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FAQs

Q1. Does my company require an audit?
A1. The limits for audit exemption have increased to turnover below £5.6 million and total assets (i.e. fixed and current assets) of less than £2.8 million. The previous limits were £1 million and £1.4 million respectively.

An existing "small" company at the date the legislation was laid before parliament (9 January 2004) may amend its accounting reference date to on or after 30 March 2004 to take advantage of the change in limits. An existing "medium" company cannot change its accounting reference date to take advantage of the change in limits unless the appropriate form 225 was lodged with Companies before 9 January 2004.

A ‘dormant’ company audit exemption may be claimed by a limited company that has not traded during a financial year provided it meets certain other criteria to qualify as ‘dormant’.

The change is effective for accounting periods ended on or after 30 March 2004.

Audit exemption is not available to any company that was at any time during the year any of the following:-

• An authorised person or an appointed representative under the Financial Services and Markets Act 2000.
• A person carrying or an insurance market activity.
• An insurance broker enrolled by the Insurance Brokers Registration Council.
• A special register body, being a trade union or employer’s association under the Trade Union and Labour Relations (Consolidation) Act 1992.
• A public company.
• A parent or a subsidiary undertaking (other than a member of a small group, the aggregate turnover of which does not exceed £5.6m net or £6.42m gross for year ends after 30 March 2004. (£350,000 net or £420,000 gross - charities) and the aggregate balance sheet total of which does not exceed £2.8m net or £3.36m gross).

Any member or members holding not less than 10% of the nominal value of the company’s issued share capital may require an audit of the company’s accounts. To do so, the member or members must deposit a notice in writing at the company’s registered office during the financial year but not later than one month before the year end. The company is then not entitled to audit exemption for the year to which the notice relates.

Notwithstanding the availability of exemption, an audit may nevertheless be voluntarily carried out if the directors so decide or be required, for example, to comply with bank lending terms and conditions.

Q2. What are the limits for small and medium sized companies?
A2. The limits for a ‘small’ company have increased from turnover less than £2.8 million and a balance sheet total (i.e. fixed and current assets) of £1.4 million to turnover less than £5.6 million and a balance sheet total of £2.8 million, although the number of employees remains unchanged at 50. These limits are now the same as those for audit exemption.

The limits for a ‘medium’ company have doubled to turnover less than £22.8 million and a balance sheet total of less than £11.4 million with the employee number again being retained at 250.

Turnover figures should be proportionately adjusted where the financial ‘year’ is not in fact twelve months.

As a general rule, for a company to qualify as small or medium-sized, the above criteria must be met for the current and previous year. If the criteria are not met for the following year, a company may continue to be treated as small or medium-sized, as appropriate, for that year. However, if the criteria are not met in the year after that, than the company must file accounts according to its size.

The size classification of a parent company is determined with regard to the aggregate qualifying criteria of the group taken as a whole.

The following companies are not eligible and are not therefore entitled to prepare small company accounts or to file abbreviated accounts, irrespective of size:

• Public companies,
• Members of ‘ineligible’ (basically public) groups,
• Insurance companies
• Persons who are permitted to carry on ‘regulated activities’ under the Financial Services and Markets Act 2000 (for example, banking companies)

The change is effective for accounting periods ended on or after 30 January 2004.

Q3. What is the best way to get money out of a company?
A3. Other than just PAYE there are various other ways in which remuneration can be paid to you. With the exception of the Benefits in Kind all the suggestions below do not attract any National Insurance liabilities for the individual or the company.

Benefits in Kind

Some options are still attractive such as Healthcare which through a company scheme do mean lower premiums in general giving you a lower taxable benefit.

Pensions

Paying your pension through your company is not a taxable benefit on you, under the new legislation your current remuneration level sets your pension payment level for the next five years, this could mean you paying a high salary in one year and increasing your pension payments, then reducing your salary while still maintaining a high pension contribution from your company.

Under the new stakeholder pension legislation it allows pension payments to be made on behalf of children under 16 or by individuals with no income, this means that family members could benefit from the company paying into a pension on their behalf.

Dividend Structure

By structuring shares within your company we can make use of you and your families tax allowances in a more tax advantageous way.

Company Car

The government is changing tax legislation in respect of company car drivers so that the benefit is becoming less attractive and could lead to many drivers having a larger than expected tax bill.

If you are a high mileage company car driver it may be more advantageous to explore the Fixed Profit car Scheme FPCS. This allows a tax free payment to be made for the use of a privately owned car on company business. If you are a director it may be advantageous for you to take your car out of the company and adopt this method of reimbursement.

Property

There are many attractive ways in which a director can hold a property and have their company rent the premises from them. The advantages are that if the director requires a loan to finance the building the interest on the loan is tax allowable as well as the attractive capital gains tax allowances available for when the property is eventually sold as it will qualify as a business asset thus giving rise to a lower rate of CGT.

Q4. What is a company’s accounting reference date?
A4. A company’s accounting reference date (ARD) is the last day of the company’s accounting period (i.e. its financial year). For all new companies, the first ARD is automatically set as the anniversary of the last day in the month in which the company was incorporated.

A company may change its ARD by shortening an accounting period as often as the company likes and by as many months as it likes. However, there are restrictions on extending accounting reference periods. A company may not extend a period so that it exceeds 18 months and the ARD may not be extended more than once in five years unless:-

• The company is subject to an administration order.
• The Secretary of State has directed the change.
• The company is aligning its accounting reference date with that of a subsidiary or parent undertaking established within the European Economic Area.

A company incorporated overseas which has registered a branch in Great Britain and which does not have to publish audited accounts in its country of incorporation or a place of business in Great Britain, is subject to the same ARD rules except that it is not restricted as to how often it may extend accounting periods. A company incorporated overseas which has registered a branch in Great Britain and which has to publish accounts in its country of incorporation, is subject to different rules.

Q5. How much is my company worth?
A5. From a financial point of view a Company is basically valued in three ways:

• By taking the average profits over a five year period after adjusting for any unusual items then applying a multiple (PE Ratio) for a similar company quoted on the stock market.
• By taking the value of shareholders funs on the company's accounts and adjusting for any increase or decrease in values of property and other company assets.
• By taking the principle set out in 2 and trying to quantify how much goodwill is in the company which has built up over years of trading and obtaining a good reputation.

However the above examples are only an indication and viable if you can find a buyer for your company and also what the current market for your current trade is.

This however is only half the equation. Many businesses are run by an individual director and their worth lies in his/her ability. Very little thought is given to succession planning and many owners leave it far too late in order to realise the full worth of their company.

By mapping out an overall strategy at an early stage it is possible to get key people in your organisation that if rewarded correctly will continue to grow the business without you having to be the key in the day to day running, this will ultimately make the business more attractive to potential buyers and enable you to realise its full worth.

Next to this is structuring the exit in order to make it the most tax efficient way for you to receive the worth of the company without having most of it taken in tax.

Q6. What is the FRSSE?
A6.FRSSE stands for Financial Reporting Standard for Smaller Entities. The FRSSE was originally issued in November 1997, in recognition that the accounting requirements and disclosures for larger entities were not necessarily appropriate for smaller entities. It brings together the relevant accounting requirements and disclosures from the other accounting standards and UITF Abstracts, simplified and modified as appropriate for smaller entities. The basic measurement requirements in the FRSSE are the same as those in other accounting standards (although with some slight simplifications), but many of the disclosure and presentation requirements of other standards have not been included in the FRSSE.

The FRSSE is an optional standard that may be applied by companies that qualify as small under the Companies Act 1985 and other entities that would have qualified as 'small' had they been incorporated. The Companies Act definition of 'small' encompasses most companies with an annual turnover of up to £5.6 million. Entities adopting the FRSSE are exempt from applying all the other accounting standards and UITF Abstracts. This considerably reduces the volume of accounting standards those entities need to comply with or refer to. However, it remains open to them to choose not to adopt the FRSSE and to comply with the other accounting standards and UITF Abstracts instead.

Financial reporting is continually evolving and therefore the FRSSE needs to be updated to reflect new or revised accounting standards and Urgent Issue Task abstracts. The third of these updates, the FRSSE (effective June 2002), was issued during December 2001 and supercedes the FRSSE (effective March 2000). The accounting practices set out in the FRSSE (effective June 2002) are regarded as standard in respect of financial statements relating to accounting periods ending or after 22 June 2002.

The FRSSE was developed and is kept under review by one of the ASB's committees, the Committee on Accounting for Smaller Entities (CASE), under the supervision of the ASB.

Q7. What are international accounting standards(IAS)?
A7.On 7 June 2002 the Council of the European Union and Parliament formally adopted the "IAS Regulation" which will require all listed companies in the European Union to prepare their consolidated accounts in accordance with international accounting standards (IAS) for each financial year starting on or after 1 January 2005

National Governments have the option to impose similar requirements for single company financial statements for listed companies and for the financial statementsof unlisted companies. The Government announced on 17 July 2003 that unlisted companies will be able to adopt IAS. Once a company has made the decision to move to IAS it will not be allowed to revert back, in order to stop the switching of standards to show results in a more flattering light and obtain tax advantages.

The Accounting Standards Board (ASB) who currently set the United Kingdom accounting standards have stated that they intend to continue to set UK standards but they will be aligned with IAS wherever practicable. AS a result, UK standards may become redundant depending on the outcome of the current consultation.

It seems likely that the ASB will continue to update the Financial Reporting Standard for Smaller Entities (FRSSE)in the short term. By amending the FRSSE to follow UK standards, the FRSSE will effectively become an international FRSSE. At some stage in the future, the International Accounting Standards Board (who set the IAS) are likely to produce their own version of the FRSSE.

Q8. Do I need to deduct tax if the company pays an individual interest?
A8.Yes, a company must deduct tax at the rate of 20% of the gross payment (25% of the net amount) if interest is paid to an individual. Examples of where a company may pay an individual interest are on a loan or a director’s loan account balance. If the interest is initially accrued in the accounts it must be paid to the individual within twelve months of the company’s year end to be an allowable deduction against the company’s corporation tax liability.

The tax deducted must be paid to the Inland Revenue each quarter on form CT61.

Interest payments to companies or pension schemes are paid gross.

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