A little bit of context to start; in the last few weeks, sanctions have been placed on Russia including a focus on companies registered to its citizens, and its oligarchs, wherever they are based. Trying to do this has highlighted some of the issues inherent in the registration of businesses to Companies House which currently allows for the true owners of businesses to be hidden.
Sanctions and regulations are vital to cracking down on money laundering and other activities.
However, in order for these to truly make a dent in economic crime activities, it is essential to know what assets are held by which companies and who are the owners of those companies.
The UK government, therefore, has introduced an economic crime bill and a whitepaper on corporate transparency and register reform with the aim of accelerating changes to Companies House. Moreover, Companies House plans to become fully digital to implement these changes.
There are several significant impacts of these changes, not only on money launderers or other criminals but also on regular law-abiding companies.
One of these impacts is that micro and small companies can no longer have access to options for abridged or filleted small business accounts and will have to report profit and loss (P&L) statements going forward.
So let us discuss how the Companies House reforms will mean for businesses having small business accounts in more detail:
Verification through digital tags
At present, it is straightforward to set up a company in the UK or file accounts, and one does not even need to verify the identities of the directors. Going forward, as Companies House becomes digital, company directors or their agents need to use iXBRL to file digitally tagged accounts. The data they share will be stored on file and cross-referenced with HMRC data.
The registrar will be given new powers to query any information, share data with other employees, delete incorrect information from the registrar, and apply fines if directors or company secretaries do not adequately meet their responsibilities.
Moreover, to ensure that there is always a direct link to actual people (and not fake names used to register a shady company), there will be restrictions on the use of officers and corporate directors. The registrar clearly has greater powers to help fight against economic crime – even for businesses with small business accounts.
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More transparency in filing
One of the most noticeable changes will be related to annual filing. At present, micro-entity filing is a commonly used option. But it offers little benefit in terms of actually understanding the financial position of the company.
That is also why it is a popular choice for fraudsters. For this reason, as well as to minimise the complexity associated with filing, the government will simplify the filing process and also remove the options for abridged or filleted accounts.
At present, when all the shareholders of a small company agree, the company can abridge the accounts that they share with the shareholders and the Companies House.
In addition, entities with small business accounts currently have the option not to submit a director’s statement and the profit-and-loss statement or the related notes to the Companies House. This is known as filleting.
When the new reforms come into play, all companies will have to share their profit and loss statements along with a balance sheet, as mentioned previously. However, micro-companies will still have the option not to file a director’s report.
What companies should know about the reforms
When the new reforms come into place, filing will definitely become much simpler. This is because the small business accounts to be submitted will be precisely the same as the accounts prepared for the shareholders.
By verifying identities and getting complete insights into a company’s financial situation, the Companies House will have much more ability to detect and prevent economic crimes such as money laundering.
In addition, the new reforms will make it easier for companies to get credit, as current laws don’t give credit rating agencies enough information on whether or not a company is credit-worthy.
In addition, the new reforms will make it easier for companies to get credit, as current laws don’t give credit rating agencies enough information on whether or not a company is credit-worthy.
On the flip side, the need for publicly filed P&L accounts will strip many companies of their privacy. Small and micro businesses may feel uncomfortable about the amount of publicly available information they have to put out.
Over to you
Overall, however, the new reforms are a step in the right direction with increased protection against fraud and safeguarding directors’ identities.
The crime-related aspects will likely come into force sooner than the changes to accounts, but accountants should start talking to their clients about the changes so that they can be prepared when it happens.
As accountants of small businesses, startups and SMEs, we know how daunting any new legislation or change can be.
If you want to understand how the Companies House reforms will affect how you operate your company and small business accounts, book a free consultation with us. We are happy to clarify your doubts!
