Companies House reform will increase “red tape” for SMEs

The UK government’s newly unveiled shake-up of corporate transparency legislation and Companies House will disproportionately hinder the already struggling small business population, according to Sanjay Parmar, partner at Grunberg & Co.

“The government’s whitepaper in connection with reforming Companies House will increase the amount of red tape for small businesses who, under the current economic climate, are already struggling to run their businesses.”

On February 28, 2022, the Department for Business, Energy and Industrial Strategy (BEIS) published a whitepaper setting out its final proposals on the reformation of Companies House. The government hopes the changes will improve business transactions and tackle economic crime.

Most notably, the reforms will hand the UK company registrar the power to challenge submitted information using a new querying power, and to remove such information if its validity cannot be proven.

A number of changes have also been made to filing requirements, including a new obligation for small companies to file a ‘profit and loss account’ to ensure that key information is available on the public register.

However, the new filing requirements could impose a potentially “detrimental effect” on SMEs competitiveness and ability to trade in the future, according to Parmar.

“The inclusion of a primary statement and the profit and loss account within the financial statements for smaller entities to be filed on the public register will not protect companies from their competitors who may have access to sensitive commercial financial information to gain competitive advantage,” he said.

“More compliance and increased disclosures affecting small and micro entities, in fact, will lead to increased compliance costs incurred by businesses,” he added.

A need for greater transparency

Parmar’s suggestion that competitiveness could be compromised as a result of heightened transparency is dismissed by Jon Stocker, general practice partner at Milsted Langdon, who noted the requirement to file a profit and loss account is a “significant and welcome change”.

“I do not believe that there is a risk of commercially sensitive information now being readily available to competitors,” Stocker said. “As an accountant dealing with smaller companies, I find it extremely rare that competitor companies have either the time or inclination to start delving into competitors’ filings.”

The new proposals also stipulate that small companies will be required to file both their profit and loss account and directors’ report, thus removing the option to file ‘filleted’ accounts.

Additionally, they state that dormant companies must file an ‘eligibility statement’. This is intended to provide the registrar with additional evidence to take stronger enforcement action for false filings in future.

Stocker welcomes such measures, arguing that they will give more transparency to the users of the information filed.m

“What the filing of the information does do is prevent the bluster of smaller or nearly dormant companies hiding that information,” he said.

“When choosing to deal with smaller companies, people with an interest in its profit and loss will receive far greater comfort and understanding of the financial position of the company, and therefore are likely to avoid entering into contracts that could incur losses.”

Stocker also draws attention to the new requirement for businesses to file accounts to Companies House digitally with full tagging, arguing that such a move is “an inevitable step” in the UK government’s ongoing shift to a digital economy.

However, Stocker did express some reservation about BEIS’ new proposals, arguing that the prospect of an amended filing date could prove disruptive for the accounting profession.

The whitepaper outlined that, while filing deadlines will not be shortened immediately, legislation will be introduced to facilitate future changes.

“The profession is currently contending with MTD and a change of basis periods, so a shortening of the filing period would just pile further pressure onto accountants that are struggling to cope with the changes already in the pipeline.”

The new Companies House proposals follow on from the UK government’s introduction of the Economic Crime Transparency and Enforcement Act, also announced on February 28. Rushed through Parliament in response to Russia’s invasion of Ukraine, the act will seek to more effectively monitor the beneficial ownership of UK property.