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Public Bill Committee Debates

Draft Companies Act 2006 (Amendment) (Account and Reports) Regulations 2008

The Committee consisted of the following Members:

Chairman: Mr. Eric Martlew
Baron, Mr. John (Billericay) (Con)
Burt, Lorely (Solihull) (LD)
Djanogly, Mr. Jonathan (Huntingdon) (Con)
Gibson, Dr. Ian (Norwich, North) (Lab)
Hoyle, Mr. Lindsay (Chorley) (Lab)
McCafferty, Chris (Calder Valley) (Lab)
McFadden, Mr. Pat (Minister for Employment Relations and Postal Affairs)
McGovern, Mr. Jim (Dundee, West) (Lab)
Seabeck, Alison (Plymouth, Devonport) (Lab)
Skinner, Mr. Dennis (Bolsover) (Lab)
Steen, Mr. Anthony (Totnes) (Con)
Stewart, Ian (Eccles) (Lab)
Stringer, Graham (Manchester, Blackley) (Lab)
Teather, Sarah (Brent, East) (LD)
Truswell, Mr. Paul (Pudsey) (Lab)
Tyrie, Mr. Andrew (Chichester) (Con)
Walter, Mr. Robert (North Dorset) (Con)
David Slater, Committee Clerk
† attended the Committee

Third Delegated Legislation Committee

Tuesday 29 January 2008

[Mr. Eric Martlew in the Chair]

Draft Companies Act 2006 (Amendment) (Account and Reports) 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 Act 2006 (Amendment) (Accounts and Reports) Regulations 2008.
The Chairman: With this it will be convenient to discuss the draft Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 and the draft Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.
Mr. McFadden: We are here to debate three sets of regulations to be made under the Companies Act 2006. I am told that that was the largest piece of legislation ever passed by the House, and I understand that the hon. Member for Huntingdon followed it throughout its various stages in Parliament. I was delighted to learn on Friday that I would be debating this short and uncontroversial set of regulations today. I do not propose to read them out, but I hope to tell the Committee the main idea behind them.
The Act is a major part of the Government’s better regulation simplification plan, and we believe that it will reduce annual administration burdens on business by some £300 million. Some of its measures have already been brought into force by regulations previously debated by the House. Hon. Members will be aware that it has been necessary to put back final implementation of the Act from October this year to October next year. That delay is, of course, regrettable, but I believe that we made the right decision in the light of advice from the registrar of companies, who could not be absolutely confident that the necessary changes to Companies House systems could be put in place in time. Businesses must be able to plan ahead with certainty, and in taking this decision early, we have given them as much notice as possible, as well as allowing Companies House more time to get the final implementation right when the time comes.
Mr. Jonathan Djanogly (Huntingdon) (Con): The delays attributable to Companies House were identified several years ago, and it has consistently delayed implementation. Will the Minister take this opportunity to update us on how it is progressing with implementation so that the next deadline will not be missed?
Mr. McFadden: The hon. Gentleman raises a fair question about whether the next deadline will be missed. Having taken the decision and provided the time, we are confident that Companies House should be able to meet the deadline.
It is important to emphasise that many of the key provisions are coming into force and will commence in line with the timetable announced in February last year. A large number of important provisions, including the statutory statement of the duties of directors general and the enhanced business review, commenced in October 2007. Another tranche, including accounting and reporting provisions, will commence on 6 April 2008. It will still be possible to commence some provisions in October this year.
Turning to the issues before us today, part 15 of the 2006 Act concerns company accounts and reports. It will come into force on 6 April 2008, and it will apply to the financial years beginning on or after that date. Part 15 confers powers on the Secretary of State to make regulations on the detailed form and content of the accounts and reports of companies. The regulations give effect to many of those provisions.
The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 replace the 11 accounting schedules to the Companies Act 1985 and their equivalents in the Companies (Northern Ireland) Order 1986. Those schedules to the 1985 Act and the 1986 order set out the detailed contents of the accounts and the format in which they must be prepared, and they cover specific types of disclosures, or apply to certain categories of companies. Not all the schedules applied to all companies.
There was some logic in separating out the requirements in that way so that each schedule dealt with a different subject, and companies have been operating that process for some years. However, there is no denying that that can be confusing, particularly for a small company. To work out what its accounts must contain, a small company must, under the system that we are changing, look at a minimum of four accounting schedules to the 1985 Act, and perhaps six. It does not have to make all the disclosures required by some of those schedules, so it needs to look at the appropriate section of the 1985 Act to work out which parts of those schedules are relevant.
When it came to restating the detailed requirements on the format and content of accounts under the 2006 Act, we wanted to make things easier for all companies, but particularly for small companies, which obviously have fewer resources than larger ones. We have therefore taken a different approach and proposed a single set of regulations for small companies. This gathers together in a single document all the requirements from the six accounting schedules to the 1985 Act that are applicable to small companies. This approach means that small companies will have to look in only one place to establish what they are required to include in their accounts and reports. They will not have to look through regulations that also apply to large companies and work out which parts apply to them and which do not. This approach should benefit small companies. When we carried out consultation, all those who commented supported the proposal.
These two sets of regulations largely restate the requirements in the accounting schedules to the 1985 Act and the 1986 Northern Ireland order. However, they make a small number of changes to the accounting requirements, which I shall outline. For all companies, the threshold for disclosure in directors’ reports of political donations and expenditure, and charitable donations, has been raised from £200 to £2,000. This is the first rise since 1980 and it was felt that it was right to make an increase 28 years after the level was set. A new disclosure requirement for donations to independent election candidates has been introduced, consequent on new provisions in part 14 of the 2006 Act.
For all companies that prepare consolidated accounts, a few minor technical amendments have been made to address the potential for differences in the context of UK accounting standards being converged with international financial reporting standards. For medium-sized companies preparing abbreviated accounts for filing at Companies House, the exemption from disclosing turnover in the abbreviated profit-and-loss account that they file with the registrar of companies has been removed. However, there is still exemption from disclosing detailed particulars of turnover in the notes to such accounts.
For quoted companies, there is a new requirement to report in their directors’ remuneration report on how they have taken account of pay and employment conditions elsewhere in the group when setting directors’ pay. That requirement will be applicable to reports for financial years beginning on or after 6 April 2009. Those are some of the changes above and beyond restating the requirements of previous legislation.
These two sets of regulations have a function beyond restating the schedules to the 1985 Act. Together with the other regulations that we are debating—the Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008—they implement European directive 2006/46/EC, which amends European accounting directives. The measures in that directive are intended to contribute to market confidence, to encourage cross-border investment, and to facilitate cross-border access to capital. It is important to get the right balance between ensuring that proper disclosures are made and not imposing undue burdens on business. We believe that that has been done through the way in which we have transposed the regulations.
Both sets of regulations give all companies the option of including a wider category of financial instruments in their accounts at fair value than is permitted under the 1985 Act. They also impose a new requirement on large companies to make certain disclosures about transactions with related parties. Small and medium-sized companies are exempt from that disclosure.
The Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008 contain further implementing measures for the European directive. They increase the thresholds defining small and medium-sized companies for accounting and reporting purposes, which will be a major reduction in the administration burden for small and medium-sized companies. The regulations also increase the audit exemption threshold for small companies and impose a new requirement for companies to make certain disclosures about off-balance sheet arrangements in the notes to their accounts, which can also contribute to the risk factors in a company. Small companies are exempted from that requirement, and medium-sized companies may limit disclosure to information about the nature and business purpose of such arrangements. The regulations make a number of technical improvements and corrections to part 15 of the 2006 Act.
In summary, the regulations are an important part of the implementation of the Companies Act 2006. They make a number of changes to accounting requirements under the 2006 Act, but, primarily, they restate the detailed requirements on the format and content of accounts in a way that will be easier for all companies, particularly small companies, to use.
4.42 pm
Mr. Djanogly : Part 15 of the Companies Act 2006 relates to accounts and reports. The provisions of this part cover the measures in part 7 of the Companies Act 1985, which relates to accounts and reports. However, as the Minister noted, the provisions have usefully been reordered to make it easier for companies of whatever size to find the requirements relevant to them. In part 7 of the 1985 Act, the provisions applying to small companies are generally expressed as modifications of the provisions applying to large companies. However, under the Companies Act 2006, the provisions are drafted on the opposite basis. In circumstances in which provisions do not apply to all kinds of company, provisions applying to small companies appear before those applying to other companies. We agree that that is a welcome approach.
Part 16 of the Companies Act 2006 brings together various provisions on the audit of companies from the Companies Act 1985. It also introduces a number of significant changes to the law on auditing that reflect EU company law directives. The regulations relate to the accounting and reporting of small, medium-sized and large companies and will amend parts 15 and 16 of the Companies Act 2006. As the Minister noted, they come into force on 6 April 2008 and apply to financial years beginning on or after that date.
The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 set out requirements on the detailed format and content of the accounts and directors’ report of small companies only, which will be inserted into part 15 of the Companies Act 2006. They will substantially re-enact existing requirements found in the schedules to the Companies Act 1985. That new lay-out separates requirements applicable to small companies from requirements applicable to medium-sized and large companies. We welcome that clarity of approach, which should enable small companies to fulfil their accounting obligations more easily because a single set of regulations for small companies has been set out. That is in line with our desire to promote good reporting standards efficiently and clearly, which we feel is achieved by the regulations.
The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 set out requirements on the detailed format and content of accounts and reports of large and medium-sized companies. They also restate the accounting schedules to the Companies Act 1985. Regulation 4 specifies certain exemptions for medium-sized companies.
We were happy that the consultation on the implementation of the Companies Act 2006 focused on the importance of increasing competitiveness, while
“ensuring that the legal and regulatory framework within which business operates promotes enterprise, promotes growth and provides the right conditions for investment and employment.”
We are always keen on moves to ensure that reporting requirements and regulatory obligations are tailored to the size of the business, thus reducing over-regulation. We know from experience that good corporate reporting is essential for a healthy and vibrant economy, and we believe that everything should be done to make that requirement easier for companies to fulfil.
Regulation 4 requires medium-sized companies to disclose their turnover in the accounts delivered to the registrar of companies. That should not result in any kind of administrative burden on the company and should bring more transparency for medium-sized companies. That clarity will give confidence to small suppliers and customers. Unfortunately, the second major change could result in a lack of clarity within the regulations. Paragraph 72 to schedule 1 requires large companies to make disclosures of transactions with related parties that have not been concluded under normal market conditions. Despite many respondents expressing concern about the lack of clarity of that term, there does not seem to be a definition of “normal market conditions” in the regulations. That is particularly worrying, given the current turbulent markets, as there does not seem to be a normal market from one day to the next. What is meant by normal market conditions? Does it include all related party transactions, including those conducted at arm’s length? That needs to be clarified.
Finally, I move to the draft Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008. The regulations implement parts of directive 2006/46/EC on company reporting by amending parts 15 and 16 of the 2006 Act. The directive sets out the conditions that determine whether a company or group qualifies as small or medium-sized. Small and medium-sized companies or groups are entitled to certain accounting and audit exemptions. The regulations also implement the requirement in the directive for disclosure of off-balance sheet arrangements in notes to the accounts.
The regulations reinstate certain exemptions relating to directors’ reports of small and medium-sized enterprises. Those exemptions were inadvertently left out of the 2006 Act, which was a serious omission. However, I do not think there will be a practical impact because of the timing. Will the Minister confirm that that is the case?
In their consultation document, the Government proposed to take advantage of the option to increase the financial thresholds used to define small and medium-sized companies and groups by 20 per cent. Respondents generally felt that the risks associated with increasing the thresholds would be outweighed by the benefits arising from the reduction in burdens on such companies. While the easing of the regulatory burden is certainly welcome and timely, as the Minister said, given that the last review was so long ago, will he please explain the findings of the consultation? Will he also confirm that the European-set amounts constitute a maximum to the thresholds? Given that the figures in the consultation document date back to June 2006, will he also give us an idea of how many companies will be affected by the change?
The final issue that I want to raise is about the off-balance sheet arrangements set out in regulation 8, which the Minister mentioned in his remarks. Broadly, all non-small companies must disclose certain information when they have been party to an arrangement that is not reflected on the balance sheet. However, the directive does not define what constitutes such an arrangement, and neither, therefore, do the Act or the regulations. In the absence of a clear definition, that requirement is likely to be applied inconsistently and to lead to unhelpful and lengthy disclosures in notes to the accounts. The CBI, the Institute of Chartered Accountants and businesses have consistently argued that a workable and authoritative definition of off-balance sheet arrangements is required because the law is likely to prove too vague to be implemented effectively. Any supplementary guidance that is deemed appropriate could be provided by the Accounting Standards Board in accounting standards. What is the position on that? Will the Minister be proposing any further initiatives in that regard?
4.49 pm
Lorely Burt (Solihull) (LD): I, too, am a veteran of the Companies Bill, and still bear the mental scars from it. Nevertheless, I welcome the draft regulations. The changes are particularly welcome following scandals around the world, such as those with Enron and Parmalat. Having standard reporting throughout Europe should increase financial stability and market confidence, and improve access to capital and investment opportunities throughout Europe, particularly with the clarification of responsibilities for directors, and the extension of annual corporate governance to publicly quoted companies throughout Europe, so that we have a fair playing field, and investors can compare different companies much more clearly. It will also lead to improved EU standards and increase the confidence of investors. The inclusion of financial instruments in the accounts at fair value should give us a more accurate picture, and is to be welcomed.
For larger and medium-sized companies, off-balance sheet transactions and related party transactions are welcome, because, again, it will give us a more accurate picture of the company’s position, and all being well, enhance investor confidence at a time when the financial situation in Europe and elsewhere in the world is looking a little rocky.
I have some questions. Like the hon. Member for Huntingdon, I am interested to probe a little more about why the financial thresholds for small and medium-sized businesses for accounting purposes are being raised. I am interested to know whether they are being raised because we were out of kilter with other standards in Europe, or whether there were other reasons why the Government felt that it was appropriate.
On the question of the thresholds for donations from £200 to £2,000, that seems reasonable, and the Minister has already explained the time difference in the last rise. Although it may not be part of the European directive, it is presumably typical of European accounting and reporting requirements.
I would also like some clarification on why independent candidates are added, and how that is different from the standards that we had before. Even if the requirement to declare donations to charities or to political parties is not part of the European directive, I am sure that British investors would like to know if funds that they are investing in European countries are being donated to Christian Democrats, communists or whatever other party. I would appreciate some clarification as to how much information will be required of European companies as well.
I would like to talk about small businesses. The changes relating to small businesses are welcome. The amended structure of the company reporting regulations—laying down all the annual disclosure requirements for small companies in one integrated and stand-alone set of rules, as opposed to the current system whereby small companies must look through a series of schedules of the Companies Act to find the standard requirements, and then the small company exemptions—is a lot more user-friendly. It also makes sense to have a stand-alone structure for larger companies, since those requirements will inevitably be more complex and will need adding to on a fairly regular basis.
I asked the Association of Chartered Certified Accountants what it felt about the measure. It should fill the Minister’s heart with joy because it said:
“For this reason we support the amended structure and consider it will be welcomed by companies and their advisers, especially in the SME context. This is a tangible way in which the government’s ‘Think Small First’ approach to company law reform can benefit business.”
I hope that the Minister will enjoy the glory. The Government are entitled to at least one gold star today.
I have a couple of questions about the impact assessment information because it is incomplete. When will the post-implementation review be completed? The information that we have says “to be confirmed”. It is vital that we know that the post-implementation review will be completed and effected. Too much Government legislation is passed and the post-implementation review is conveniently forgotten. Similarly, the total cost of enforcement must be confirmed. I am a little dismayed that the Government can give the go-ahead when we do not know when we will be told whether it has worked as it was supposed to, or what the cost will be.
4.56 pm
Mr. McFadden: I thank the hon. Members for Huntingdon and for Solihull for their broad support for the regulations and for their recognition that we are trying to simplify things for business through this type of regulation. They asked a number of specific questions that I will try to answer. If, for some reason, I do not answer them all, I will be happy to write to the hon. Members.
I start with the issue of thresholds for small businesses. The thresholds were raised to give maximum benefit to companies, especially small companies, from the regulations. The hon. Member for Huntingdon asked me how many small businesses would benefit from that. In the impact assessment there is a table at the back. For example, under small companies, the current definition would give a total of 1,407,700 small companies, and the new definition would give us 1,410,800. There are similar figures for medium-sized companies and so forth. The thresholds are a maximum.
The hon. Gentleman asked about off-balance sheet arrangements and the definition of that. The question has come up before. We took the view that it would be difficult, if not impossible, to provide a watertight legal definition that covered not only all types of off-balance sheet transactions that would be covered now, but those that should be covered in future. Recital 9 of the directive provides useful examples—the creation or use of special purpose entities and other examples. The Department intends to publish guidance on its website drawing attention to the recital. The hon. Gentleman will know that off-balance sheet activities is an evolving sector. It is not static and therefore to try to define a precise legal sense would, even if it were possible, soon be out of date as companies come across new ways of inventing and working with such measures.
The hon. Gentleman asked about the mistake in the Act about the directors report exemption for small and medium-sized companies. He is right to say that the omission has no practical impact, and we have used the regulations to correct that. The hon. Member for Solihull asked about the donations provisions in the measure, in particular about independent candidates. Those have been added because, for the first time under part 14 of the 2006 Act, shareholder approval is required for such donations. It closes a loophole that existed under the 1985 Act.
Lorely Burt: I am sorry to appear uncomprehending, but with independent candidates, does the Minister mean individuals who stand as independents?
Mr. McFadden: I take “independent” to mean non-party.
The overall cost benefits of the measures were raised in the impact assessment. It is estimated that the amendments arising from the directive will give a net benefit of £33.43 million. Part of that benefit is because of what we have done on the thresholds for small and medium-sized companies. The hon. Lady asked when those provisions will be reviewed. The impact assessment says that the fourth and seventh directives are currently under review as part of the EU simplification plans. The impact assessment for the other regulations states that it is intended that they will be reviewed in 2011.
I was asked what “normal market conditions” referred to. Those are arm’s length transactions between independent parties. Related party transactions were also raised. The requirement is drafted in such a way that companies can make wider disclosure, if it is in accordance with international accounting standards. By following those standards, the question of what is meant by normal market conditions is hopefully of less relevance. I hope that I have covered most of the questions raised.
Question put and agreed to.
That the Committee has considered the draft Companies Act 2006 (Amendment) (Accounts and Reports) Regulations 2008.


That the Committee has considered the draft Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008.—[Mr. McFadden.]


That the Committee has considered the draft Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.—[Mr. McFadden.]
Committee rose at two minutes past Five o’clock.

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