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Companies House reforms to clamp down on fraud
On 9 December 2020, the government launched three consultations in respect of Companies House and the register of companies. Steve Collings reports on the notable points raised in the government’s consultation on Companies House reform.
These consultations aim to support reforms to prevent fraud and give businesses greater confidence in transactions.
Under the proposals, directors will not be able to be appointed until their identity has been verified and the registrar’s powers will be increased so that it can query, investigate and remove false or inaccurate information. The proposals aim to crack down on fraud and money laundering and provide businesses with increased confidence.
The three consultations are:
- Improving the quality and value of financial information on the UK companies register
- Powers of the registrar
- Implementing the ban on corporate directors
This is the first of three articles which will look at some of the detail in the proposals and will examine some of the most notable aspects of the consultation including reducing filing deadlines and issues in respect of the financial statements for small and micro-entities.
Improving the quality and value of financial information
The first consultation, which closes for comment on 3 February 2021 (see conclusion below for details on how to respond to the consultation), sets out planned reforms of Companies House to ensure that it is fit for the future and continues to make a valuable contribution to the UK’s business environment. These reforms will give Companies House a more effective role in assisting the government’s wider efforts to tackle economic crime by improving the integrity of the information made publicly available about companies and other business entities.
This consultation sets out proposals under three themes:
- How information is submitted to Companies House
- What information should be filed at Companies House
- What Companies House does with this information
Part A of the consultation focuses on how information is delivered to Companies House. It proposes to require financial statements to be delivered digitally and to introduce full tagging of accounts. It also seeks views on reducing the filing deadline for accounts.
The proposed approach is a ‘file once with government’ approach. This approach aims to reduce the burdens on companies and increase the efficiency and effectiveness of government agencies in regulating, monitoring and preventing fraudulent activity.
Suggestions on the ‘file once with government’ approach include adopting a centralised accounts submission standard which would ensure all government bodies receive identical information through the use of one portal. The consultation also looks at certain options that may include:
- Enabling companies to file their accounts in one central place and for all government bodies to extract the information they need from that central source; or
- Developing technology that would send the relevant information to each government organisation at the relevant time.
Section 2 of Part A focuses on mandating digital filing of the financial statements. The consultation acknowledges that requiring all financial information to be delivered in a digital format is a critical step towards companies being able to file their financial information once across government and is also critical in ensuring proposals referenced elsewhere in the consultation can be achieved.
Companies House confirmed that in 2019/20 they received just less than 7,000kg of paper each month. The consultation therefore acknowledges that digital filing will reduce the volume of paper used by both Companies House and the preparer.
Tagging of financial information
Fully tagged financial reporting in iXBRL format has been mandatory for filing accounts with HMRC since 2016. The consultation proposes to mandate financial information to be fully tagged for filing at Companies House and states that this is an important first step towards any future plans for companies to be able to file once with government.
Companies House also plans to validate more tags than it currently does which means that more checks will be performed on financial statements when they are filed. The consultation proposes that if they do not meet the required standard, the accounts will be rejected and the checks carried out will be aligned as far as possible with HMRC.
Reducing the filing deadline
The consultation acknowledges that most companies file their accounts digitally anyway and, in future, Companies House wants all companies to file digitally. In light of this, Companies House is proposing to reduce the filing deadline. At the present time, due to Covid-19, filing deadlines have been temporarily increased up until 5 April 2021 but in a non-Covid-19 environment the filing deadline for public companies is six months from the reporting date and for private companies is nine months from the reporting date.
Suggestions to reduce the filing deadline ranged from three to six months from the end of the reporting period. The consultation is seeking views on shortening the time allowed to submit accounts to Companies House – in particular it wants views on what the impact would be if the filing deadline were shortened to three months for public companies and six months for private companies from the end of the reporting year.
What is to be filed at Companies House?
Part B of the consultation asks whether further information may improve the value of the register. The government proposes that company directors should confirm the company’s eligibility to file certain types of accounts and is seeking views on revising the small company accounts filing options.
The consultation acknowledges that the company directors are ultimately responsible for ensuring the financial information lodged at Companies House gives a true and fair view of the financial position of the entity. The government therefore proposes to implement a requirement for accounts to include a declaration of eligibility which is signed by the director(s).
This declaration will require all three threshold conditions (turnover, balance sheet total and employee numbers) to be disclosed by all companies (although the government are still considering whether these thresholds disclosed in the company’s declaration should be made available on the public register and wants views on the publication of this information). The director(s) will also confirm that the company meets the threshold conditions to file under the filing regime adopted.
In the case of dormant accounts, the declaration will include confirmation that the company is not trading and meets the criteria to file dormant accounts (ie it has no significant accounting transactions).
The proposal is that the declaration need only be signed by one director. However, all directors will be liable in the case of a false statement. Sanctions for false declarations may include fines and/or criminal sanctions or director disqualification. It should be noted that the registrar’s powers are also being increased within the consultations and these will be examined in the next article.
However, there will no longer be an obligation on the part of the registrar to accept documents that, on the face of it, appear to be compliant with the requirements of the law.
Companies House plans to introduce validation checks to ensure the threshold conditions match the requirements for the filing regime used.
Small companies filing options
Since the abolition of the ‘abbreviated accounts’ regime, small companies have had some degree of flexibility afforded to them in terms of what they can currently file at Companies House. They can file the full accounts, ‘filleted’ accounts or ‘filleted abridged’ accounts. The two most commonly filed accounts for companies at the smaller end of the scale are filleted and filleted abridged accounts because these contain the minimum amount of information required for Companies House purposes.
Many respondents to previous consultations have argued that the information lodged by companies at the smaller end of the scale, including micro-entities, provides little value and have questioned whether it is right for a company to obtain limited liability protection while providing such minimum financial information. Some respondents have argued that all companies should file a profit and loss account.
There have also been suggestions that as more detailed financial information is supplied by small entities to HMRC and banks, that same level of information should also be made available on the public register. This could generate a lot of debate.
Since its introduction, the micro-entities regime has been taken up by many micro-entities. The information on the register for micro-entities is very limited and the consultation suggests that the level of information provided in a micro-entity’s financial statements lodged with Companies House potentially deters lenders and credit agencies from agreeing finance for companies that file such accounts. The consultation confirms that a study published by Cardiff University concludes that “there is systemic evidence that the credit scorer penalises companies which file micro-entity abbreviated accounts”.
Companies House also stated that it has evidence that the micro-entities regime introduced in 2013 is not being applied correctly. Some entities are reporting as a micro-entity when they are not entitled to do so. Companies House suggests that this may be because companies do not understand the eligibility criteria or are confused by the range of filing options available.
In addition, Companies House also suggests that fraud investigation bodies have reported that micro-entity accounts are often used by companies that are investigated in money laundering cases.
The government is therefore proposing to review the filing options that are made available for small entities with a view to reducing the number of options and making the filing process easier while, at the same time, increasing the value of the register.
This first article has examined some of the more notable points raised in the government’s consultation on Companies House reform. The consultation closes on 3 February 2021 and you can respond to the consultation in three ways:
When responding, please state whether you are responding as an individual or representing the views of an organisation.