Operating a Business and Employment in the United Kingdom

Part Three of The Investors' Guide to the United Kingdom 2015/16

Jonathan Reuvid

• Publisher: Legend Business
• Year: 2015
• eBook ISBN: 9781785079399
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

Those who have already taken the decision in principle to invest in the UK, will now need to be conversant with the legal, accounting and taxation regimes of operating a UK business. The third section of the Investors' Guide to the United Kingdom covers in detail the important elements of financial reporting and accounting, business taxation and planning both for the business and foreign nationals, financial compliance issues and the legal aspects of employment, pensions and employee benefits and incentives.

Part Three

Operating a Business and Employment in the United Kingdom

3.1 FINANCIAL REPORTING AND ACCOUNTING: AN OVERVIEW

Stephen Brown, Mazars

INTRODUCTION

All limited and unlimited companies in the UK, regardless of whether they are trading or not, are required to keep accounting records throughout the period. This chapter sets out the key financial reporting and accounting requirements for companies trading or investing in the UK.

GENERAL PRINCIPLES

Where formal accounts are required, in particular for limited companies, these must include for accounting periods commencing after 1 January 2015:

• An Income Statement;

• A Statement of Financial Position signed by the director;

• A Directors’ Report signed by a director or the company secretary;

• A Strategic Report signed by a director (if applicable);

• Notes to the accounts; and

• Statement of Cashflows (if applicable);

• Consolidated Financial Statements (if applicable);

• An Auditor’s Report signed by the auditor (if required).

In general, all private and public limited companies are required to send a full copy of their accounts to Companies House every year.

Once received, all accounts filed and held at Companies House are available to the general public on request. For this reason the option to file abbreviated accounts is attractive to some small companies.

Small companies are entitled to certain disclosure exemptions in relation to the accounts they must send their shareholders, and can, in addition, file abbreviated accounts with the Registrar of Companies. Medium-sized companies can also send abbreviated accounts to the Registrar but the reduction in disclosure in these accounts is negligible. In both instances they must, however, provide a full set of accounts for their shareholders. For both small and medium-sized companies, the production of abbreviated accounts is entirely voluntary.

A company/group filing small company abbreviated financial statements does not need to file a Directors’ Report, Income Statement and can include fewer notes to the financial statements.

For a company to qualify as small, at least two of the following conditions must be met:

• Turnover must be less than £6.5 million;

• Gross assets must be less than £3.26 million; and

• Average number of employees must be less than 50.

A company filing medium abbreviated financial statements has a limited option to reduce disclosure but does need to include a Directors’ Report, an Income Statement and notes to the financial statements.

For a company/group to qualify as medium-sized, again, at least two of the conditions below must be met:

• Turnover must be less than £25.9 million;

• Gross assets less than £12.9 million; and

• Average number of employees less than 250.

The time normally allowed for companies to deliver their accounts to Companies House is:

• 9 months from the ARD (Accounting Reference Date) for a private limited company.

• 6 months from the ARD for a public limited company.

The ARD is the period-end date to which all accounts are prepared and normally covers a period of 12 months, although this can be extended to a maximum of 18 months. Filing of financial statements for a first year entity must be within 21 months of incorporation. Late delivery of accounts to Companies House will result in a late filing penalty, which is, technically, a criminal offence for which Directors can be prosecuted.

ACCOUNTING

Regulations regarding the presentation of the primary financial statements in the UK are found in several sources such as UK company law and UK and international accounting standards. Note that subsidiaries of overseas firms incorporated outside the UK are subject to the normal UK accounting practices. Branches or places of business of overseas firms have special registration procedures.

Accounting Principles

All accounts in the UK are prepared in accordance with two fundamental accounting concepts:

• Going concern – the accounts are prepared as if the company will be trading in the foreseeable future (at least 12 months from the date of signing the financial statements).

• Accruals basis – income and expenditure should relate to the period in which it occurred, not the period in which it was received/paid.

Whichever accounting policy is selected, they must be transparent and reflect industry and sector norms.

Financial Reporting

Until recently, Financial Reporting Standards were developed solely by the Accounting Standards Board (“ASB”). These standards, in conjunction with the requirements of UK companies legislation (principally the UK Companies Acts), helped make up what is known as UK GAAP, which gives guidance to companies and auditors on how UK accounts should be prepared to give a ‘true and fair’ view of the company’s financial position.

However, due to increasing globalisation in the world economy, it became necessary to produce a set of International Financial Reporting Standards (“IFRS”) so that potential investors can compare firms on a global scale.

EU firms with securities that are publicly traded on a regulated stock exchange are required to apply EU-adopted IFRS when producing consolidated accounts. In the UK, this means any company listed on any of the markets of the London Stock Exchange. Individual subsidiary companies are not yet required to prepare financial statements under IFRS.

At present, only the types of company detailed above are required to adopt IFRS. However, even companies not required to do so can choose to adopt these new standards. A company that chooses to use IFRS to produce its accounts for one financial period cannot change back to UK standards in the following years. There are limited exceptions to this, such as if the company becomes a subsidiary of a group that uses UK standards as opposed to IFRS, in which case the company can revert back to using UK standards.

UK companies were required to adopt a new financial reporting framework for accounting periods beginning on or after 1 January 2015 when the extant FRSs, SSAPs and UTIFs were withdrawn from UK GAAP.

The new framework has been updated to achieve greater convergence with international standards and is split into three tiers (based on public accountability and size) for financial reporting purposes.

Listed and AIM companies must use IFRS in their group accounts AIM companies because the listing rules require it and full listed companies because regulations require that all companies listed on an EU regulated market use IFRS, as adopted in the EU, in their group accounts.

Other entities that are not required to use IFRS had the following choices:

• IFRS – any entity, except a charitable one, can adopt IFRS if they wish.

• FRS 101 – (‘IFRS’ with reduced disclosures) - this is only available to subsidiaries of parent companies who have adopted IFRS, and it allows the subsidiaries to adopt IFRS but with reduced disclosures;

• FRS 102 – the standard that has replaced UK GAAP;

• FRS103 – Insurance contracts is a fourth standard added to the framework which is relevant to entities that are applying FRS102 that have insurance contracts; and

• FRS105 – the financial reporting standard applicable to micro entities.

FRS103 should be applied by an entity that applies FRS102 and issues insurance contracts and/or holds reinsurance contracts. This FRS should also be applied to financial instruments (other than insurance contracts) that it issues with a discretionary participation feature.

“Small” companies/groups as defined by the Companies Act have previously had the option to use the FRSSE, for accounting periods beginning on or after 1 January 2015 FRSSE (effective 2015) has replaced FRSSE (effective April 2008).

The amendments to FRSSE primarily reflect that FRS 102 is replacing existing SSAPs and FRSs from January 2015. The key differences between FRSSE (effective April 2008) and FRSSE (effective 2015) are as follows:

• An annual assessment is required of whether there are any indications of impairment of any assets.

• If unable to make a reliable estimate of the life of goodwill or intangible assets the maximum life shall not exceed five years (changed from 20 years).

• The definitions regarding related party transactions and key management personnel have been aligned with FRS 102.

• The exemption for disclosure of intra-group related party transactions where any subsidiary party to the transaction is 100% owned by the group has been included.

FRSSE (effective 2015) will be withdrawn from 1 January 2016 at which point companies/groups that are “small” but not “micro” (meaning they cannot apply FRS 105) may use FRS102 for smaller companies.

FRS102 for smaller companies (which is an amendment to FRS102 by way of a new section 1A for small entities) requires entities to apply the full recognition and measurement principles contained in FRS102, but retain presentation and disclosure requirements that are appropriate to a small company.

Companies that meet the “micro” criteria have the choice of applying FRS105 for micro entities. For a company to qualify as micro-sized, at least two of the conditions below must be met:

• Turnover must be less than £632,000;

• Net assets less than £316,000;

• Average number of employees less than 10.

For a company to be eligible to apply FRS105 it can not meet any of the following criteria:

• Companies excluded from the small companies regime;

• Financial institutions including credit, insurance and banking institutions;

• Charities;

• Small parent companies who choose to prepare consolidated financial statements;

• Companies that are included in consolidated financial statements; and

• Public companies.

FRS105 is effective for accounting periods commencing on or after 1 January 2016 which means that there will a one year period where “micro” companies that have previously applied FRSSE (UK GAAP applicable to smaller entities) will have to adopt FRSSE (effective 2015) or FRS102 for smaller companies before FRS105 becomes effective.

FRS105 requires only two primary statements and the information contained on these primary statements will be condensed. Amongst other simplifications assets can not be measured at fair value or at revaluation under FRS105.

As before FRS105 and FRS102 for smaller companies are not mandatory and a company could in...

Table of contents

• Cover
• Title
• Foreword
• Part Three: Operating a Business and Employment in the United Kingdom