Monthly Archives: May 2018

Shareholders and partnership agreements

When entrepreneurs start a business together, it’s often a good idea to draw up an agreement beforehand. The following is a non exhaustive list of items you may want to consider when drawing up an agreement.

1) Profit split

It’s important to consider at the beginning how the business will share out profits between the partners. You may want to make allowance for partners putting in more of their own money, time or contacts. There are various ways of achieving this; for example paying interest on loans; preference shares; or an adjustment to the shareholdings; or use of differential share classes. We can advise on the full implications of each approach so you can choose what works best for you.

2) Work split

When one partner will retain an existing job, while another will work on the business full time, it’s advisable to clarify expectations with each other. Long holidays can be another source of controversy.

3) Voting rights

It’s possible to have profit share splits differ from voting share splits by using differential classes of shares. We can advise on how this can be done using differential share classes or by other means.

4) Exit strategy

What happens if the partnership doesn’t work out? Can one partner sell their share in the business to a third party? What happens if someone dies or wants to retire? We always recommend you agree on how to handle a worst case scenario gracefully.

One popular approach is to agree to appoint an independent valuer in certain situations so that the exiting partner’s interests are bought our by the existing partners. We can act as independent valuers.

5) Banking access

Partnerships are built on trust. But that doesn’t mean you cannot mutually agree to sensible controls – perhaps requiring two signatures to pay more than a fixed amount. Being a bank signatory is a highly responsible position. In an otherwise equal partnership, if one individual is a bank signatory, and the other is not, it is a significant asymmetry which may cause controversy later – we would suggest that finance is for everyone.

6) Drawings

As well as agreeing on profit split, it’s important that partners agree on when those profits will be drawn from the business and paid to themselves personally. A common arrangement is to draw anticipated profit share by monthly standing order, with a periodic distribution once the accounts have been drawn up and the precise position of each partner is known.

Expenditure on items like business entertaining and company cars can be a problem, and it’s advisable that partners agree boundaries with each other.

7) Control over expenditure

We suggest that partners may want to think about what decisions are so important that they need to be taken together. For example, hiring staff, changing bankers, or signing contracts committing the company to a level of spending over a set amount could all be items covered in a partnership agreement

You may wish to seek expert legal advice rather than drawing up your own DIY agreement – the law is full of surprises.

Dormant companies

Category : Accounting

What are dormant companies?

A dormant company is a company which does not carry out a trade. To qualify as dormant, a company must either be non trading in its first year of existence, or otherwise be non trading for two consecutive years.

What difference does being a dormant company make?

Dormant companies can file simplified single page accounts, and are exempt from audit even if they are part of a group which requires auditing.

What level of activity constitutes trade?

It’s not clear. A maximalist interpretation would find that the company trades if it incurs expenses, even if those expenses are settled by the shareholders. As every company pays an annual £13 filing fee, that would preclude any company from being dormant – so this interpretation is clearly not accepted in practice.

A more reasonable interpretation would find that a company is dormant if:-

  • All its expenses were paid by the shareholders. Even a minimal level of expenditure settled from the Company’s own resources – for example bank charges – would probably taint the dormant status.
  • It did not engage in trading activity (for example, advertising or promotion as well as making sales or incurring expenses). There will be edge cases where judgement needs to be applied.
  • Expenses paid by shareholders were purely of a recurring type such as filing fees and accountant fees necessary to maintain the company in its existence.
  • Often, but not necessarily, dormant companies have no equity other than share capital.

Note that the definition of a trading company for accounting purposes differs from that used for tax purposes.

Can a dormant company hold assets which do not generate income

Companies holding assets such as investment properties seem not to be regarded by Companies House as dormant . The online form that Companies House provide to file dormant accounts allows for only two types of asset in a dormant company – cash, or unpaid share capital owned by the shareholders.  Ultimately it is however a matter of judgement. If the investment property earns rent, clearly the company is not dormant.

FRS105 Micro-entity Accounts

Category : Accounting

Do you like to understand the detail behind your annual accounts? At Somers Baker Prince Kurz we like to take the time to explain what we do (we’re accountants after all) to our clients, so that the accounts are meaningful and useful documents rather than an administrative drudge.

The UK government has recently introduced a relaxed accounting standard for “micro entities”. This allows smaller business to produce shorter, more readable accounts without pages of complicated accounting policies and detailed notes on small points.

What is a micro-entity

The three main criteria are: –

  1. Turnover of no more than £632,000
  2. Gross assets (i.e. – without subtracting any liabilities) of no more than £316,000
  3. No more than 10 employees

Two of these three criteria need to be met for two consecutive years (for a newly incorporated company it suffices to meet the criteria in its first year). There are certain companies which cannot qualify as micro-entities regardless of their size: –

  • Members of a group preparing group accounts.
  • Investment undertakings
  • Financial holdings undertakings
  • Credit institutions
  • Insurance undertakings
  • Charities

What is FRS 105?

FRS 105 is the Financial Reporting Standard applicable to the Micro-entities Regime, issued by the Financial Reporting Council (FRC).

How do micro-entity accounts differ from other accounts?

There are two broad categories of difference between micro-entity accounts and other small company accounts:

Valuation differences

The starting point for assets valuation is the original cost , and never at their current market value. This is particularly significant for companies with holdings of publicly traded shares and investment properties.

Where the tax valuation (“tax base”) and the accounts valuation (“net book value”) of an asset differ, there is no need to calculate the “deferred tax” effect of the difference.

For example, if some publicly traded shares purchased by the company have increased in value between the purchase date and the financial year end, there is no need to account for either the increase in value of the shares or the tax that would be payable had the gain in value of the shares been crystallised.

Disclosure differences

The format of micro-entity accounts is quite rigidly set out in law (Section C of Part 1 of Schedule 1 to the Small Companies Regulations) . There are no detailed notes of various items – for example splitting current assets between trade receivables, cash held, and other debtors. The only notes required are for matters specifically required under the Companies Act 2006: –

  • Cash advances, credits or guarantees made by the company in favour of the directors (where the director has lent money to the company, this need not be disclosed). Detailed information must be given on the the
    • Amount.
    • Interest rate.
    • Other main terms of the transaction.
    • Amounts written off, waived or repaid.
  • Other guarantees, contingencies or potential liabilities that the company may be exposed to.

FRS 105 accounts do include a profit and loss (or income) statement, but this can be removed (“filleted”) from the accounts filed publicly at Companies House.

What are the advantages of FRS 105?

FRS 105 accounts are less technical  and easier to prepare and understand.

What other accounting standards apply to UK Companies

Use of FRS 105 for qualifying companies, LLPs, partnerships and sole traders is optional but not compulsory. These entities can optionally choose to adopt FRS 102 section 1A.

  • The accounting standard applicable for small companies is FRS 102 section 1A.
  • Medium or large private companies and groups apply full FRS 102.
  • Publicly trading groups report using “EU adopted IFRS”
  • The subsidiaries of these groups can use FRS 101 or full EU adopted IFRS.

Making Tax Digital

What is making tax digital for business?

It’s a government scheme to change the way that accounting information is recorded and transmitted to HMRC.

How does it affect my business?

The earliest impact on businesses will be the requirement for VAT registered businesses to file their vat returns using Making Tax Digital (MTD). This means that you will need to do your bookkeeping and vat returns on MTD compliant software, and you can no longer use the existing (free) HMRC website.

What do I need to do?

You need to work with your software provider to ensure that the software will be compatible with MTD. If your bookkeeping software will not be compatible, you will need to change providers.

Can I carry on using my existing bookkeeping software and just put summary totals into the MTD compliant software to file my return?

No. HMRC require that the MTD system must have digital access to the underlying transactional records. Automated (API) links between existing software and an MTD compatible system are acceptable and may be useful for individuals with specialised or excel software.

Typing in summary totals with your digits does not count as a digital link!

When does it start?

The changes take effect for VAT returns covering a period beginning on or after 1 April 2019.

How can SBPK help?

We are delighted to be able to offer you training on a variety of modern cloud and standalone systems which are compatible with Making Tax Digital.

We can help move your data over from legacy systems to newer MTD compatible systems.

We also provide a complete outsourced bookkeeping and VAT service which will of course be MTD compliant.

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