Companies House reforms will help combat economic crime, but micro and small companies lose options for abridged or filleted accounts and will have to report profit and loss (P&L) statements.
Russia’s invasion of Ukraine is a humanitarian disaster, but it also reminds us of the potential impact of sanctions, anti-money laundering regulations and the role of Companies House. We are seeing growing imposition of sanctions on Russia itself but also on Russian oligarchs, wherever they and their assets live.
If we are to successfully impose sanctions and identify suspicious activity that may be related to kleptocrats, organised crime gangs and other money launderers, we need to know what assets are held in which companies and who owns those companies. The government is therefore accelerating the planned changes to Companies House, having now issued its corporate transparency and register reform whitepaper with the detailed proposals, accompanied by a draft economic crime Bill.
The impact of these proposed changes on those who are not money launderers – but just law-abiding business people with registered companies, together with their accountants – is potentially significant.
To implement these changes Companies House aims to become a fully digital organisation. To increase transparency in annual filings there will no longer be options for abridged or filleted accounts for micro and small companies, removing some of the privacy previously enjoyed by these entities.
It is incredibly simple to set up a new company in the UK and there is no requirement to verify the directors’ identities. It is also incredibly simple to file almost anything, including micro-entity accounts, whether entitled to do so or not. In order to identify suspicious activity we need to know more about these companies.
Because Companies House aims to become fully digital, directors or their agents will have to file digitally tagged accounts, using iXBRL. Once information is tagged it can be easily searched and cross-referencing with data held by HMRC.
The registrar will have greater powers that will help in the fight against economic crime. Their role will be to promote and maintain the integrity of the register and they will have new powers to query information and share data with other authorities. The registrar can also apply fines when company directors or secretaries fail to meet their responsibilities and to remove incorrect information from the register.
If you are setting up a company or making filings, you will have to have a verified identity with Companies House (no more Donald Ducks listed as directors then!). There will also be restrictions on the use of corporate directors and officers, to maintain a direct link to natural persons.
Perhaps the most noticeable changes proposed for small and micro-entities (though not yet in a draft bill) will be the increased transparency required in annual filings. Evidence has suggested that data from micro-entity filing is of little value as it does not contain sufficient information to give a true and fair view of the financial position of the company. This fact also means that micro-entity filing options are attractive to fraudsters.
There is also complexity in the filing options, as many of you will fully appreciate, so the government will simplify the filing regime. There will be filing options for micro and small companies, but the options for abridged or “filleted” accounts will be removed.
Where all the shareholders agree, small companies can currently take advantage of the ability to abridge their accounts. This reduces the detail in the accounts that both shareholders and Companies House receive, compared to the basic small company provisions. The option for abridged accounts will now be scrapped.
Current requirements permit a small entity (including a micro-entity) to omit the profit and loss account and related notes, together with the directors’ report, when filing at Companies House. Removing this filleting option means that all companies will have to file a profit and loss account as well as a balance sheet and small companies will have to file their directors’ report. Micro-entities will retain an exemption from the requirement to prepare or file a directors’ report, however.
So, a win for simplicity, as the accounts to be filed will be exactly those that have been prepared for shareholders. It is also a win for companies that need credit, as under the current regime credit rating agencies can rarely gather sufficient information from Companies House to form an opinion on a small or micro-entity’s credit worthiness. The downside for many, is the loss of privacy due to the publicly filed profit and loss accounts, which will become another price of limited liability.
Restrictions on corporate directors, increased transparency of information, verification of identity and information sharing powers will give Companies House a much greater role in economic crime prevention and detection. Some of that will be around tax fraud, but much might be in relation to foreign “dirty” money and the laundering of the proceeds of organised crime.
These reforms are wide-ranging and we have only touched the surface, but when enacted they will have a significant impact on the publicly available information about a company’s performance, something many small business owners may find uncomfortable. However, the increased ability to tackle fraud and money laundering will benefit the economy as a whole and protect directors who are now vulnerable to identity theft.
The speed of implementation will vary, with economic crime issues likely to be rushed through given the current global situation, but with changes to the accounts taking longer. It is probably a good idea to start mentioning to clients the impending changes, so it isn’t such a shock when they finally arrive.