8 Annual accounts of micro-entities
| (30478)
7229/09
+ ADDS 1-2
COM(09) 83
| Draft Directive amending Council Directive 78/660/EEC on the annual accounts of certain types of companies as regards micro-entities
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| Legal base | Article 44(1)EC; co-decision; QMV
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| Document originated | 26 February 2009
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| Deposited in Parliament | 6 March 2009
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| Department | Business, Enterprise and Regulatory Reform
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| Basis of consideration | EM of 17 March 2009
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| Previous Committee Report | None, but see footnote 47
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| To be discussed in Council | No date set
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
8.1 In 1978, the Council adopted Directive 78/660/EEC (the 4th
Company Law Directive) to create a harmonised set of requirements
for the external reporting of all limited liability companies,
and Council Directive 83/347/EEC (the 7th Company Law
Directive) subsequently added a common set of requirements for
consolidated financial statements. According to the Commission,
these two measures together create the core of the accounting
acquis, and, despite a number of further measures, they
still form the basis of accounting for small and medium sized
enterprises (SMEs) within the Community. It also says that, although
this has led to an improved financial reporting environment, every
new piece of legislation has created further requirements, and
that, whilst each may have been justified in its own right, it
is now important to consider whether less useful requirements
should be removed or replaced.
8.2 In particular, it notes that the European Council
in March 2007 underlined the importance of reducing administrative
burdens in order to boost the European economy, especially bearing
in mind the potential benefits for SMEs, and that the recent European
Economic Recovery Plan[47]
to restore consumer and business confidence pledges to reduce
this burden by, among other things, removing the requirement on
micro-enterprises to prepare annual accounts.
The current document
8.3 In putting forward this proposal, the Commission
notes that Recommendation 2003/361/EC defines micro, small and
medium-sized enterprises, but says that consultation with Member
States has indicated that the thresholds for micro-enterprises
may be too high for accounting purposes. It has therefore proposed
the introduction of a new, smaller category of "micro-enterprise",
which on their balance sheet do not exceed two of the following
limits — a balance sheet total of €500,000, net turnover
of €1 million, and/or an average number of employees of 10
persons during the financial year in question. However, a company
would lose its micro-entity status if it exceeded two of these
three these criteria for two years running, whilst a company declining
in size would gain such status if it did not exceed two of the
criteria in two consecutive years.
8.4 The proposal would also amend Council Directive
78/660/EEC to exempt such entities from the obligation to publish
annual accounts, which the Commission suggests should lead to
a reduced administrative burden whilst providing adequate protection
and information to stakeholders and aligning the reporting requirements
of these entities to the real needs of users. More specifically,
it notes that there are about 3.5 million micro-entities within
the Community which meet at least two of the relevant criteria,
and that it costs each of them €1558 to meet the current
reporting obligations: thus, even if about 25% of this sum were
still needed to meet managerial and other needs, the Commission
estimates that the proposal would be reduced the overall burden
by about €6.3 billion.
The Government's view
8.5 In his Explanatory Memorandum of 17 March 2009,
the Economic and Business Minister at the Department for Business,
Enterprise and Regulatory Reform (Mr Ian Pearson) says that the
Government has supported this proposal since its inception. In
particular, it believes that there will be major cost savings
for business, of particular importance in current difficult trading
times; that the reduction of burdens would also facilitate the
process whereby, in a recession, many individuals set up a small
business as a response to redundancy; and that, depending up how
the Government chooses to implement the Directive, micro-entities
would be able to prepare one simple set of accounts serving for
tax returns and for shareholder requirements.
8.6 The Minister goes on to address three objections
which have been raised to the proposal. First, some accountancy
bodies have suggested that SMEs need to prepare accounts for the
sake of good financial management, but he says that the Government
does not believe that this necessarily entails having to comply
with the detailed requirements of national law deriving from the
4th Company Law Directive, which are designed for larger
companies with more complex financial transactions. A second objection
is that the 4th Company Law Directive would be replaced
by 27 varying national laws, with damaging consequences for cross-border
business, but the Government believes that micro entities do not
tend to engage in cross-border trade. Lastly, it is said that
banks might continue to require micro companies to draw up accounts
in accordance with the Companies Act provisions deriving from
the 4th Company Law Directive, but the Government does
not consider this will be the case, believing that banks manage
the credit-worthiness of small businesses by monitoring their
business bank accounts, and that they will typically also seek
personal guarantees or security from Directors for their loans
to micro-entities.
8.7 The Minister says that, if the draft Directive
becomes law, the options for the UK are to not require micro entities
to prepare any accounts for their members; to continue to require
accounts from micro entities as for other small companies (a 'do
nothing' option); or to devise a simplified form of reporting
which lies between the two. He also says that the other issue
is what information (if any) on micro-entities needs to be filed
with the Registrar of Companies, adding that any change to requirements
will have to be consistent with changes introduced by HM Revenue
and Customs, which is currently considering plans for the simplification
of corporation tax for this size of entity.
8.8 The Minister summarises the situation by pointing
out that the impact on business will depend crucially on the final
detail of the UK's implementation, but says that the maximum benefit
is likely to be £103m-£403m per annum for the entities
concerned.
Conclusion
8.9 This proposal gives effect to one of the areas
contained in the European Economic Recovery Plan, and, depending
upon how it is implemented in the UK, would appear to provide
potentially useful savings for the businesses which would be affected
by it. Consequently, although we are drawing the document to the
attention of the House, we are content to clear it.
47 (30213) 16097/08: see HC 19-i (2008-09), chapter
4 (10 December 2008). Back
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