Corporate Governance & Regulation

A recent County Court case serves as an important reminder to comply with the requirements to preserve and maintain proper company accounting records. The case concerned a fast food takeaway company in Walsall. The sole director of the company was found to have failed to submit adequate accounting records to the tax authorities. This resulted in his disqualification from acting as a director for 7 years during which he cannot be involved, directly or indirectly, with the formation, promotion or management of a company without prior permission of the court.

Dave Elliott, Chief Investigator for the Insolvency Service, said:

'The company director's duty was to maintain and preserve his company’s financial records. If he had done this, he would have been able to provide information to the tax authorities and also the liquidator attempting to wind-up the company’s affairs. This should serve as a reminder to all directors to comply with their statutory duties.'

There is a requirement to hold company records for 6 years from the end of the last company financial year they relate to, or longer if:

• they show a transaction that covers more than one of the company’s accounting periods
• the company has bought something that it expects to last more than 6 years, like equipment or machinery
• you sent your Company Tax Return late
• HMRC has started a compliance check into your Company Tax Return.

If your company records have been lost, stolen or destroyed you must do your best to recreate them. You are also required to tell your Corporation Tax office straight away and include this information in your Company Tax Return.

The money laundering rules are designed to protect the UK financial system and put in place certain controls to prevent businesses being used for money laundering by criminals and terrorists. The money laundering and terrorist financing (amendment) regulations 2019 (MLRs) came into force on 10 January 2020. This updates the existing regulations to incorporate international standards set by the Financial Action Task Force (FATF) and to comply with the EU’s 5th Money Laundering Directive.

The key changes for businesses dealing with HMRC mean that money service businesses and trust or company service providers who apply to register from 10 January 2020, will not be able to carry out relevant activity until HMRC has determined their application for registration.

HMRC will now supervise two new groups of businesses that are subject to the new anti-money laundering regulations. 

Firstly, letting agents who rent out property valued at 10,000 euros or more for a minimum of one calendar month, including both commercial and residential property – the online system for these letting agency businesses to register will open in May 2020.

Secondly, those in the art market who deal in in sales, purchases, and storage of works of art with a value of 10,000 euros or more, whether this is for a single transaction or series of linked transactions, regardless of payment method used – art market participants can register now via the online system. Businesses must register by 10 January 2021. The changes also add more categories within the scope of the anti-money laundering regulatory framework.

There are a limited range of circumstances when a company can request to be removed from the register (known as being struck off). For example, a voluntary strike-off can be requested by a dormant or non-trading company.

A limited company can be closed down by using this striking-off process, but only if it:

• hasn't traded or sold off any stock in the last 3 months. For example, a company in business to sell apples could not continue selling apples during that 3 month period but it could sell the truck it once used to deliver the apples or the warehouse where they were stored.
• hasn't changed names in the last 3 months
• isn't threatened with liquidation
• has no agreements with creditors, e.g. a Company Voluntary Arrangement (CVA)

If the company does not meet these conditions, then the company will need to be liquidated (also known as a 'winding up').

Before applying for a strike off, the company must be legally closed down. This involves:

• announcing plans to interested parties and HMRC
• making sure employees are treated according to the rules
• dealing with business assets and accounts.

A tax accounting period for Corporation Tax purposes cannot exceed a 12 month period. If company accounts cover less than 12 months then the accounting period will normally end on the same day, and thus will be shorter than 12 months. This can happen if the company stops trading or shortens its company’s year-end: also known as its accounting reference date.

There is an interesting anomaly if the company has more than one trade. If this is the case, the company may make up accounts for one or more of them with different accounting dates, instead of one account for all its activities. In a case like this, the company should agree the accounting date it will use. Normally a date which achieves an unbroken succession of 12-month periods is preferable.

Companies may also have to contend with having two different company accounting periods. This is because there are different rules for Companies House filings and for HMRC to whom any Corporation Tax due is ultimately paid.

A Close Company is broadly defined as a company that is controlled by:

• five or fewer participators or
• any number of participators who are also directors or
• where more than half the assets of which would be distributed to five or fewer participators, or to participators who are directors, in the event of the winding up of the company.

A participator is broadly somebody who has a share or interest in the capital or income of a company such as having share capital, voting rights or a right to capital on winding up of the company. This can be a shareholder, director or a loan creditor.

Most small private companies will meet the definition of a Close Company and there are some specific tax rules that apply to these companies. This includes, for example, where a Close Company pays for personal expenses of a director or makes a loan to one of its participators.

Under certain circumstances, companies (including non-resident companies trading from a branch or agency in the UK and local authorities) can have a duty to deduct tax in connection with certain payments. In effect the company accounts for all or part of the tax liability on behalf of the recipient of the payment.

For example, from:

• payments of yearly interest
• annual payments
• patent royalties
• royalties etc to a person who lives abroad
• the proceeds of a sale of patent rights paid to a non-UK resident
• chargeable payments connected with exempt distributions
• directions for deduction from payments to non-UK residents.

Companies (and various other entities) making these deductions are obliged to account for the amounts deducted using form CT61. HMRC is happy for the entries on these forms to give aggregated figures of amounts paid or credited and the tax deducted for the return period. However, the payments should be split for pre and post 5 April interest to reflect any change in the tax rate.

There are a limited range of circumstances when a company can request to be removed from the register (known as being struck off). For example, a voluntary strike off can be requested by a dormant or non-trading company.

You can object to a limited company’s application to be struck off the companies register if you’re a shareholder or other interested party, such as a creditor, and have a reason to stop the application, for example:

• you have not been told about the company’s decision
• you think the declarations on the company’s application are false
• the directors have broken the law, for example tax fraud
• you want to take legal action against the company

When a company has applied to be struck off, it is required to post a notice in the Gazette. You can only raise an objection (to Companies House) after this notice has been published.

You will need to provide evidence to support your objection, for example invoices showing the company is still trading or owes a debt.

Companies House must receive your objection at least 2 weeks before the notice expiry date (2 months after the date of publication). Companies House will let you know if your objection is successful and will usually set a time limit during which the company cannot be struck off.

An overseas company must register with Companies House if they want to set up a place of business or branch in the UK. Generally, this would be if the overseas company had a physical presence in the UK through which it carries on business.

If an overseas company does not have a physical presence in the UK, they are not usually required to register with Companies House. For example, an independent agent who conducts business on behalf of an overseas company is not considered to have a physical presence in the UK, neither is an occasional location such as a hotel where a director of an overseas company may conduct business during periodic visits to the UK.

If an overseas company is required to register, then they must submit a completed OS IN01form and pay the standard registration fee of £20 to Companies House. If the company is registering its first UK establishment, it must also send Companies House a certified copy of the company’s constitutional documents and a copy of the company’s latest set of accounts (with a certified translation in English if prepared in another language).

The overseas company can be registered using its corporate name (its name under the law of the country of incorporation), or an alternative name under which it proposes to carry on business in the UK.

There are special rules in place which limit your options to change your company’s year-end date. A company’s year-end date is also known as its ‘accounting reference date’ and is historically set by reference to the date the company was incorporated. Under certain circumstances it is possible to make a change to the year-end.

As a general rule, you can only change the year end for the current financial year or the one immediately before it. Making a change to a year-end date will also change the deadline for filing accounts (except during a new company’s first financial year).

There is no limit to the amount of times you can shorten a year-end date, but you can only extend the period to a maximum of 18 months once in every five years. The financial year can be extended more often under limited circumstances. For example, if the company has been placed in administration.

A request for a change to an accounting reference date can be made online using the Companies House online service or by using a postal version of the Change your company accounting reference date (AA01) form. No change can be made to a period for which accounts are overdue.

Please note

There is no overriding reason for using one date over another, but there are a number of factors to consider. The most common year-end dates are 31 December (to coincide with the end of the calendar year) or 31 March (to coincide with the end of the tax year).

Companies House has issued a press release to remind companies to keep on top of their filing responsibilities. The end of this month, 30 September 2019, marks a common deadline for many companies who will need to file their company accounts with a 31 December 2018 year-end date. Last year, a total of 25,049 companies failed to meet the 30 September 2018, filing deadline.

In fact, we are told that another 643 companies narrowly avoided a penalty. They actually filed their accounts in the final hour before the deadline. In total, 223,640 late filing penalties were handed out in 2018.

Companies House also published some of the bizarre excuses it has received for late filings including:

• I found my wife in the bath with my accountant,
• pirates stole my accounts,
• a volcano erupted, and
• goats ate my accounts and prevented me from filing!

The late filing penalties are designed to encourage companies to file their accounts and reports on time. The penalties for late submission by a private limited company are as follows:

 

How late are the accounts delivered	Penalty
Not more than one month	£150
More than one month but not more than three months	£375
More than three months but not more than six months	£750
More than six months	£1,500

The penalty is automatically issued if your accounts are filed late and the penalties are doubled if your accounts are late 2 years in a row.

Failure to file confirmation statements or accounts is a criminal offence which could see the directors personally fined in the criminal courts. Late penalties which are unpaid, will be referred to collection agents and could result in a County Court judgement or a Sheriff Court decree against your company.

It is possible to appeal against a penalty, but there are strict circumstances for doing so including that you must be able to prove that the circumstances were outside of your control.