Founders' Guide to Related Party Disclosures in UK Statutory Accounts

Understanding Related Party Disclosures in UK Statutory Accounts

For an early-stage founder, the line between personal and company finances can often feel blurred. You might pay for a critical software subscription on a personal card to get the business running, or an angel investor who is also a specialist might offer their services. These transactions are a normal part of the startup journey, but they create a non-negotiable compliance task for your UK company accounts: related party disclosures. Getting this wrong isn't just a minor bookkeeping error. Omitting or misidentifying these transactions can lead to delays in your year-end close, challenges from auditors, and even penalties from Companies House. This guide breaks down how to report related party transactions in UK company accounts, transforming a compliance headache into a straightforward process. For broader context, see the Statutory Financial Reporting hub.

What Counts as a Related Party Transaction?

Before you can report these transactions, you must first identify them. The rules exist to ensure transparency for shareholders, lenders, and other stakeholders, showing them that the company’s assets are not being used to unfairly benefit insiders. This transparency is fundamental to good corporate governance and builds trust with potential investors and regulatory bodies.

The Governing Standard: FRS 102

The primary guidance for UK small companies comes from FRS 102, the UK’s financial reporting standard. "Related party disclosure rules for UK small companies are primarily governed by FRS 102, specifically Section 1A." (FRS 102 Section 1A). For more detailed requirements, the comprehensive standard is "FRS 102 Section 33." (FRS 102 Section 33). These sections outline who qualifies as a related party and what information must be disclosed in your statutory accounts.

Who Is a Related Party?

A ‘related party’ is a person or entity connected to your company with the potential to influence its financial and operating decisions. For most pre-seed to Series B startups, this typically includes:

• Directors and key management personnel: This covers anyone with authority and responsibility for planning, directing, and controlling the company's activities.
• Their close family members: This includes spouses, children, and other dependents who may be expected to influence, or be influenced by, that person in their dealings with the company.
• Significant investors: In practice, "Key investors are typically considered related parties if they have significant voting rights, often defined as 20% or more, or hold a board seat." This is because their position gives them significant influence over company policy.
• Other companies controlled by any of the above individuals: If a director or major shareholder also owns another business that transacts with your startup, that business is also a related party.

What Is a Related Party Transaction?

A ‘related party transaction’ is any transfer of resources, services, or obligations between your company and a related party, regardless of whether a price is charged. This is a broad definition that captures not just sales and loans but also non-cash support. Common examples include loans, sales of goods or assets, providing or receiving services, or guaranteeing a loan on behalf of the company.

Three Common Scenarios for Startups and How to Report Them

Theory is one thing; day-to-day operations are another. Let’s explore the three scenarios that cause the most confusion for founders and how to manage your director transactions reporting correctly.

Scenario 1: The Founder Loan and the Director's Loan Account (DLA)

This is the classic startup situation. Your SaaS company needs a new server, or your e-commerce brand needs to pay for initial inventory, but the company bank account is low. You pay for it on your personal credit card. You have just created a loan from you (the director) to the company, a common subject of founder loans disclosure.

How to Handle It: Using the DLA

Scrambling to locate payment evidence for these transactions at year-end is a major pain point. The solution is to track it systematically from day one in your accounting software, such as Xero. This is managed through a Director’s Loan Account (DLA). The DLA is not a bank account; it is a ledger account within your company’s books that records all money flowing between a director and the company that is not salary, dividends, or direct expense reimbursement. When you lend the company money, the DLA is credited (the company owes you more). When the company repays you, the DLA is debited.

Best Practice and Disclosure

While tracking in Xero is essential, formal documentation is crucial for larger sums. A scenario we repeatedly see is founders neglecting to create a paper trail, which complicates the year-end process and can look unprofessional to auditors. It is important to know that "For director loans or other related party amounts over £10,000, a formal loan agreement is considered best practice." This agreement should outline the amount, interest rate (if any), and repayment terms, providing a clear audit trail.

Use the Notes to the Accounts templates for detailed disclosure examples.

Example Disclosure Note:
Related Party: Jane Doe
Relationship: Director
Description of Transactions: The director provided an unsecured, interest-free loan to the company to assist with short-term working capital requirements. Repayments are made as cash flow permits.
Amount of Transactions in Period: £15,000 advanced to the company.
Amount Outstanding at Year-End: £12,500 owed to the director.

Scenario 2: The Investor Providing Specialist Services

Imagine a Deeptech startup has an angel investor who is also an expert in regulatory submissions. They offer their consulting services to help the company prepare a grant application. This transaction goes beyond their initial equity investment and must be evaluated and reported as a related party transaction. This is a key area of investor transactions in accounts that requires careful handling.

How to Handle It: The Arm's Length Principle

The core principle here is that the transaction should be conducted at ‘arm’s length’. This means the terms and pricing should be the same as if the company were dealing with a completely independent third party. Mispricing these transactions can attract scrutiny from HMRC, who might reclassify them and create unexpected tax liabilities. For example, if services are provided far below market rate, HMRC could view the discount as a form of payment or benefit, triggering tax consequences.

If the investor provides the service at a market rate, you simply need to disclose it. If it is provided at a discount or for free, this also needs to be disclosed as it represents non-cash support. The best way to handle this is to have the board formally approve the arrangement, documenting why it is in the company’s best interest and providing evidence of how the price was determined to be at arm's length (e.g., by comparing quotes from other suppliers).

Scenario 3: Non-Standard Director Expenses and Benefits

Standard, receipt-backed business expenses reimbursed at cost, like travel for a client meeting or a software subscription, are a normal part of business and do not typically require a separate, detailed disclosure note. The same goes for salaries paid under a formal employment contract. The reporting requirement kicks in for transactions that fall outside these norms.

How to Handle It: Separating Business from Personal

Consider a Biotech founder who receives a large, one-off bonus that was not tied to their employment contract, or the company pays for a large personal item like a family holiday. These transactions would need to be disclosed. The key distinction is between standard remuneration, which is disclosed in aggregate, and exceptional transactions that could be seen as benefiting the director beyond their agreed compensation package.

To avoid confusion and a messy DLA, it is vital to have a clear process for expenses. Using tools like Pleo or Soldo, which integrate with Xero, can create a clean and defensible audit trail. They allow you to issue company cards with set limits and capture receipts digitally, ensuring that only legitimate business expenses are recorded as such and preventing the accidental mixing of personal and company funds.

The Disclosure Checklist: How to Report Related Party Transactions in UK Company Accounts

To prevent a last-minute scramble that risks missing filing deadlines with Companies House, you should have a clear record of all related party activity. Your accountant will need specific details to prepare the notes for your statutory accounts. The formal requirement is that "Required disclosure information includes: the name of the related party, their relationship to the company, a description of the transaction(s), the total amount of transactions during the year, and the amount outstanding at the balance sheet date."

Here is a practical checklist of what to gather for each transaction:

1. Who was involved? Collect the full name of the related party (e.g., John Smith, not just ‘John’) and their precise relationship to the company (e.g., ‘Director’, ‘Shareholder with 25% voting rights’, ‘Spouse of Director Jane Doe’). This establishes the connection clearly.
2. What happened? Write a clear, concise description of the transaction (e.g., ‘Unsecured loan provided for marketing expenses’, ‘Provision of marketing services’). This explains the nature of the dealing.
3. What were the financial details? Record the total value of all transactions with that party during the financial year and the amount of any outstanding balance at the year-end. Specify whether the balance is owed *to* or *by* the company.
4. What were the terms? Note any key terms and conditions, such as the interest rate on a loan, repayment schedule, or any security provided. If no formal terms exist (e.g., for an interest-free loan), this should also be stated to provide a complete picture.
5. What is the proof? Gather copies of any loan agreements, service contracts, invoices, or board minutes approving the transaction. This documentation substantiates the disclosure and is critical for audit purposes.

To make this practical, keep a single folder for these materials and record dates, approvers, and the rationale for any non-standard pricing. To avoid delays, consult the timelines in the UK Statutory Accounts Deadlines guide.

Practical Action Plan for Statutory Accounts Compliance

Staying on top of related party transactions isn't about becoming an accounting expert. It’s about implementing good financial hygiene that builds a strong, compliant foundation for your startup. Getting this right builds trust with current and future investors and ensures you meet your UK company accounts requirements.

Here is your action plan:

1. Maintain a Register of Related Parties: Do not wait until your accountant asks. Create and maintain a simple list of all your company's related parties. This includes all directors, key managers, investors with significant influence (typically 20% or more), and their close family. Review and update this register whenever your leadership team, board, or cap table changes.
2. Systematise Your Tracking: Relying on spreadsheets is a high-risk method prone to errors and omissions. Use your accounting software correctly. In Xero, create and use a separate Director's Loan Account for each director and reconcile these accounts at least monthly, not just at year-end. For expenses, implement tools like Pleo or Soldo to enforce your expense policy and create a clean data trail from the start.
3. Formalise and Document Everything: For any material transaction, create a paper trail. For director loans over £10,000, draft a simple loan agreement. For services provided by an investor, have the board approve it and document the basis for the pricing in the board minutes. This documentation is your best defence against any future scrutiny.
4. Understand the Stakes: Remember who is looking at this information. "Regulatory bodies concerned with these disclosures include HMRC and Companies House." Companies House requires it for corporate transparency. HMRC reviews these transactions to ensure they are commercially sound and that the correct amount of tax is being paid, preventing disguised remuneration or distributions.

Finally, always be mindful of your context. This guidance is specific to UK Statutory Accounts and FRS 102. Requirements can be very different in other places; for example, "it should be noted that requirements differ significantly in other jurisdictions, such as the US under US GAAP." See our comparison of FRS 102 vs FRS 105 for more on UK standards. For end-to-end filing processes, consult the Filing Statutory Accounts with Companies House guide.

Frequently Asked Questions

Q: Do salaries and dividends count as related party transactions that need detailed disclosure?
A: No. Salaries paid under a formal employment contract and dividends paid to shareholders are part of the ordinary course of business. While director remuneration is disclosed in aggregate in the accounts, individual salary payments and pro-rata dividends do not typically require a separate related party note.

Q: What happens if a director's loan account is overdrawn?
A: An overdrawn DLA means the director owes the company money. If this loan is not repaid within nine months and one day of the company's year-end, it can trigger a significant temporary tax charge for the company under Section 455 rules, which is payable to HMRC.

Q: Are transactions with another company I control also related party transactions?
A: Yes. If a director, key manager, or significant shareholder of your company also controls another entity, transactions between your company and that entity are considered related party transactions. They must be disclosed to ensure transparency about potential conflicts of interest.

Q: Is there a minimum transaction value that requires disclosure?
A: Under FRS 102, there is no specific de minimis threshold for disclosure. The guiding principle is materiality. However, for transparency and good governance, it is best practice for startups to disclose all related party transactions, regardless of size, to create a clear and complete financial record.