PracticeAccounting FirmsAdviser: Small business needs small government.

Adviser: Small business needs small government.

With most SMEs baffled by over-complex company law, John Davies argues that simplicity is the key to effective and enduring legislation.

According to a recent NatWest survey of small businesses, government regulation and the paperwork that ensues from it has become the biggest single bugbear of small firms.

Separately, over half of respondents to the Federation of Small Businesses 2004 survey said that they were either dissatisfied or very dissatisfied with the complexity, volume, compliance costs and problems of interpretation which they face in dealing with the law.

The DTI is now calling for new powers for parliament to issue statutory instruments to revise any part of company law, and also to bring in ‘restated’ (read simplified) versions of selected passages of the Companies Act in order to help SMEs – and their advisers – understand company law better. This would be done via a new streamlined procedure outside the standard scrutiny and approval process.

As far as simplification goes, that is certainly a sound goal in itself. Even discounting the proliferation of statutes and statutory instruments, the rules on matters such as loans to directors and distributions are famously complex. But the background to these new proposals begs examination.

The Company Law Review, which was appointed as far back as 1998, set out to perform a thorough overhaul of our companies’ legislation, with a specific brief to bring it up to date and make it more intelligible to the 99% of limited companies which now qualify as ‘small’.

The group of experts presented a massive package of reform proposals, one of which was that the legislation be rewritten from top to bottom, with emphasis on legislation being simplified and made as accessible as possible to small firms.

The DTI endorsed these recommendations in a white paper issued in 2002, and work has been ongoing on the project of rewriting the act ever since. This is not expected to result in draft legislation for at least another two years. But if this re-writing exercise is underway, it seems strange we are already talking about special powers to allow the government to simplify legislation that has not actually been written yet. If the DTI still believes that it possible to make simple law via secondary legislation, why can it not be done in primary legislation, as was the original intention?

No-one believes that change in the business environment will not continue to happen: European law alone will ensure this. But the company law reform project is an outstanding opportunity to effectively start again from first principles – for a solid but flexible foundation to be laid down which can discourage the frequent, piecemeal change that has been so apparent over the last 20 years.

Compare all this with another piece of legislation that has more than stood the test of time. The Partnership Act of 1890 has now straddled three centuries and yet only needed 50 short clauses to be as effective as it has undoubtedly been. This, surely, is the gold standard we want our legislators to aspire to.

Send in your questions for our adviser panel of experts on matters relating to small practices by emailing adviser@accountancyage.com. John Davies is head of business law at ACCA

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