Starting a limited company means encountering terminology you may not have needed to think about before. From Corporation Tax and cash flow to registered offices, there’s plenty to become familiar with.
You don’t need to understand everything immediately, but knowing the following key terms can help you manage your company and meet your responsibilities with ease.
Turnover
Turnover is the total income your company generates from selling goods or services before any costs are deducted.
For example, if your company makes £50,000 in sales during the year, its turnover is £50,000. This shouldn’t be confused with profit, which is what remains after relevant costs have been taken into account.
Profit
Profit is the amount your company makes after relevant business costs have been deducted from its income.
For example, if your company generates £50,000 in sales and has £30,000 in costs, the difference is £20,000. You may also encounter terms such as gross profit and net profit, which measure profitability at different stages.
Cash flow
Cash flow refers to the movement of money into and out of your company.
Money may come in through customer payments and leave through costs such as stock, software, wages and supplier invoices. A company can be profitable but still experience cash flow problems if it doesn’t have enough money available when payments are due, which is why keeping track of when money actually enters and leaves the business is important.
Corporation Tax
Corporation Tax is a tax limited companies may pay on their taxable profits.
Your company is responsible for working out how much Corporation Tax it owes, reporting the relevant information to HMRC through a Company Tax Return and paying any tax due by the appropriate deadline.
VAT
VAT, or Value Added Tax, is a tax charged on many goods and services.
A company must generally register for VAT if its taxable turnover exceeds the current registration threshold, although businesses below the threshold can choose to register voluntarily.
Director, shareholder and PSC
A director is responsible for running a limited company and has legal duties relating to how the company is managed.
A shareholder owns shares in the company and may receive a share of its profits through dividends. In many small companies, the same person can be both a director and shareholder.
PSC stands for person with significant control. This usually refers to someone who owns or controls a substantial part of the company.
Registered office address
A registered office address is the official address of your limited company. It’s used for formal correspondence from organisations such as Companies House and HMRC and is shown on the public Companies House register.
Every UK limited company must have an appropriate registered office address in the same UK jurisdiction in which the company is registered.
Read our guide to registered office addresses and why you need one in the UK
Accounting period
An accounting period is the period of time covered by your company’s accounts.
You may also encounter terms such as financial year and tax year, which don’t necessarily refer to the same period. Knowing the dates that apply to your company is important when preparing accounts, calculating tax and keeping track of deadlines.
Annual accounts and Company Tax Return
Annual accounts provide a financial overview of your company for a particular accounting period. They include information about its financial performance and position and, in most cases, must be filed with Companies House.
A Company Tax Return is submitted to HMRC and contains information used to calculate how much Corporation Tax your company owes. Although the two can contain related financial information, annual accounts and a Company Tax Return are separate requirements with different purposes and deadlines.
Companies House and HMRC
Companies House incorporates limited companies and maintains the UK register of companies. It’s where companies file information such as annual accounts, confirmation statements and changes to certain company details.
HM Revenue & Customs (HMRC) is responsible for administering and collecting taxes. Depending on your circumstances, your company may deal with HMRC for Corporation Tax, VAT and PAYE.
Knowing the difference between the two organisations can make it much easier to understand where information needs to be filed and which deadlines apply.
Final thoughts
Becoming familiar with these terms will give you a useful foundation for managing your limited company, understanding its finances and keeping up with its responsibilities.
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