Dealings between a company and the people who run it are not always at arm's length. This note tells readers about transactions with related parties so they can judge whether the figures were affected.
What this note shows
A related party is, broadly, a person or entity that controls or significantly influences the company, or is controlled by someone who does. For a typical small company that means the directors and their close family, any controlling shareholder, a parent company, and other businesses those people control.
Under FRS 102 Section 1A (paragraph 1AC.35), a small company must disclose material related party transactions that were not concluded under normal market conditions: the amount, the nature of the relationship and other information needed to understand the transaction. Transactions with wholly owned group members do not need to be disclosed. Section 1A also encourages small companies to give the fuller related party disclosures in FRS 102 Section 33, so many accountants disclose material transactions even where they were on normal terms — as the demo company does.
When you need the note
- A director's loan account — money owed by or to a director, especially interest free — is the most common reason. An interest-free loan is not on normal market terms.
- Rent paid to a director for premises they own, or sales and purchases with a company a director controls.
- Management charges or loans between companies under common control.
A loan the company has made to a director is also disclosed in the loans to directors note, which Companies Act 2006 s413 requires. Many accountants give both; at a minimum, make sure the loan is covered somewhere.
Where the figures come from
This is a text note. Nothing is pulled from the trial balance; you write the description and amounts yourself, usually from the director's loan account and the nominal ledger for any related company.
The directors' loan warning
When the accounts are checked, Tax Optimiser looks at the “Directors loan accounts” balances in the trial balance (whether the director owes the company or the company owes the director). If there is a balance and neither the related party transactions note nor the loans to directors note is switched on, a warning appears in the validation messages:
“The trial balance has a directors' loan balance of £… but neither the related party transactions note nor the loans to directors note is included. Check whether it needs to be disclosed.”
Switching on either note clears the warning. It is a reminder, not a block on filing — see Validation and signing.
Completing the note in Tax Optimiser
- Open the period, choose View Accounts, then Notes.
- Select Transactions with related parties, then the Related party transactions section, and set Show this note in the accounts to Yes.
- Click Use Template and pick the wording that fits, or type your own. If there are several related parties, apply a template, then add further sentences by typing them below (applying a second template replaces the text).
- Click Save changes.
Wording templates
The company name, period end date and a director's name are filled in automatically; you are asked for anything else.
- Transaction with a director-controlled entity — trading with a company a director controls. Asks for {{TransactionValue}}.
- Transaction with a related party — any related party, with the reason they are related. Asks for {{RelatedPartyName}}, {{Relationship}}, {{TransactionValue}} and {{BalanceOutstanding}}.
- Loan from a director (interest-free) — money the company owes a director, with the prior year balance. Asks for {{BalanceOutstanding}} and {{PriorBalanceOutstanding}}.
- None requiring disclosure — a statement that there were no related party transactions requiring disclosure.
The general template ends “Transactions were carried out on an arm's length basis.” Delete that sentence if it is not true — a transaction that was not on normal terms is exactly what the note needs to make clear.
How it appears in the accounts
The note prints under the heading “Transactions with related parties” as plain text.
Frequently asked questions
Do small companies have to disclose related party transactions?
Yes, if they are material and were not concluded under normal market conditions (FRS 102 paragraph 1AC.35). Fuller disclosure is encouraged but not required.
Is a director's loan a related party transaction?
Usually, yes. A director is a related party, and an interest-free loan is not on normal market terms. A loan to a director must also be shown in the loans to directors note.
Why am I getting a warning about a directors' loan balance?
The trial balance has a balance on a directors loan account, but neither this note nor the loans to directors note is switched on. Switch on the note that applies, or check the balance is right.
Do I need to name the related party?
Give enough for a reader to understand the relationship. Naming the director involved, as the templates do, is normal practice.
Are dividends paid to directors a related party transaction?
Dividends paid to shareholders in proportion to their shares are distributions shown in the dividends note, and are not usually described here.