What is the Economic Crime and Corporate Transparency bill?
The Economic Crime and Corporate Transparency bill is a UK government initiative to tackle economic crime and help to improve transparency over corporate entities. The legislation aims to combat money laundering, tax evasion and other forms of economic crime in the UK through accountability of UK businesses.
Even before the Coronavirus, the UK Government was looking at the issues. The war in Ukraine has apparently brought forward legislation. The Government have reviewed the impact of sanctions, anti-money laundering regulations and the role of Companies House.
Companies House is the UK public register for companies. It receiving filings from UK limited companies e.g. their annual Financial Statements, directors, share capital and their shareholders etc.
The Government says that there is a lot of dirty money being laundered by Russian oligarchs who purchase properties in London and the rest of the UK. These properties are often owned by UK companies and it is difficulty in understanding who really has the beneficial ownership of these properties.
The government is therefore accelerating changes at Companies House to facilitate corporate transparency. The measures in the bill aim to clampdown on criminals, terrorists and anyone who abuses the UK's financial system.
The bill has slowly been working itself through the House of Common, and is now at committee stage within the House of Lords. [Edit: It finally received Royal Assent in October 2023]
So what has any of this to do with small companies?
Effect on small and micro-entity companies
One of the main provisions of the bill is to require all companies, regardless of their size or turnover, to publish their Profit & Loss Account at Companies House.
The Profit & Loss Account is a one of two main reports forming part of annual Financial Statements of a limited company. It shows the turnover (income), expenses, profit before tax and the tax charge of a company for a period of time, usually a year. Currently, small companies are exempt from publishing their Profit & Loss Account at Companies House.
The other main report from the annual Financial Statements is the Balance Sheet. The Balance Sheet shows fixed assets, current assets, short-term liabilities, long-term liabilities and share capital and reserves at each year end. Putting this in layman’s terms, the Balance Sheet shows amounts for book values of plant and other equipment; money due from customers and other entities; cash at bank; stock; money due to suppliers; bank and other loans; taxation due and other amounts due to by the company.
Only large and medium-sized companies, as defined by the Companies Act 2006, are required by law to file their Profit & Loss Account, and some supporting notes and information, at Companies House.
Smaller companies only file a summarised Balance Sheet and some notes relating to the Balance Sheet. A small company, defined by the Companies Act 2006, must satisfy any two of the following: have a turnover under £10.2m, have a Balance Sheet (gross assets) total less than £5.1m or have 50 or fewer employees. A company may fail the criteria for one year before losing its 'small' status.
A micro-entity is the smallest type of limited company in the UK. The Companies Act 2006 sets out what is a micro-entity i.e. a company that must satisfy at least two of the following conditions: have a turnover of less than £632,000; have Balance Sheet total assets less than £316,000; and have no more than 10 employees.
As well as filing Profit & Loss Account at Companies House, Micro-entities do not file any notes to the Balance Sheet. The notes expand on and provide additional information about the assets and liabilities shown on the Balance Sheet. The only note that is filed by a micro-entity is the average number of employees in the year.
Micro-entities will retain an exemption from the requirement to file a Directors’ Report. However, the latter is normally just a few standard text paragraphs in a page and of little use to anyone.
Currently, there is no publicly-announced timetable for when and how the new rules will be introduced. However, I think before the end of 2024 would be a good bet of when they will be implemented.
Companies House have stated that the requirements to file a profit and loss account will be set out in further regulations and that companies will be given plenty of warning of the filing changes. The secondary legislation, to implement the changes, is currently being finalised and further details will be available in due course.
The new regulations will also set out the form and content of the Profit and Loss Account that must be delivered to Companies House.
It should be remembered that we are only talking about what must be filed at Companies House. Unless further regulations / changes in the law are introduced, a company will still prepare its normal 'full accounts', for its shareholders and HMRC, but something less detailed may need to be filed on the public record at Companies House.
Accounts can be filed at Companies House in paper format, though most micro-entities or small companies file their accounts electronically, either through an accountant or by manual completion of a template grid with tick boxes online through the Companies House website.
The government is planning the introduction of a digital filing requirement, with full tagging of financial information in iXBRL format. Currently, accounts and Corporation Tax Returns are filed with HMRC in iXBRL format. This is similar to a website page because you can read the accounts by human eye. However, behind the report is a digital report tagging the amounts and some text, making it computer readable.
Supporters for filing the Profit & Loss account
The supporters of the bill argue that requiring small companies to publish their Profit & Loss Account would increase transparency and accountability in the business sector as well as to improve public trust and confidence in the UK economy. They claim that this would help to detect and prevent economic crimes, like fraud, corruption and tax avoidance.
They also point out that publishing the Profit & Loss Account would not impose a significant administrative or cost burden on small companies, as they already have to prepare it for shareholders and file it with HMRC along, with their annual Corporation Tax Return.
The information included in the annual Financial Statements is private information. It only needs to be provided to the management (directors) and owners (shareholders) of the company. HMRC are the only other organisation that must be provided with a full set of the annual Financial Statements, including a Profit & Loss Account, Balance Sheet and any notes.
Evidence has suggested that the information available from micro-entity [Balance Sheet only] filings at Companies House are of little value as they contain insufficient information to understand the financial position of the company. It is argued that micro-entity filing options can be attractive to fraudsters, as so little information is filed about small companies at Companies House.
Providing more public information could benefit small businesses by improving their access to finance. The Balance Sheet filed at Companies House is very simple and of little use in determining credit risk. However, a bank, loan, lease or HP company could insist on a full copy of the annual Financial Statements before considering the provision of finance to them.
Opponents for filing the Profit & Loss account
The Profit & Loss Accounts reveals sensitive information about business income, costs and margins, which could be exploited by rivals or customers.
Requiring small companies to publish their Profit & Loss Account would violate their privacy and confidentiality and potentially expose them to unfair competition and predatory practices from larger customers and rival suppliers.
For the smallest of companies, and particularly those owned and managed by a single individual, the legislation will amount to a requirement to publish their personal income, salary or drawings to anyone that chooses to look at Companies House.
Directors and shareholders of micro-entities may be exposed to greater risks of cyberattacks and identity theft, as the same individuals can be workers, managers, owners and financiers.
The above could potentially discourage some small businesses from incorporating or operating in the UK. As such, owners of small companies may consider operating as sole traders and partnerships. The latter file nothing on the public record at Companies House and therefore keep their financial affairs private.
One of the main benefits of operating as a limited company is the limited liability status. This keeps the financial affairs and risks of the company completely separate to the owners and managers. Some argue that you cannot and should not have individuals receiving the benefits of limited liability without transparency and accountability.
Companies House currently make no charge for anyone in the world to download and review any financial information published at Companies House. Even a modest charge, of say £10, may stop nosy neighbours, employees, customers and suppliers having a free casual look at your company’s and your personal information.
In conclusion
The Economic Crime and Corporate Transparency bill is a controversial proposal that has sparked a heated debate among different stakeholders.
The main question is whether the benefits of increased transparency outweigh the risks of reduced privacy for small companies and their owners.
While some see it as a necessary measure to combat economic crimes and enhance transparency, others see it as an excessive regulation that would harm small businesses and infringe their rights.
The bill is currently under final detailed scrutiny with the House of Lords and will shortly become law, through an Act of Parliament. It therefore remains to be seen what impact it will have on the UK business sector. The details surrounding exactly what has to be published at Companies House has yet to be defined. This will be legislated through secondary legislation and left to ministers and MPs, probably with some consultation, to decide on the exact requirements.
This article is principally written for small and micro-entity clients of the firm. I personally doubt that any of our clients’ turnover, expenses, profits or financial position would change as a result of the information filed at Companies House. Surely, those involved in fraud and money laundering will continue and keep their affairs off the register at Companies House and you and I will just have to file our profits and earning to anyone who wishes to look.