The Minister for Employment Relations and Postal Affairs (Mr. Pat McFadden): I beg to move,

Thank you, Mr. Caton. The regulations relate primarily to the late filing penalty regime, which is the regime of civil penalties for companies that deliver their accounts to the registrar of companies after the date on which they are due. The Companies Act 2006 provides for such a regime, with the details to be set out in regulations; these regulations exercise that regulation-making power.

First, the regulations increase all penalties for such late filing by 50 per cent., to reflect the impact of inflation since such penalties were first introduced in 1992. Secondly, the regulations shorten the penalty bands—different penalties for the different amounts of time by which filing is late—so that the penalties increase faster along the time scale of late filing. The second band of penalties will apply to accounts delivered more than one month late, as opposed to more than three months late under the current regime. The third band will apply to accounts delivered more than three months late, as opposed to more than six months late under the current regime, and so on. That is intended to focus the penalty regime on companies that file very late. Thirdly, the regulations focus on repeat offenders. A company that both files late and fails to deliver its previous year’s accounts on time will pay double the penalty that it would otherwise have done. So, that focuses both on late filing and on repeat late filing, year after year.

The first two changes will come into force on 1 February 2009. In the interests of simplicity, they will apply to all accounts filed after that date, whether under the Companies Act 2006 or under the transitional regime for accounts prepared under the Companies Act 1985. To achieve that, the regulations also amend the 1985 Act, using the power that exists in section 257 of that Act for that purpose.

The repeat offender provision will come into force only for accounts under the 2006 Act, so in practice the impact of any double penalty would be unlikely to be felt by anyone before 2011. In addition, the regulations align the penalty regime for limited liability partnerships with that for limited companies, as is the case now.

Finally, the regulations set the statutory filing deadline for limited liability partnerships to nine months after the year end. Again, that is in order to apply the same rules to such partnerships as those that apply to private companies under the 2006 Act.

The regulations follow a consultation process on the late filing penalty regime, which took place between July and October of last year and to which the Government received a range of responses. The majority of responses broadly supported the proposal. Where concerns were expressed, they came from two different directions.

First, some responses argued that the idea of a late filing penalty regime was misconceived. But the principle of such a regime is set out in the new Act, and is not strictly part of today’s debate. Nevertheless, I would like to explain why we have late filing penalties. Before the penalties were introduced in 1992, under the last Government, some 40 per cent. of all companies did not file their accounts on time, despite the fact that it was a criminal offence not to do so. After 1992, when the penalties were introduced, that figure fell to about 16 per cent. However, that figure is still too high and we hope that the changes contained in the regulations will reduce it further. The figures show that, overall, the regime has been effective since it was introduced.

We should also remember that there is a wider public good in ensuring that companies file accounts. Customers, suppliers, and other businesses can learn a lot about a company and take informed decisions from reading its accounts. That level of transparency benefits the economy as a whole.

Some respondents who supported the principle of late filing penalties nevertheless argued that they were unfair to small or other types of companies. But the 2006 Act was designed on the “think small first” principle. We have reduced substantially the amount of information that small companies need to file with Companies House. There is a public interest in being able to view the accounts of all companies, however small. To water down the penalty regime would send a signal that, despite the legal obligation on companies to file, the Government did not take the matter seriously. Conversely, some respondents to the consultation argued that the proposed changes do not go far enough and that stiffer punitive penalties are needed.

Taking all the responses together, we took the view that the balance of the proposal was about right. It will strengthen the late filing penalty regime and update the charges from those introduced in 1992. However, it will not be unduly harsh on a company that files slightly late once because of an unforeseen event and that resolves not to do so again. There is a public and a business interest in a regime that encourages filing on time. That is what the regulations intend to achieve.

Mr. James Clappison (Hertsmere) (Con): I welcome you to the Chair, Mr. Caton. It is a pleasure to serve under you for what I apprehend will be only a brief period. Nevertheless, there are a number of questions that I would like to ask the Minister and they need to be put properly.

I do not take issue with much of what the Minister has said. My questions will principally be probing for more information on what he has told us. We recognise the value of the provisions on the late delivery of accounts. As the Minister has acknowledged, it was the last Conservative Government who introduced the regime and, by his own account, it has been successful in reducing the incidence of late filing.

We agree with the Minister that it is important for customers and suppliers, among others, to be able to view a company’s accounts and reports to form a view on their dealings with the company. For that opportunity to be enjoyed, the accounts must be filed in a timely way. However, we note that there is a substantial increase in the civil administrative penalty. As the Minister has said, there has been no increase in the penalty since 1992. We are told that the increase reflects inflation and a certain measure of rounding up. It would be nice to see the day when Governments round down rather than up, but that day has not arrived today. He said that all such penalties have increased by 50 per cent. That will require further investigation.

We note also that there is a mechanism for doubling the penalty if there has been a failure to comply with filing requirements in relation to previous financial years. There has also been some change in the time periods relating to the penalties. In the consultation document, the Government set out their rationale for the proposed changes. The Minister adverted to the penalty regime as having initially been effective, having reduced from 40 per cent. to 16 per cent. the incidence of late filing. In the consultation document, the Government say that the effectiveness of the penalty regime has begun to decline over time. Against that background, will he tell us whether the number of companies filing their accounts late has gone up or down in recent years? We will be grateful if he gives us that information in respect of private and public companies. What proportion of companies have filed their accounts late in the last five years?

There is a new time period in respect of penalties for filing between one month and three months late. It seems that there has been a real-terms increase in penalties. We note what the Minister has said about the penalties increasing by 50 per cent., but a company filing its accounts late by six weeks faces an increase in penalty from £100 to £375. My maths is awful, but I cannot make that an increase of 50 per cent. The Government seek to justify the change in their consultation paper by talking of a new period of late filing between one month and three months rather than three months as at present and a surge in accounts filed just under three months late. They say they have had feedback from customers that there is deliberate behaviour by some companies who file their accounts just before the three months when there is an increase in the penalty.

What do the Government mean by a surge in accounts filed just under three months late? What is evidential basis for that assertion? If the Government are concerned about a last-minute surge just under the three months’ limit, will the Minister tell us why the time period for the increased penalty begins just after one month rather than just before three months? For example, a company filing its accounts five or six weeks late faces a steep increase in the penalty from £100 to £375.

On the penalty regime, the consultation paper states:

A footnote says that

in April 1992—

Against that background, can the Minister explain the penalty regime selected for between three months and six months and the separate time period for more than six months? For a private company filing late between three months and six months, the penalty goes up from £250 at present to £750 under the new regime. A private company that files its accounts more than six months late faces an increase in the late filing penalty from £500 to £1,500. My maths may be awful, but that strikes me as being more than an across-the-board increase of 50 per cent., so we would be grateful for a little more information. The figures are set out in the consultation document, but it is silent on the reason for them.

The explanatory memorandum says, somewhat obliquely, that the new regime

In his opening remarks the Minister referred to an intention to focus on offenders who file very late but the penalty regime and the time period seem to focus on all late filers of more than month. I ask the Minister what the rationale is for the steepness of these increases, where the evidence is of late filing in the periods concerned and on what basis were the calculations made. It would be interesting to know, too, how much was raised through penalties for late filing in the last year for which figures are available.

Another feature of the proposal is the doubling of the penalty if there was repeated late filing in the previous year. The consultation document states that a significant number of companies file late repeatedly and the Minister referred to that in his opening remarks. Can he tell us the proportion of companies who were repeat offenders in the most recent year for which figures are available? Can he also tell us whether there has been any trend in that figure in recent years and whether the incidence of late filing has gone up or down?

Another aspect is that the registrar has the discretion not to collect a penalty because of exceptional, mitigating circumstances. Will the Minister tell us what will happen under the regime of repeated late filing when that has happened? For example, if the registrar has exercised his discretion not to collect a penalty one year and the company files its account reports late the following year, will the company be liable for a double penalty? If the company will be liable for a double penalty, how is that justified when the company was allowed not to pay the penalty because of exceptional circumstances the previous year?

The Minister referred to the question of small businesses and mentioned what was said at the consultation about them, and as he has said, the philosophy of the Companies Act 2006 is to “think small first.” He made a number of general observations about that, but I would be grateful if he could simply tell us whether the philosophy of “think small first” is reflected in any way in the statutory instrument.

Will the Minister say a word more about limited liability partnerships, which he mentioned briefly at the end of his remarks? According to the explanatory notes, the provision for doubling the penalty for repeated late filing does not yet apply to limited liability partnerships. Will he tell us whether the Government’s intention is that it should do so, and if it is, will he give us some indication of when the Government expect the doubling provisions for repeated late filing to apply to limited liability partnerships?

I re-emphasise what I said at the outset of my remarks: our questions are here to probe what the Government are doing, but we do not dispute the need for effective measures to ensure compliance with the requirements to file company accounts reports because we think that that is important. When Ministers make changes, however, they need to answer questions about them.

Mr. Peter Kilfoyle (Liverpool, Walton) (Lab): I congratulate the Minister on the scintillating argument that he has put on the riveting subject of late filing penalties. My hon. Friend the Member for Walthamstow (Mr. Gerrard), who is unfortunately absent due to cardiac surgery in St. Bartholomew’s, will be terribly disheartened at not having heard the Minister’s tour de force today. However, I would like to put one question to the Minster: what was the total amount of fines collected in the last year for which figures are available and what work, if any, has been done to project what might accrue to the Government in the future?

Lorely Burt (Solihull) (LD): By and large, the measures are welcome. It is right that filing deadlines should be adhered to by companies, and making up to date information on a company’s affairs available to the public, investors and current or prospective suppliers should be a quid pro quo for the acquisition of limited liability status. That applies to company accounts just as much as to any other statutory information.

The late filing penalties that were introduced some years ago were successful for a while in reducing late filing, but the current penalties seem to have lost their ability to deter companies from filing late because the scale of penalties has not been upgraded since 1992, and some companies now just factor the fine into their plans. Therefore, it is right that the scale is revised to reflect inflation, as is now proposed.

The one month period also seems sensible: one month can reflect an unforeseen problem where the company genuinely intended to file on time, whereas three months reflects a more deliberate and serious lack of filing. The hon. Member for Hertsmere is correct, but the insertion of the new period distorts the percentage increase to more than 50 per cent. What extra gain, apart from the money accruing to the Government, do the Government expect? In other words, what percentage more companies do the Government expect will now toe the line because of the disproportionate charge that is being levied on companies that file late over and above one month? The strapline for the Companies Bill was “think small first”, but private companies are not necessary small companies. What regard was therefore given to the special requirements of small companies?

The Association of Chartered Certified Accountants and other accountants’ and solicitors’ groups query whether these fines are now enough. One relevant factor is that these fines are imposed only when the accounts are filed. That enables companies to postpone the filing of their accounts and the absorption of the consequent penalty until they have attended to matters that they think are more pressing or that might improve their cash flow to the point where they are willing and able to bear the penalty. Over and above financial penalties, Companies House could consider contacting companies shortly before the expiry of the relevant filing deadline, with a reminder that the deadline is approaching. That could be done using the accounting reference period. Many companies might respond more positively to an encouragement than to a penalty. I should be grateful if the Minister could comment on that too.

Mr. McFadden: A number of questions have been asked and I shall attempt to respond. I should like to thank my hon. Friend the Member for Liverpool, Walton for reminding me that Martin Luther King can probably rest easy in his grave, given the oratorical skills on display today. Despite that, I hope that I can answer some of the questions.

The hon. Member for Hertsmere asked about time, inflation, fines and so on. I hope that I was clear in my opening remarks that we are doing several things here. One is increasing the fines. As I said quite explicitly, we are also increasing the speed at which they would kick in and I set out the time scale of one month, three months and so on. That is quite deliberate. We want to encourage people to file on time. Where they are late, we want to encourage them to be less late than they might otherwise be.

The hon. Gentleman also about figures for the companies involved and how much was raised, which my hon. Friend also asked. In 2006-07, around £38 million in penalties was raised. That is from a total of just under 221,000 companies receiving late filing penalties. The hon. Gentleman asked me whether the rate had gone up. It has gone up slightly from 2005-06 by around 0.5 per cent. or so, but 0.5 per cent. of 1.66 million companies is an increase worth noticing. So the regime has been pretty effective since it came in in 1992.

The hon. Member for Solihull asked what we projected for the future, given the figures at the moment, and my hon. Friend asked a similar question. We have not made an estimate of the future because we hope that this regime will encourage people to file early. This is not some secret regime for the Government to raise money. Companies House does not directly make money out of this. All of the fines raised go into the consolidated fund. We hope that this will change the behaviour of companies and encourage them to file earlier. That is what is intended by the increased penalties and, as I explained to the hon. Member for Hertsmere, the increased time scale.

Lorely Burt: What percentage of companies do the Government expect to conform to the filing deadline as a result of the disproportionate percentage, farther down the line, of the fines being levied? In other words, in relation to the number of companies filing just under the three-month period, what percentage of companies that were not previously toeing the line do the Government expect will now do so?

Mr. McFadden: Our target would be that everyone would comply. We have not set a target by saying, “X per cent. do not comply at the moment; we hope that Y per cent. will not comply in future.” That is the point of the increased penalties regime.

Perhaps I may try to answer some of the other questions that were asked. The hon. Member for Hertsmere asked about limited liability partnerships and when other regulations would apply to them, specifically on the matter of repeated late filing. The answer is that relevant provisions will apply in October 2008 when part 15 of the Companies Act 2006 comes into force.

The hon. Gentleman asked why we wanted to double the penalty for repeat offenders. It is important that we signal that the matter is not to be taken lightly. That is the reason: there should be extra recognition. In 2007, for example, 26 per cent. of companies that filed their accounts late had also failed to meet the filing deadline the previous year, so for some companies there is a pattern.

The hon. Gentleman also asked about evidence for the Government claim that there is a sort of bulge in the figures as the deadline is approached, so I shall give some figures. In the second half of 2007, for example, 3,200 accounts were filed between 79 and 85 days late, but just before the three-month period 8,600 accounts were filed late. In fact, 3,500 were filed on day 88 alone. A pattern can be seen of companies almost factoring in the cost of the penalty, as the hon. Member for Solihull said, and filing right up against the three-month deadline. We want accounts to be filed on time, and if they are late, we want them to be late by as little time as possible.

Mr. Clappison: This has been a useful exercise in listing the information and evidence. Will the Minister deal with my point about discretion, and whether that would count for the purposes of a repeat late filing?

Mr. McFadden: It depends on why the penalty was not collected. If it was because the company showed that it did file on time—if Companies House had made a mistake—the company would not face a penalty in year two. However, if the company filed late but was let off on discretionary grounds, it would still need to file on time the following year. Discretion in the first year, I suppose, cannot be taken as an expectation of discretion in the second, and in that sense it would count.

Question put and agreed to.

Resolved,

Committee rose at one minute to Five o’clock.