The
Committee consisted of the following
Members:
Chairman:
Mr.
Martin Caton
Burgon,
Colin
(Elmet) (Lab)
Burt,
Lorely
(Solihull)
(LD)
Clappison,
Mr. James
(Hertsmere)
(Con)
Davies,
Philip
(Shipley)
(Con)
Dobson,
Frank
(Holborn and St. Pancras)
(Lab)
Duddridge,
James
(Rochford and Southend, East)
(Con)
Gerrard,
Mr. Neil
(Walthamstow)
(Lab)
Gummer,
Mr. John
(Suffolk, Coastal)
(Con)
Heald,
Mr. Oliver
(North-East Hertfordshire)
(Con)
Hepburn,
Mr. Stephen
(Jarrow)
(Lab)
Kilfoyle,
Mr. Peter
(Liverpool, Walton)
(Lab)
McFadden,
Mr. Pat
(Minister for Employment Relations and Postal
Affairs)
McGovern,
Mr. Jim
(Dundee, West)
(Lab)
MacShane,
Mr. Denis
(Rotherham)
(Lab)
Morley,
Mr. Elliot
(Scunthorpe)
(Lab)
Seabeck,
Alison
(Plymouth, Devonport)
(Lab)
Teather,
Sarah
(Brent, East) (LD)
Sara
Howe, Committee Clerk
attended the Committee
The following also
attended, pursuant to Standing Order No.
118(2):
Main,
Anne
(St. Albans) (Con)
Second
Delegated Legislation
Committee
Monday 4
February
2008
[Mr.
Martin Caton
in the
Chair]
Draft Companies (Late Filing Penalties) and Limited Liability Partnerships (Filing Periods and Late Filing Penalties) Regulations 2008
4.30
pm
The
Minister for Employment Relations and Postal Affairs (Mr.
Pat McFadden):
I beg to
move,
That the
Committee has considered the draft Companies (Late Filing Penalties)
and Limited Liability Partnerships (Filing Periods and Late Filing
Penalties) Regulations
2008.
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
bandsdifferent penalties for the different amounts of time by
which filing is lateso 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 years 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 todays 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.
4.36
pm
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 companys 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:
Late
filing penalty rates have not changed since the introduction of the
regime in 1992. The proposal includes an
across the board increase in all penalties in line with the increase in
RPI between April 1992 and February 2007. Rounded up, this equates to a
50 per cent. increase.
A
footnote says that
the
index has increased from
136.7
in April
1992
to 201.6.
This would involve increasing the £100 penalty to £147.
We have rounded it up to
£150.
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
increases the
level of penalty in particular for those who file more than one month
late.
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 Governments 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.
4.47
pm
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. Bartholomews, will be terribly
disheartened at not having heard the Ministers 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?
4.48
pm
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 companys
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.
4.52
pm
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 timeif Companies House had made a mistakethe
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,
That
the Committee has considered the draft Companies (Late Filing
Penalties) and Limited Liability Partnerships (Filing Periods and Late
Filing Penalties) Regulations
2008.
Committee rose
at one minute to Five
oclock.