Further supplementary memorandum submitted
by Companies House
Thank you for your letter of 8 October and for
the further opportunity to respond to questions from the Select
Committee. My answers to the queries are as follows:
I note that your first paragraph referred to
the potential for Companies House to make a loss in 2007-08. I
think there may have been some misunderstanding about the period
to which I was referring. In the hearing I said that Companies
House would make a loss "next year". By this I was referring
to the next financial year (due to begin on 1 April 2008). It
was never our expectation that we would make a loss in 2007-08.
As you can imagine, by the date of the committee in March 26,
the position for 2007-08 was fairly certain.
The second paragraph of your letter asked why
the surplus from the last two financial years could not have paid
towards implementation costs of the Companies Act 2006. A loan
of £10 million was requested from BERR to enable Companies
House to meet future large one-off items arising over the period
of CSR07. However, tight management of our costs, together with
the delay in the implementation date of CA2006, has meant that
as yet that loan has not been drawn down from BERR. In fact, the
loan arrangement was first reduced to £8 million in April
2008, and draw down is now being finalised for only £4.5
million in the first quarter of 2009, effectively utilising the
£5.4 million surplus in "reserves" for implementation
of the programme to date.
Your third query related to my prediction that
a loss of £5 million would be balanced over a four year period.
Our forecasts showed that costs would rise, peaking in 2008-09
due to the impact of additional one-off costs associated with
implementation of the Companies Act 2006. Thereafter, annual costs
would reduce over the subsequent two years due to increases in
efficiency, to yield surpluses in those years, thus balancing
the operating account surplus over the four year period.
You asked whether there is a chance that a surplus
could also be made. This links to your query about the challenges
in forecasting which face us in meeting our required rate of return
of 3.5%. The sensitivity to changes in the variables under which
Companies House operates is high, and tension must be maintained
between making a small positive return, without any cross-subsidy,
and ensuring that cash reserves are not exhausted. These variables
include:
— The number of incorporations, dissolutions
and mortgages.
— The rate of electronic take-up of
documents filed.
— The speed at which efficiencies can
be realised.
— Uncertainty over the impact of the
new Companies Act functions on the operational capacity of Companies
House.
— Demand for Company Searches.
In turn these are at least partly influenced
by:
— The current uncertain economic climate.
— Any changes in tax regimes for companies.
For example, a 1% change in take-up for our
electronic annual return (lower price than for a paper filed return)
results in a reduction in fee income of £300,000, and over
the past three years we have moved from 10% to today's 86% electronic
take-up. Forecasting that change is difficult over a longer period,
and so costs and priorities have to be constantly reviewed to
ensure that overall business plans can be delivered.
A further example shows the difficulty in forecasting
income streams. In April 2008, we became aware of 50,000 companies
incorporated between January and March 2007 which would be dissolving
during 2008. This resulted in a £750,000 reduction in our
income budget for the current year, for which we have attempted
to mitigate the effect by reducing our expenditure.
Therefore, maintaining sufficient cash to do
what is required, but balancing that with the constraint of not
cross-subsidising activity, nor making excessive surpluses taking
one year with another, remain the major challenges to forecasting
activity in Companies House.
Turning to the query on PROOF, it is true that
not all company changes can be filed electronically. At present
83% of documentation can be filed electronically and current levels
of take up are at 49%. You are right in saying that the key to
making PROOF compulsory is to make e-filing compulsory for these
documents. PROOF is a scheme that requires the agreement of the
company and therefore making it mandatory is not a practical aim.
A better approach is to broaden the use of PROOF as a first step
and ultimately mandate electronic filing of company information.
The Companies Act 2006 gives me the power to seek approval from
Parliament to mandate the electronic filing of documents. Although
we have not yet put a detailed timescale together we envisage
that approximate timings might be:
— Consult with customers on our strategy
for electronic filing (which will include the potential for mandation)—January
2009.
— Launch a revised electronic PROOF
service which will make it much easier for customers to sign up—June
2009.
— Link with that launch a marketing
campaign which warns companies of the dangers of not signing up
to PROOF.
— Depending on the outcome of consultation,
make further progress towards 100% electronic filing of basic
form types (ie PROOF-related documents) and, subsequently, all
filings—detailed timings to be considered post consultation,
but 2011 would be feasible for the first stage in my view.
20 October 2008
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