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Accounts tagging issue for micro-companies

26th Sep 2016
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The final stage of producing statutory accounts is something that many micro companies need help with.

Following our catch up with McArthur Davies Marketing, as part of a new collaborative project with Receipt Bank, tax editor Rebecca Cave looks at the key tax issues micro-businesses need to consider.

Can do

There are numerous capable directors of micro-companies who manage their accounting data perfectly well using excel spreadsheets, or accounting software. Those individuals have all the information they need to understand their own company’s performance on a daily basis and to produce adequate management accounts.

What the director may need a little extra help with, is the task of compiling accounts suitable for public consumption. Company law requires all companies to file annual accounts with Companies House. Those accounts must be drawn up under UK generally accepted accounting practice (UK GAAP), which means adhering to a long list of financial reporting standards, including the recently introduced FRS 102, or FRS 105 for micro entities.

Statutory accounts

The core problem is how to translate the management accounts into statutory accounts, and code each figure so it can be read by the HMRC computer for tax purposes.    

Accounting firms such as Dunkley’s provide the missing link by taking the client’s figures from a trial balance and reading them into software that produces the required statutory accounts. The same software also tags each figure in the accounts under the iXBRL taxonomy required by HMRC for the company accounts and tax return.

For accounting periods ending after 31 March 2010 all companies must file iXBRL tagged accounts and tax computations. Company accounts submitted in other formats are rejected.

Directors loans

As well as tagging the figures in the accounts, the managers at Dunkley’s review the company’s accounts for sense and potential tax problems. For example, any loans made by the company to the directors or their associates are reviewed, and recommendations are made for repayment.

Where such a director’s loan is still outstanding nine months and one day after the company’s year-end, a corporation tax charge of 25% (subject to this year's rate change - see below) of the amount of the loan must be paid alongside the main corporation tax due on profits for the period. Repayment of the director’s loan before that date will avoid such a corporation tax charge arising.

However, the directors need to be careful not to ‘bed and breakfast’ significant loans. Anti-avoidance rules introduced from 20 March 2013, require the repayment of a loan to a participator worth £5,000 or more to be ignored if that loan is replaced by the company with another loan worth £5,000 or more. Where the outstanding amount is £15,000 or more, the 30-day period is ignored, if at the time of the repayment of the first loan arrangements are in place for the repaid amount to be replaced by the company.

Rate change

Corporation tax rates generally change on 1 April, but the corporation tax charge on outstanding directors’ loans increased on 6 April 2016 from 25% to 32.5%. The higher rate only applies to loans taken out on or after 6 April 2016, so it is crucial to accurately record when a loan was first conferred and when it was paid off.

Where the director has received several distinct loans from the company, and he makes a repayment, the sum repaid is first set against the oldest loans on a first-in first-out basis. Hence loans that generated a corporation tax charge at 25% of the outstanding amount will be treated as being repaid first.

AccountingWEB recently delved into the activities and issues faced by McArthur Davies Marketing:

Sponsors note: Receipt Bank extracts the key information from your client receipts and invoices, removing the need for time consuming manual data entry.