAT records if you’re registered for VAT, PAYE records if you employ people, and records of your personal income if you’re a sole trader.
You must also report any changes in your business to Companies House, such as changes in directors or the registered office address. Furthermore, you must also register for Corporation Tax within three months of starting to do business. This involves preparing an annual financial report, known as a Company Tax Return, and paying Corporation Tax on your profits.
A balance sheet is a financial statement that shows what your company owns and owes at the end of your financial year. It's a snapshot of your business's financial position at a specific point in time.
As a small business owner, you must prepare a balance sheet as part of your annual accounts, which you must file with Companies House. This requirement applies even if your company is considered dormant, i.e., not trading.
Your balance sheet must show your company's assets, liabilities, and shareholders' equity. Assets include cash and items that can be turned into cash, such as inventory and accounts receivable. Liabilities include what your company owes, such as loans and accounts payable. Shareholders' equity is the value of your company's assets minus its liabilities.
Alongside the balance sheet, you'll also need to prepare a Profit and Loss (P&L) statement. This financial report gives an overview of your company's revenues, costs, and expenses over a period.
As well as giving you insight into your company's financial performance, a P&L statement is necessary for paying Corporation Tax. It's also required when submitting your accounts to Companies House.
Your P&L statement should include total sales, cost of sales (the direct costs of making or buying what you sell), gross profit (sales minus cost of sales), operating expenses, and net profit or loss (gross profit minus operating expenses).
As a small business owner, you're responsible for meeting all tax filing requirements. This involves registering for taxes, calculating how much tax you owe, and submitting tax returns on time.
In your first year of operation, there can be several taxes you may need to register for, including Corporation Tax, VAT, and PAYE. You may also need to complete a Self Assessment tax return if you're a sole trader or in a partnership.
Corporation Tax is a tax on your company's profits. You must register for it within three months of starting your business and pay it nine months and one day after the end of your accounting period (usually your financial year).
VAT is a tax on the sale of goods and services. If your VAT taxable turnover is more than £85,000, you must register for VAT.
PAYE is the system HM Revenue and Customs (HMRC) uses to collect Income Tax and National Insurance from employment. If you employ people, you must register as an employer and set up a PAYE scheme.
Last but not least, good cash flow management is central to the survival of any small business. It involves tracking incoming and outgoing cash to ensure that you have enough money to cover your operational costs.
To manage your cash flow effectively, you should create a cash flow forecast, keep on top of invoicing, chase late payments, and keep a close eye on your business bank account.
In your first year of operation, it's particularly important to monitor cash flow carefully, as you'll likely have initial expenses that can strain your budget. Understanding your cash flow can help you make informed decisions about managing your business's money and planning for growth.
Companies House is a UK government entity that oversees the registration of new companies, updates to company details, and the filing of annual accounts. As a small business, it becomes crucial to have a clear understanding of the Companies House requirements in the first year of operation.
Upon launching your enterprise, you must register with Companies House. This step is vital as it informs the government about the existence of your business and provides necessary details like business name, registered business address, and the details of directors.
But the responsibility doesn’t end there. Companies House also mandates that every business, including small companies, must file their annual accounts every financial year. These accounts are then made publicly available. The information disclosed in these accounts includes your balance sheet, profit and loss account, and a directors' report - a statement from the company's director about the performance and strategies of the company over the past year.
Filing your accounts with Companies House is a yearly requirement, and this starts from the first year of your business. It’s essential to note that these accounts must be filed nine months from the end of your company's financial year for small companies, and seven months for medium-sized companies.
Even if your company is dormant, which means it had no significant transactions in the last financial year, you still need to file annual accounts. A dormant company is a company that has had no 'significant' transactions in the financial year. Significant transactions don't include filing fees paid to Companies House, penalties for late filing of accounts, or money paid for shares when the company was incorporated.
The Accounting Reference Date (ARD) is the end of your financial year. This date is automatically set as the last day of the month in which your company was incorporated. The first financial year ends on the ARD, and subsequent financial years end on the same date each year.
For instance, if a small company was incorporated on 15th April 2024, the ARD would be 30th April. The first financial year would be from 15th April 2024 to 30th April 2025. The following financial years would run from 1st May to 30th April, and so on.
The ARD is essential because annual accounts are prepared and filed according to the financial year ending on the ARD. As defined by Companies House, small company accounts must be delivered to Companies House within nine months after the ARD and medium-sized within seven months. Micro-entities sometimes have different deadlines so it's important to check this.
It's also worth noting that the first accounts usually cover more than one year. For instance, if a company is incorporated on 15th April 2024, and the first accounts are made up to 30th April 2025, they would cover a period of 12 months and 15 days.
Starting a small business in the UK comes with its fair share of accounting obligations in the first year. From maintaining accurate accounts, filing a balance sheet, preparing a profit and loss statement, meeting tax filing requirements, ensuring good cash flow management, understanding the Companies House requirements, to knowing your Accounting Reference Date, there's a lot to consider.
However, with a clear understanding of these requirements, you are better equipped to navigate your first year in business. Meeting these obligations not only keeps you in good standing with regulatory bodies but also provides an accurate picture of your financial health, which is crucial for making informed business decisions.