Related party transactions must be disclosed in your company accounts as required by law. This article focuses on the common related party transactions exist in small companies.
Related party definition
The Financial Reporting Standard (FRS) 102 defined a related party is a person or his/her close family who has control or jointly control, or significant influence over or is key management personnel of a company. Any transactions between this person and the company are classified as related party transactions.
Transaction with directors is a related party transaction
Say, you and your spouse are the directors and also the shareholders of your limited company. During the year, you provided an interest free loan to your company of £18,000 to pay for your office rent of £15,000, bought an office equipment cost £3,000 because your business has yet generated sufficient fund to be independent by itself.
Assuming your company still owe you £18,000 at your balance sheet date, in your company accounts, you would disclosure the following.
The ultimate controlling party of the company are Mr. YOU and Mrs. YOU who are the directors and shareholders of the company.
At the end of the year, the company owed the director, Mr. YOU an amount of £18,000. (2020, £0). It is an interest free loan.
People with significant control over your company
Say, you and your spouse are the directors and shareholders of the company. Your father in law does not legally own the company or has his name put down as the company director or shareholder but he has the authority and responsibility over how your company should operate. In other words, you and your spouse run the company under his instructions. In this instance, your father in law is the person with significant control of your company and you must disclose this fact in your company accounts and also in your confirmation statement.
Correspondingly, you must also keep and maintain the PSC register.
Companies under common control
Say, you are the sole director and sole shareholder of a limited company A and also of a limited company B. During the financial year, you paid a legal fee of £600 on behalf of company B using Company A’s money. You must disclose this transaction in your company accounts as follows:
At the end of the year, the company paid a legal fee on behalf of company B an amount of £600. Company B is also under the common control of Mr. YOU.