Filing shake-up for small companies to go aheadby
Small companies will have to file a profit and loss account with Companies House following the passing of the Economic Crime and Corporate Transparency Act last week.
Plans for tighter rules over how companies report information to Companies House were given the green light last week, enabling the government to press ahead with the requirement for small companies (including micro-entities) to file a profit and loss account.
The passing of the Economic Crime and Corporate Transparency Act means that small companies and micro-entities will have to file a profit and loss account, with small companies having to also file a director’s report. This change ensures that turnover is available on the public register. The Bill also removes the option for companies to prepare abridged accounts.
Who is affected?
For the purposes of these new rules, a small company is defined as satisfying two of the following: either having a turnover of £10.2m or less, £5.1m or less on its balance sheet, or having 50 employees or fewer.
As for a micro-entity, the government fact sheet defines these as having two of the following criteria: a turnover of £632,000 or less, £316,000 or less on its balance sheet, or 10 employees or fewer.
While the Bill had been waiting in the wings for several months, currently there is no timetable for the new rules to be rolled out.
A Companies House spokesperson told AccountingWEB: “The requirements for a profit and loss account will be set out in regulations and we will ensure companies are given fair warning of the changed expectations. The secondary legislation and implementation programme is currently being finalised and further details will be communicated soon.”
The requirements will become clearer once the secondary legislation is issued, which should set out the form and content of the profit and loss account that will be delivered to Companies House.
In addition to the new profit and loss filing requirements, directors of companies that use audit exemption rules, such as dormant companies, will also have to provide additional information, including a statement to confirm the company qualifies for the exemption.
This is the first step, but the government also plans to mandate digital filing and full tagging of financial information in iXBLR format and reduce the number of times a company can shorten its accounting reference period.
Opinions divided on the requirements
Opinions have been divided since news about the changes in filing requirements for small companies emerged last year.
“Many comments suggest the filing of the profit and loss account for small companies is long overdue given the limited liability afforded to companies,” Steve Collings, audit and technical partner at Leavitt Walmsley Associates, told AccountingWEB. “Conversely, many practitioners and their clients are nervous about this information being placed on the public record for reasons of commercially sensitive information. Some comments have also suggested reverting back to a subscription-based Companies House service in light of this new information which will be available to companies.”
He added: “Clients will need to be notified in advance about these new requirements in law so they are aware that additional financial information is required to be submitted to Companies House.”
Indeed, when AccountingWEB polled readers in March on an episode of Any Answers Live, 51% opposed the reforms, with 32% saying they were undecided and only 16% saying that they supported changing the filing requirements.
As a staunch opponent of the reform, Izzi Rosenberg from Harris Rosenberg argued that the reforms are not going to meet its objectives to prevent fraud. "It's completely useless. Anyone who needs to see a profit and loss, lenders and HMRC will get exposure to that and putting it in the public view will not combat fraud."
He also raised concern that it's going to expose small businesses to a "nosey neighbour culture" and puts them at a weak competitive advantage against larger customers.
"You have a lot of small businesses who are solely supplying to a supermarket chain as their main customer. But if they've got access to information on these smaller companies, they can see [how much they contribute towards their] turnover and they can see information about their profit margins, and if they think this supplier has been too profitable, then they're going to start squeezing them," he said.
While public access is still a concern, it is still up to the secretary of state to decide whether the regulations include whether the profit and loss accounts are available to the public.
Clamp down on fraud
These requirements are part of a raft of new powers handed to Companies House to clamp down on fraud, including the rollout of identity verification for all new and existing registered company directors, people with significant control and those delivering documents to the registrar.
The government’s ambition is for the new requirements for small companies to lead to a “more reliable and accurate” companies register and that the information filed at Companies House is “closer to what companies have already prepared”.
The government said the reforms will “achieve a better balance between greater transparency and minimising burdens on business” while also solving the issue of inaccurate or insufficient information on the companies register.
“Requiring more information to be filed will reduce the risk of deliberate misuse of minimal disclosure options to hide money laundering and other fraudulent activity. Ensuring all companies report sufficient information to determine a company’s size and eligibility to file under size-specific regimes will improve the value and reliability of the information,” expanded the government factsheet.
UPDATE: This article was updated to clarify that although the Profit and Loss accounts must be filed the secretary of state may decide that they won’t be available to the public.