With risks including financial penalties, reputational damage and even disqualification, specialist contractor accountant, ClearSky Accounting, has put together its top tips on how to avoid falling foul.
1. You must meet all statutory filing requirements
As a company director, you are responsible for completing several accounting-related tasks each year, including submitting annual company accounts to Companies House and filing corporation tax returns to HMRC.
Failure to meet any statutory deadlines could result in a hefty fine. It is therefore imperative that Limited company contractors know when to produce and submit key documentation.
Many Limited company contractors enlist the help of a qualified accountant to eliminate such responsibilities, whilst also helping to ensure their company operates in a tax-efficient manner.
2. You must maintain accurate financial records
A willingness to invest time in maintaining up-to-date accounts and financial records is a key character trait of a successful Limited company contractor. Directors must have the ability to present a ‘true and fair’ view of their company’s financial position.
Failure to maintain detailed and accurate financial records could see your company come under scrutiny of the taxman, or result in you paying too much tax.
In the event of an investigation, HMRC has the power to examine a company’s financial records dating back six years. This highlights the importance of maintaining precise accounting records, including invoices, expenses receipts and bank statements.
3. You must make legal dividend payments
The ability to take control of your financial affairs is one of the major advantages of becoming a Limited company contractor.
To help maximise earnings, Limited company contractors may pay themselves both a salary and company dividends.
Legislation stipulates that all Limited companies must have sufficient profits to cover any dividends. Failure to comply could see these payments being treated as ‘ultra vires’, meaning you may be liable for costly repayments and even prosecution.
HMRC has also been known to class illegal dividends as employment income, meaning they become liable for income tax and National Insurance contributions (NICs).
4. You must not accept benefits from a third party
Directors of Limited companies are entitled to accept benefits as long as they create no conflict of interest. For example, you can accept tickets to a top sporting event that are offered in order to foster good relations, as long as your decision to accept does not compromise the integrity of your company or its business dealings in any way.
There is often a fine line between what is right and wrong, especially since the introduction of the Bribery Act. It is therefore crucial to implement a clear policy that sets appropriate standards on the acceptance of benefits.
5. You must comply with the Companies Act 2006
The Companies Act 2006 is a key piece of legislation that governs how a director should run their Limited company. In addition to the above responsibilities, directors must also:
- exercise their powers for proper purpose
- promote the success of the company by acting in its best interest
- exercise independent judgement
- exercise reasonable care, skill and diligence
- avoid conflicts of interest with third parties
- avoid risk and minimise any losses
Specialist help and advice
Meeting all of the legal requirements associated with being a Limited company director may seem like a daunting prospect, particularly with a number of laws designed to penalise those who act irresponsibly or incompetently.
Enlisting the help of a qualified accountant helps to alleviate any unnecessary burdens and ensure that you, as a company director, act honestly, competently and conscientiously.
This article was written by Daniel Mepham, accounting director for ClearSky Accounting.