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Companies House reforms, intended to help tackle economic crime, involve changing the filing requirements for small companies, including micro-entities.

The Economic Crime and Corporate Transparency Bill, which is currently going through Parliament contains proposals to reform Companies House and equivalent Registrars for Scotland and Northern Ireland.

Part of the Companies House reforms involve changing the filing requirements for small companies (including micro-entities). The idea behind these changes is to improve transparency by making more financial information available to the public. The government’s proposals also state that this will help tackle economic crime and provide more information for enforcement agencies. 

To recap on the current size thresholds, a company is “small” if it satisfies two out of the following three criteria for two consecutive years:

• turnover £10.2m or less
• balance sheet total (that is, total assets) of £5.1m or less
• an average of 50 employees or fewer.

A company is a “micro-entity” if it satisfies any two of the following three criteria for two consecutive years:

• turnover £632,000 or less
• balance sheet total (that is, total assets) of £316,000 or less
• an average of 10 employees or fewer.

To ensure the integrity of information placed on the public record, the reforms will provide the registrar with more power to query the information in accounts. The objective of these additional powers is to ensure information on the register is more reliable and accurate. 

There are some additional new measures to be introduced which include the following.

• Anyone setting up, running, owning or controlling a company in the UK will need to verify their identify with Companies House.
• Companies House will be provided with the power to challenge suspicious information and to inform security agencies of potential wrongdoing.
• Overseas agents will no longer be able to create companies in the UK on behalf of foreign criminals.
• The quality of information provided to Companies House will be improved so that companies that rely on it to make business decisions can trust who they are doing business with.
• Filing processes for small businesses will be streamlined and digitised.
• Company directors will be better able to protect personal information published by Companies House that may put them at risk of fraud or other harm.

Current filing regime for small entities

Currently, section 444 of Companies Act 2006 states that the directors of a company subject to the small companies’ regime:

1. must deliver to the registrar for each financial year a copy of the balance sheet drawn up as at the last day of that year, and
2. may also deliver to the registrar
   1. a copy of the company’s profit and loss account for that year, and
   2. a copy of the directors’ report for that year.

Note the word ‘may’ in b) above. 

Most small companies choose to file just the balance sheet and related notes. This version of the accounts that are filed at Companies House has been coined “filleted” accounts or “filleted abridged” accounts. The majority of small companies tend not to file the directors’ report, profit and loss account and any notes relating to the profit and loss account. 

The current regime has not been without its interpretational difficulties since the abolition of abbreviated accounts, which many questioned the reason for at the time. Abridged accounts have often been misinterpreted as a replacement for the old abbreviated accounts, which they were not. 

The government carried out a consultation regarding the action it should take to ensure the integrity of information lodged at Companies House. During that consultation, the accountancy profession, credit sector law enforcement bodies, and some individuals suggested that the minimal disclosures which small entities make in their financial statements does not provide a level of transparency that would be considered necessary to get limited liability protection.

Small and micro-entities make up the majority of the public register, hence the reforms will impact such entities. 

New regime

Under the new regime, there will only be two filing options: micro-entities and small companies. There will be no option to file abridged accounts and the government has suggested this will help to avoid confusion and reduce costly mistakes.

All small companies, including micro-entities, will need to file their profit and loss accounts. The government states that putting key information on the public record (such as turnover and profit or loss) will help creditors and consumers make better-informed decisions. 

There are likely to be divided opinions on this issue. Some commentators suggest that filing profit and loss accounts at Companies House will result in sensitive information being placed in the public domain. Others suggest that it is only right that a small company files a profit and loss account given that it receives limited liability protection. 

It is not certain at the present time as to the format the profit and loss account that is to be lodged with the Registrar of Companies will take. A notable point made by the government in these proposals is as follows: “The detail and format of the profit and loss account filings will be set out in secondary legislation. This is being developed in consultation with business and accountancy groups. We’ll keep you updated on its development and on timescales.”

This suggests that the format of the profit and loss account may be different for filing purposes than the profit and loss account, which is prepared for the shareholders and other stakeholders, such as HMRC. 

For small companies that claim audit exemption, there will also be an additional statement required by the directors. The statement will require the directors to identify the exemption being relied on and to confirm that the company qualifies for the exemption. 

Currently, small entities claiming audit exemption are required to include a statement confirming the company is entitled to exemption from audit under section 477, Companies Act 2006 and that the members have not required the company to obtain an audit. The additional statement is likely to require the directors to confirm how the company is eligible to claim exemption from audit.

Other notable changes

There are some other notable changes proposed in the Economic Crime and Corporate Transparency Bill as follows:

• a requirement for accounts to be filed digitally and fully tagged using iXBRL
• the removal of a paper filing option for most companies
• providing the Registrar of Companies with power to require all component parts of a filing to be delivered together to facilitate the digital filing of more complex accounts
• limiting the number of times a company can shorten its annual reporting period (this is likely to be aligned to the five-year rule for lengthening a reporting period).

Conclusion

At the time of writing, the Bill was at the committee stage. It is expected to be given Royal Assent in the spring and so we should know in the coming months when this legislation will become effective. 

Noel Guilford