Annual Accounts are very familiar to business people. Every year statutory reports which comply to specific accounting standards must be filed with HMRC and Companies House. But what about Management Accounts? There is no legal obligation to generate them. Why then, do so many organisations depend on Management Accounts in running their operations and could you be benefitting from them too?
Author Archives: Keith Grover
How to make better decisions with Management Accounts
Better business decisions lead to stronger businesses, with higher turnover, lower costs and greater productivity. Business leaders and owners, including those in medium sized, and small fast-growing businesses, use Management Accounts as a tool to provide them with financial performance information. For charities Management Accounts are often vital to provide Trustees with the information they require to provide good governance for the organisation. Could your organisation benefit from regular Management Accounts?
Top tips to prepare for company year end
At company year end, it’s time for limited companies to file corporate tax returns with HM Revenue & Customs (HMRC) and provide annual accounts to Companies House. Whilst small and micro companies don’t have to provide full accounts reports to Companies House, they are still required to provide simplified accounts reports as a statutory requirement. Since corporation tax is calculated by HMRC based upon the financial position of your company at year end it’s vital to have everything in order. There are steps you can take to make this process as smooth as possible. At HB Accountants, we can provide as much or as little support as you need at year end. Here are our top tips to prepare for company year end.
Ten things to look for in an Accountant
What matters most when you need to find professional Accountants to support your business? Doubtless every accountancy practice will have its own merits. To make an informed decision, here are 10 key factors which the team at HB Accountants believe that you should consider.
Does my organisation need an audit?
Businesses and charities must audit their accounts when they have grown above a certain size. The smallest organisations are exempt from this legal requirement. There are also circumstances when you may need or want an audit regardless of the scale of your operations. If you are in any doubt as to whether you need to conduct an audit or not, just contact HB Accountants and we can talk you through the regulations.
Exactly what is an audit?
An audit is the systematic examination of an organisation’s accounting records, as well as the physical inspection of its assets. When performed by a qualified accountant, such as HB Accountants, it enables us to verify whether the financial statements have been prepared in line with relevant legislation and accounting standards, and importantly whether they provide a true and fair view of the organisation’s financial position.
When to book an audit – size threshold
When a private limited company hits two of these thresholds, in two out of three years, it’s time to book an audit.
- annual turnover £10.2m
- assets worth £5.1m
- number of employees 50 on average
When a charity hits either one of these thresholds it’s time to book an audit.
- gross annual income above £1m or
- gross assets of above £3.26m and a gross annual income above £250,000.
Where a charity’s income is from £25,000 to £1m, external scrutiny in the form of an independent examination is still required by the Charities Commission. In addition, many charities require regular audits regardless of the size of the organisation, as set out in their constitution or legal instructions from donors or trustees.
Other reasons to book an audit
There are further reasons why organisations must or should complete an audit.
Regulated finance or legal industry sector firm
If you operate a regulated business, then there’s often a legal requirement that you undertake audits. For example, if your run a financial services business, friendly society or legal practice. These organisations operate in a position of trust with customers, and a regular financial audit provides much-needed assurance as well as compliance with the regulations.
Subsidiary of a company
If your parent company is legally required to audit its financial statements, then this extends to any subsidiary companies, even if they are individually below the legal threshold size unless the subsidiary exemption criteria has been met.
Shareholder makes a section 476 request
Under the Companies Act 2006, section 476, a shareholder can give notice that an audit is required. To be able to do this the shareholder must have at least a 10% stake in a class of the company’s shares or if there are no shares they must represent 10% of the members of the company.
Bank or lender audit requirement
In certain circumstances your bank or another lender may need the added assurance of an audit to assess your current financial position, and make decisions about the services it offers, such as a business loan.
Preparing for sale of business
It may be advantageous to audit your financial statements when you plan to sell your business to maximise the pay-out shareholders receive and to get the best possible terms.
Preference and good practice
Even when an organisation is not compelled to have an auditing regime due to legal regulations, many choose to have regular audits to provide stakeholders with complete confidence in their financial reports.
Audit exemptions
Some organisations are exempt from having full audits.
Small businesses
Small businesses may be exempt, provided they aren’t required to audit accounts due to being a charity or other regulated business. To be exempt as a small business, at least two of these figures for this year and last year must be below this size threshold:
- Turnover below £10.2 million
- Total assets below 5.1 million
- Number of employees below 50
Subsidiary exemption
A subsidiary of a larger group may be exempt if the group meets certain criteria and the parent company gives a guarantee of all outstanding liabilities at the end of the financial year.
Charity exemption
Charities with a gross income of less than £1m can choose to opt out of a full audit provided that gross assets do not exceed £3.26m and gross income does not exceed £250,000 and provided their constitution does not demand an annual audit. Although if turnover exceeds £25,000 they will still need some form of independent examination.
It’s easy to be more audit savvy
These are broad guidelines about which organisations must audit their accounting records. If it’s obvious that you need an audit, then get in touch and we can explain the benefits of our audit service. If it’s not obvious whether you need an audit, then do talk to us to discuss your organisation’s circumstances. We can help you to identify if an audit is a legal requirement, or if it simply makes good sense, or if an audit is not required at all. We are always ready to answer questions and provide advice. Just call 01992 444466 or email directors@hbaccountants.co.uk
Gross Profit Vs Net Profit
If you are a business owner, then knowing what your gross and net profits are will be vital to your business. Whilst net profit shows how much money you made overall, knowing what your gross profits are in relations to them can help you form a better business strategy.
In a nutshell, gross profits are your turnover, minus the costs of the goods sold. This includes products, materials, shipping costs etc.
Your net profit is your gross profit minus all the other costs associated with running your business, such as salaries, rent, taxes, insurance, utilities etc.
Knowing what your net profit is at any given time will give you an indication of how much money your company has to reinvest in the business or distribute to shareholders… or alternatively how much you need to pull your socks up!
How to use net and gross to help your business succeed
The net profit alone doesn’t necessarily show the truth of how well your company is doing, and that’s where knowing what your gross profits are coming in handy. You may, for instance, have moved to larger premises or have had a recruitment drive for staff to handle an anticipated rise in work, in which case your net profits will have taken a hit. However, if your gross profits are good, you can attribute the downturn in net profits to the expenses incurred in the move and be confident that you’re still on the right track in business terms. Alternatively, high gross profits and low net profits will tell you that even though your core business is strong, you need to investigate where you’re spending the excess money enabling you to do something about it.
We find that, as a general rule of thumb, if you are looking after your overheads properly, the net profit should take care of itself. There’s a great phrase, “turnover is vanity, profit is sanity but cash is reality”, which means you need to get your profit right before taking care of your working capital.
If you are looking for a Hertfordshire accountant, please contact us to find out more about the services we offer.
Some Relief for Furnished Holiday Lets
For several years now the lack of availability of Business Property Relief (‘BPR’) for furnished holiday lets (‘FHLs’) has been well known and established through cases such as Pawson, Green and Ross. The courts in these cases ruled that the holiday lets were too much of a passive investment to qualify as a business, even though the owners were providing varying degrees of service it was often held to be no more than would be expected from self-catering (i.e. investment) properties. The boundary between a mere investment and an active business (not “trade”, the legislation says “business”!) is a hard one to cross with the level of other services provided to guests needing to be more akin to a hotel than a self-catering holiday let.
The loss of BPR can be a major blow to an estate. The 100% relief against inheritance tax afforded by BPR can be very valuable, hence why HMRC will be vigorous in their investigations into such a claim. For income tax and CGT purposes however there is usually no argument from HMRC. If the let is furnished, available for let for 210 days a year and let out for 105 days with no long term lets then as far as CGT is concerned the various trading reliefs are available. For income tax purposes too, if those criteria are met then the income is classed as trading thus allowing the owner to claim capital allowances. Such income is also qualifying income for pension purposes allowing for greater retirement planning opportunities. The loss of BPR for the estate after all those lifetime benefits can be most unfortunate.
However, an estate recently succeeded in obtaining the coveted BPR for a holiday let business. The executors of Mrs Grace Joyce Graham claimed the relief for holiday flats on the Isles of Scilly. Smelling blood HMRC contested the claim but the First-Tier tribunal dismissed HMRC’s challenge. In this instance the amount of work the deceased and her daughter put into the business (up to 200 hours per week between them at busy periods) and the level of extra services available to the guests were more akin to a hotel to anything else. New guests were given personal tours of the property and the level of personal attention was such that several TripAdvisor comments highlighted it was this personal input and hospitality which made their holiday special. In addition to the 4 flats on offer, there was: a swimming pool, a croquet lawn, a prize-winning garden (from which the guests could help themselves to herbs), a games room with a snooker table, table tennis, board games and videos; there was a sauna, the laundry room and a BBQ. Each flat was fully furnished and had its own kitchen and dining/living area. Basic foods were provided, flowers were delivered into the flats for new guests along with home-made marmalade (and wine or champagne for special occasions). Golf buggies and bicycles were available to borrow, the guest lounge contained books, an open fire and leaflets on local attractions.
The court pointed out that “it will only be the exceptional letting business which falls on the non-investment side of the line” – making clear that this finding did not alter the recent hard-line taken by the courts. But in this particular instance, Mrs Graham’s personal attentiveness in her lifetime pushed her estate’s BPR claim over that line:
“The pool, the sauna, the bikes, and in particular the personal care lavished upon guests distinguished it from other “normal” actively managed holiday letting businesses; and the services provided in the package more than balanced the mere provision of a place to stay. An intelligent businessman would in our view regard it as more like a family run hotel than a second home let out in the holidays”.
Making Tax Digital for VAT
The Making Tax Digital (MTD) reforms represent a fundamental and unprecedented change to the UK tax system, which will ultimately impact all UK tax payers.
MTD has been delayed for all other taxes until at least 2020 but it is a requirement for all VAT-registered businesses with a turnover above £85,000 per annum to submit their VAT returns digitally, using MTD-compatible software, from April 2019.
MTD means that VAT registered businesses with turnover over the £85,000 threshold will need to submit their VAT returns digitally using MTD-compatible software. However, MTD also means businesses will need to keep their records in a digital format which enables information to be provided to HMRC directly from their accounting system or via bridging software, through application programme interfaces (APIs) which can also receive information from HMRC.
If you are a VAT-registered business with turnover of the £85,000 threshold you will need to keep digital records. If you keep your records on a spreadsheet you will need to have digital links, through MTD-compatible software, from the spreadsheet to HMRC. If you use an accounting package but prepare your VAT return using a spreadsheet, from April 2019 the accounting package and the spreadsheet will need to be linked digitally.
Many accounting software package providers will provide the application programming interface (API) links and there will also be third-party bridging software solutions. However, you will still need to keep digital records of the underlying transactions.
Under MTD, digital records of all sales will have to be kept, broken down by VAT liability (ie, the value of standard-rated, zero-rated, exempt and outside-the-scope supplies). As of now, only a total of all sales is required for the VAT return. It is also necessary to retain other information, such as all adjustments for business entertainment, car leasing and reverse charges on imported services, and summarise purchases broken down by VAT liability.
For VAT returns submitted on or after 1 April 2019, you will be required to submit the information which completes the existing nine boxes on the VAT return digitally using MTD-compatible software. However, you can also choose to voluntarily submit supplementary data on a periodic basis, such as in relation to the total adjustments made or total supplies made at different VAT liabilities.
HMRC has stated that when deciding whether to carry out a VAT inspection on a business, it will take into account whether the business has provided supplementary data, there are no queries, HMRC is less likely to carry out a VAT inspection.
HMRC has confirmed that there will be a ‘soft landing’ period between April 2019 and March 2020, when there will be no financial penalties for record-keeping failures. However, there must be a digital link between your accounting records and HMRC from the outset on 1 April 2019.
Benefits of using a local accountant
When you’re looking for a new accountant, there are a number of business benefits to choosing a local firm. We have many clients in and around our Hoddesdon office, which helps us form great relationships with them.
Here are our top reasons why you need to look for a local accountant:
Research – If you are thinking about hiring a local accountant, you can ask your contacts for recommendations and testimonials. Even if they don’t use the firm you’re asking about, they will probably have heard something about them from their contacts, giving you a better idea of their reputation.
Building better relationships – By using a local accountant, it is almost certain that you’ll build up a better relationship with them than you could with a firm a long way away. You’re more likely to bump into them outside the workplace and this kind of familiarity will help your professional relationship. It is also easier to meet face-to-face which is always more personable, and if any matters arise that you need to consult them about, you can easily go to their office to discuss things in depth.
Networking – If you enjoy networking, you’ll get to know people from your accountancy firm at some point, enabling you to build a personal relationship and find out more about each other’s businesses outside of formal meetings. These can also be helpful in terms of referrals. We organise our own networking meetings for companies in Hoddesdon and the surrounding areas, and are often able to put clients in touch with each other, or our networking contacts, which benefits both businesses.
Charities – Another aspect of networking is getting involved with charitable events and fundraising, which is something the majority of companies do. Supporting events organised by your accountancy firm, or asking them to support your events, can be a further boost to building a good relationship with them.
Local economy – By using local suppliers, you’ll be helping to keep the money circulating in the local economy, which is a boost in terms of jobs and prosperity for all the businesses in the area.
If you are looking for a Hoddesdon accountant, contact us to arrange an appointment or talk to us at one of our local networking events.
Why you need to have a review with your accountant
You may have used the same accountant for a number of years, and you may well be happy with them – we hope you are! But it’s always a very useful exercise to review your accountant from time-to-time just to check that you’re getting the most appropriate service for your business.
When you do your review, it encourages you to think about the service you’re getting and assess whether or not you’re getting what you need from your accountant. Here are the questions we think you need to ask yourself in order to make an informed assessment.
Are they technically strong?
Are you getting a high enough technical service, particularly on the tax side of things? As your needs get more complex, do you feel that they are on top of what they need to be doing?
Are you happy with the way they communicate?
Does your current accountant communicate clearly with you so you understand the information clearly? How much jargon do they use? How approachable are they? Do you feel you can contact them when you have a question? A good accountant isn’t just an expert at what they do, it’s all about getting a good service, and dealing with you on a personal level is a very important part of this service.
How proactive are they?
Do you ever have to chase your accountant to get things done? Are they always dealing with things late and scrambling to meet deadlines or do they get things done in a timely manner? A good accountant will plan ahead and make sure everything’s properly scheduled. As issues are about to come up, they will tell you they are dealing with them, rather than waiting for you to have to prompt them when you receive a notification after the deadline has gone.
Do they give you practical solutions to problems?
The relationship between you and your accountant works both ways – if you’re getting a good quality service, they will be proactive and suggest practical solutions to any problems you might encounter. A good accountant will be happy to work through things with you to make sure that everything is on the right path.
Are they at the right level?
Do you feel that your accountant is experienced enough to handle your accounts? It may well be that you started working with them when your business was small, but your company has seen great growth. You need to ask yourself if your accountant has grown at the same rate because, with the best will in the world, their skills might not be enough for your needs as a larger company any more.
If you’re happy with the answers to all these questions, then you’ve got the right accountant for your needs, along with the peace of mind this brings. If not, then contact them to discuss your concerns, after which, if you’re still not sure, it may be time to look for a new accountancy service. Contact us for more information or to see how we could help you turn those unsure questions into informed decisions.
