Companies House reforms give power to help combat financial crime
In December, the government launched three consultations to support Companies House reform, aimed at reducing fraud and money laundering. This is intended to improving the quality of information on Companies House to increase transparency.
The proposed changes, described as significant and far-reaching, will reform Companies House to help combat economic crime and make the register more useful. These consultations relate to: improving the quality and value of financial information on the UK companies register; extending the powers of the registrar; and implementing the ban on some corporate directors. If these changes are ratified, directors will not be able to be appointed until their identity has been verified, and the registrar’s powers will be increased so that it can query, investigate, and remove false or inaccurate information. Both the accountancy sector and businesses will also be affected by reforms to the filing regime, with proposals including shorter filing deadlines, and changes to the nature and format of the information companies have an obligation to provide.
The broad package of reforms has been championed by the sector, not least the IFA. “If the aim of the proposals is to help improve business transactions and tackle economic crime, then we say this can’t happen soon enough,” said John Edwards, CEO, Institute of Financial Accountants (IFA).
Responses to the consultation will be reviewed by government, but assuming the reforms remain largely the same, what could they entail?
Improving the quality and value of financial information
The first of these planned reforms will provide Companies House with a more effective means of assisting the government’s broader efforts to combat fraud, tax evasion and other forms of economic crime, by improving the integrity of the information made publicly available about companies and other business entities.
This consultation is set out in three chapters:
- How information is submitted to Companies House?
- What information should be filed at Companies House?
- What does Companies House with this information?
Simultaneously, the proposals highlight a move towards adopting a “file once” approach, enabling filed information to be shared as appropriate between Companies House, HMRC, and other government agencies. This seeks to reduce the burden placed on companies, and increase the efficiency and effectiveness of government agencies in regulating, monitoring, and preventing fraudulent activity.
Some of the most notable aspects of the consultation include reducing filing deadlines and issues in respect of the financial statements for small and micro-entities:
- Reducing filing deadlines
Companies House want all companies to file digitally, something which the consultation acknowledges that most companies already do anyway. Beyond COVID-19, it has been proposed to reduce the filing deadline, with the deadline for public companies being three months instead of six months from the reporting date and six months rather than nine months from the reporting date for private companies.
- Small companies filing options
It has been suggested that as small entities supply more detailed financial information to HMRC and banks, so too the public register should make this same level of information available. However, this is potentially a contentious issue. This could negatively impact micro-entities: currently such companies have very limited information on the register and the level of information provided in a micro-entity’s financial statements lodged with Companies House could potentially deter lenders and credit agencies from agreeing finance for companies that file such accounts. What’s more, the consultation can prove evidence of this from a study conducted by a third party.
Powers of the registrar
This consultation addresses how Companies House should implement its proposed new, discretionary powers so that the registrar is no longer obliged to accept documents where there is a reason to query any information contained in them. Although the issues are rather broad, they are underpinned by the key objective to improve reliability of information on the register, alongside the drive to target criminals who misuse corporate structures.
The proposals on the registrar’s powers are set out in three chapters:
- Introducing a new power to query information
- Reform of the registrar’s existing powers
- Rules governing company registers.
Implementing the ban on corporate directors
The third consultation focuses on ways to implement the proposed ban on corporate directors of UK companies, unless their own directors are all 'natural persons' (i.e. actual human beings), whose identities have been verified by Companies House. This seeks to challenge unlawful activity by those who abuse the role of corporate director to prevent individual accountability.
As part of the wider reforms, the government plans to introduce ID verification for general partners of limited partnerships and for “designated members” of LLPs. The government sees this as potentially being an appropriate means of permitting appointments where the corporate director is one or other of those partnership forms.
In terms of overseas entities, it is expected that ID verification will enable a noticeable improvement in transparency, as the government proposes scrapping the reference to the place of origin of a corporate director, so that UK and overseas entities are given the same treatment. This will help create a foundation for constructive cross-border relationships to be built on, where appropriate.
Although the power to prohibit corporate directors is nothing new, it has yet to be implemented, with the government suggesting this should now be done in conjunction with the Corporate Transparency and Register Reform.
IFA cautiously welcomes reforms
While the IFA was supportive overall, given the potential of these reforms, it did query the link between the Economic Crime Levy (ECL) and the Companies House Reforms. Proposed last summer, the ECL was reiterated in the March 2020 budget, confirming the government’s intention of a levy, paid for by the AML-regulated sector including accountancy firms, to fund Companies House reforms and increase capacity to tackle money laundering.
John Edwards commented: “In the IFA’s response to the consultation, we were of the view that the economic crime levy on the AML-regulated sector should not fund the Companies House reforms. While the accountancy sector has shared objectives with the NECC, NCA and the government to drive down economic crime, and appreciates the need for funding, it is our view that funding from these initiatives must come from other sources such as the government spending review.
“Overall, we at the IFA believe that by giving accounting firms and agents access to better quality information, these reforms provide a significant opportunity in the war against fraud and other economic crime and will signal a new era in corporate transparency which can only have positive ramifications for the economy as a whole.”