Companies House reform will add unnecessary red tape

Hillier Hopkins LLP

Chartered Accountants & Tax Advisers

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Proposals by the Government to reform Companies House look to promote greater transparency, combat fraud and corruption, and tighten money laundering measures. They will also add unnecessary red tape on already hard-pressed small and growing businesses.

The Government in February published its long-awaited White Paper setting out its aims on the reform of Companies House. It is a detailed proposal highlighting 58 separate and often technical areas that it believes need to change. Draft legislation is expected to shortly follow.

Its headline proposals include:

  • All new and existing company directors, Persons with Significant Control (PSC) and anyone else submitting filings will need a verified account at Companies House.
  • All companies will be required to file fully tagged digital accounts.
  • Small companies will no longer have the option to prepare and file abridged accounts and will be required to file both a profit and loss account and directors’ report.
  • Micro-entities, businesses with a turnover of under £600,000, will also be required to file a profit and loss account but do not need prepare or file a directors’ report.
  • Increased powers for Companies House to enable more investigations and challenges of filings.

There is much to be applauded in the proposed reforms and there is little doubt that greater transparency in the finances of businesses is welcome. But many small and growing businesses will ask whether many of its measures are necessary, adding unnecessary red tape when Government has promised a post-Brexit “bonfire” of regulation.

Engines of the economy

There are 4.4 million companies registered at Companies House with some 650,000 new registrations each year. The Government in its White Paper recognises that the “vast majority” of these “are small or micro businesses”.

Small businesses are the engines of the UK economy, employing three-fifths of the UK workforce contributing 50% of the turnover of the private sector. They need to be nurtured and supported if they are to flourish and grow. A fair and proportionate regulatory regime underpins that.

It is not without a degree of irony that one of the great promises behind our decision to leave the European Union was a ‘bonfire’ of red tape that ties UK businesses in unnecessary knots. And yet this white paper proposes exactly the opposite.

Let us look at a few of the proposed measures.

Full digital accounts

The White Paper will see small businesses no longer able to file abridged accounts, having to file both a profit and loss account and directors’ report.

At first glance this seems straightforward – businesses already create a profit and loss account and directors’ report in their annual report and accounts for the benefit of HMRC and shareholders. Simply filing with Companies House is no additional burden.

The issue at stake is not the additional burden, but why such a move is necessary and how that additional information will be used? There is no indication in the White Paper of how this information will be used by Companies House or why it will help combat fraud.

There is no public interest in making full reports and accounts open to the wider public: in fact, the only organisations that are likely to benefit are the privately-owned credit rating agencies. It appears that the Government is simply collecting data for no benefit or reason.

That accounts will need to be tagged and filed digitally adds yet a further layer of complexity and red tape with a considerable cost burden for small owner-managed businesses. Again, the proposals do not explain how this will help combat fraud and tighten the net on money laundering.

Companies House Verification

The proposals will require all company directors or Persons with Significant Control to create a verified account at Companies House – supported by photo ID. It is again, on the face of it, a sensible sounding proposal.

Putting aside the question of whether it is effectively an ID card scheme for businessmen and women, there is no explanation of who will be responsible for ensuring these accounts are valid and will do little to deter the most determined of individuals with criminal intent.

The Government appears to be focusing its efforts on tackling fraudulent and criminal behaviour on a greater use of technology that simply does not yet exist.  Historically, the government’s road to “world-beating” technology is littered with highly expensive failure, which does not fill us all with confidence.

Increased investigatory powers

There can be no doubt that Companies House needs greater teeth to hold rogue directors to account, and these proposals are to be welcomed.

These powers need, however, to be matched with a significant increase in the number of qualified individuals employed by Companies House to lead those investigations. They will need to be led by qualified accountants.

The sector is seeing an increasing demand for qualified accountants in both private practice and in growing businesses and a shortage of suitable individuals. Where these individuals will come from and how they will be funded is not explained.

Reform and thresholds

Broadly, we welcome these proposed reforms of Companies House. There is without doubt a need for greater transparency and better reporting. But in these proposals, the Government has taken the proverbial sledgehammer to crack a nut. The question of proportionality needs to be readdressed.

In the eyes of the Government a micro business can turn over up to £600,000 a year and a small business up to £10.5m. Whilst many of these proposals when applied to a £10m turnover business will make perfect sense, the same cannot be said to a business with a turnover of under £1m.

The Government, remembering its promise to remove red tape and to make the UK more business friendly, might want to rethink who falls inside these proposed reforms.

If you have any concerns about the above please get in touch with one of our experts on hi@hhllp.co.uk or +44(0)330 024 3200.

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Jonathan Franks

Jonathan’s 30 years in practice have been devoted to looking after owner-managed and family businesses, whether as auditor, accountant, or adviser on corporate transactions.

Contact Jonathan at jonathan.franks@hhllp.co.uk or on 020 7004 7110