Posted on March 16, 2022  
by Noel Guilford

This is important news for all small companies; at the moment small companies can file abbreviated accounts – just a summary balance sheet and NO profit and loss account. This means we get to keep a secret the detailed information about running of our businesses, including sensitive areas like turnover, gross margin, staffing ratios, overheads etc.

But to help combat economic crime proposed changes in company law going through parliament mean small companies will have to file full accounts in future.

This is being rushed through now in response to the Ukrainian crisis to help the imposition of sanctions and reduce organised crime and money laundering. 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, however, on those who are not money launderers – but just law-abiding business people with registered companies, together with their accountants – is potentially significant. It also means any competitor will be able to look at your business in far more detail.

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 government needs 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 Mickey Mouses 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.

Transparency in annual filings

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.

Abridged and ‘filleted’ accounts

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.

Simplicity vs privacy

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.

Economic crime

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.

Results of the reform

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. We don’t know when this will be, but it will be soon.

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Noel Guilford

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