Draft Small Companies (Micro-Entities' Accounts) Regulations 2013
The Committee consisted of the following Members:
† Bellingham, Mr Henry (North West Norfolk) (Con)
† Blackman, Bob (Harrow East) (Con)
† Burns, Conor (Bournemouth West) (Con)
† Campbell, Mr Ronnie (Blyth Valley) (Lab)
† Coffey, Dr Thérèse (Suffolk Coastal) (Con)
† Doughty, Stephen (Cardiff South and Penarth) (Lab/Co-op)
† Fabricant, Michael (Lichfield) (Con)
† Gyimah, Mr Sam (Lord Commissioner of Her Majesty's Treasury)
† Lee, Dr Phillip (Bracknell) (Con)
† Moon, Mrs Madeleine (Bridgend) (Lab)
† Murray, Sheryll (South East Cornwall) (Con)
† Perkins, Toby (Chesterfield) (Lab)
† Sharma, Mr Virendra (Ealing, Southall) (Lab)
Simpson, David (Upper Bann) (DUP)
Stringer, Graham (Blackley and Broughton) (Lab)
† Swinson, Jo (Parliamentary Under-Secretary of State for Business, Innovation and Skills)
John-Paul Flaherty, Committee Clerk
† attended the Committee
Fifth Delegated Legislation Committee
Monday 25 November 2013
[Mr Dai Havard in the Chair]
Draft Small Companies (Micro-Entities’ Accounts) Regulations 2013
The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Jo Swinson): I beg to move,
That the Committee has considered the draft Small Companies (Micro-Entities’ Accounts) Regulations 2013.
I am delighted to open proceedings on what is an all round good news story, and I hope we will be able to find cross-party agreement this evening. The Government are committed to reducing burdens on business, so we welcome today’s opportunity to debate reforms that will simplify the annual financial returns that our smallest companies are required to make to Government, freeing them up to focus on running and growing their businesses.
The regulations amend the Companies Act 2006 to implement the flexibilities permitted by the European Union micros directive, which has now been incorporated into the new accounting directive. The directive sets an important legal precedent in European company law. It creates the micro-entity, a new category of company, and provides the opportunity to reduce the administrative burdens on the smallest companies to a level much more proportionate to their size. We welcome the initiative.
A micro-entity company is one that, at its balance sheet date, does not exceed two of the following conditions: a balance sheet total of £315,000; a net turnover of £632,000; and an average of 10 employees during the financial year. The flexibilities offered by the directive will be known as the “micros exemption”.
There are an estimated 1.56 million micro-entities in the UK, just over half of all the companies on the register. These very small companies are hugely important to the UK economy, and I am sure Members will agree that they have a significant role in supporting growth. We see such companies in our constituencies up and down the country.
Mr Henry Bellingham (North West Norfolk) (Con): I agree with my hon. Friend that anything that can be done to reduce burdens on small and medium-sized enterprises is to be welcomed. May I ask for some clarification? The Minister mentioned a turnover of £632,000, a figure that makes sense, although many businesses with such a turnover are quite large companies. Do the regulations apply only to limited companies, or also to limited liability partnerships and non-incorporated businesses?
Jo Swinson: The regulations amend the Companies Act 2006, so the changes apply to companies; they will not currently apply to limited liability partnerships. Many sole traders up and down the country do not have the same reporting requirements. The issue is what
needs to be filed at Companies House, so I am talking about companies regulated by what they have to provide to Companies House.The Government’s plan for growth, published in March 2011, set out our ambition
“to make the UK one of the best places in Europe to start, finance and grow a business”.
The plan noted that that could be achieved in part by lessening the regulatory burden on business. Very small companies are currently required to follow the same financial reporting rules as other small companies that are financially many times larger, with turnovers of up to £6.5 million. I take my hon. Friend’s point that £632,000 could be seen as quite sizeable, but there is obviously a significant difference in what much larger companies have to provide.
The Government do not believe that it is necessary for all micro-entities, many of which have simple business operations, to have to provide the same level of information as larger companies. Our existing financial reporting requirements address information needs that normally exist between the shareholders and the management of the company. Of course, that is most important where there is a separation between the ownership and management of the company.
In the case of micro-entities, many of which are owner-managed, such separation of control rarely exists. Research shows that approximately 45% of these 1.56 million companies have only one shareholder. In such circumstances, financial statements are not needed to communicate between management and shareholders.
Michael Fabricant (Lichfield) (Con): I am interested in what my hon. Friend the Minister is saying about the reporting of profit and loss and balance sheets. Quite often, one significant cost for smaller companies is auditing charges. If auditing will still be required, how does she think the passing of the regulations will affect the charges for micro-companies?
Jo Swinson: The difference between what will have to be produced for these companies is significant, and I will illustrate that. The accounts with notes that are currently required to be given to Companies House typically run to seven pages of A4. Under the new guidelines, the information to be produced will be simple and consist of perhaps one side of A4. The charges that must be paid to accountants for preparing such accounts will be of a different level.
The other helpful thing is that because the accounts will be so much simpler, many companies will not have to employ external accountants because they will be able to produce their simple figures on an A4 sheet.
Michael Fabricant: Will my hon. Friend give way?
Jo Swinson: I will answer the second part of the hon. Gentleman’s initial question, and then I will give way again.
Audit fees, which can be important, will no longer be required for small companies or micro-entities. However, it is obviously for companies to choose whether they want an audit, particularly if they think their shareholders want that. It stands to reason that auditing a single sheet of accounts will be much easier than auditing multiple pages of accounts.
Michael Fabricant: My hon. Friend has answered the question I was going to ask.
Micro-entities suffer disproportionately from the burdens associated with comprehensive financial reporting requirements although many do not receive any real benefit. The EU directive provides several options for member states. Importantly, it recognises explicitly that member states must assess how the options complement their own national financial reporting framework.
We consulted on the implementation of the options in the micros exemption. As is allowed, we will enable micro-entities to prepare and publish simple, highly abridged financial statements and relieve them of their current obligation to produce full notes to the accounts, provided that specified notes are placed at the foot of the balance sheet. Those will be limited to information about commitments by way of guarantees and any advances and credits to the directors.
The consultation responses indicated two issues of particular concern. First, several respondents noted that the exemption for micros would allow directors to state that the accounts gave a true and fair view of the company’s financial position, provided that the accounts complied with the directive. They questioned how that could be achieved in view of the reduced content of the accounts. They thought that might conflict with the established UK approach, in which company accounts are considered true and fair only if they are prepared in accordance with UK accounting standards.
The second concern highlighted the ability to provide a partial exemption from certain aspects of accruals accounting. We received almost total opposition to the introduction of that provision. Respondents noted that such an approach would lead to confusion, would add unnecessary complexity to the preparation of the company’s financial statements and, significantly, would not achieve any real savings for the micro-entities. Respondents argued that if the exemptions were implemented, that would result in a loss of confidence in the financial statements and lead to conflict with other parts of company law.
We listened carefully to the concerns raised in the consultation and held further meetings with professional bodies to consider the issues. On the first issue—“true and fair”—we acknowledged the potential for conflicts with other areas of legislation, so we made it clear in the regulations that only those aspects of accounting standards that conflict with the reduced reporting requirements of micro-accounts may be set aside. The regulations make it clear that should micro-entities voluntarily provide additional information, that must comply fully with relevant accounting standards if it is to be considered true and fair.
On the second issue of partial accruals accounting, to which there was almost total opposition, we agreed with the arguments presented. To ensure that confidence in financial statements is not undermined, the regulations do not implement that option in the United Kingdom. Who says that when the Government consult, they have already made up their mind? This is a good example of our having listened to the results of consultation.
The exemptions do not apply to all micro-entities; there are exclusions. Credit institutions, investment and insurance companies, financial holding companies,
and any companies already excluded from the small company regime cannot take advantage of the micro- exemption.We have also excluded charities. That reflects our discussions with the charity commissioners, who said they wanted charities to have to continue to apply the additional accounting rules for charitable companies, to maintain the higher level of transparency expected by donors and those helping to fund important causes through charitable companies. I am sure hon. Members will understand why that is.
Mr Bellingham: Before my hon. Friend concludes, will she say something about the consultation that took place and some of the organisations that were consulted? For example, did she consult the Federation of Small Businesses, the CBI, the Small Firm Council and the Forum of Private Business? I am sure they will all be very pleased about what the Government have done. It would be useful to hear what sort of consultation took place.
Jo Swinson: We certainly consulted widely. Obviously, the consultation was open to any organisation that wanted to give its views. I am happy to write to the Committee with fuller details of what exact responses were received and from which organisations. I know that the Federation of Small Businesses, for example, which was mentioned by my hon. Friend, is an assiduous responder to Government consultations.
Of course, we are also proactive in the Department in going out to such organisations to ensure that they are happy with what is proposed. Others we have particularly engaged with on these regulations are the professional accountancy bodies that are very involved with these issues in their day-to-day work. As I pointed out, there will be a slightly reduced demand for the services of that profession. However, we have worked closely with it to ensure that the regulations make sense.
The Government are aware that the micros exemption will not be suitable for all micro-entities. Directors of micro-entities will be free to choose whether to prepare and publish micro-entity accounts, and they will base their decision on the information needs of their company. However, micro-entities with simple structures will now have the option to prepare truly simple accounts.
I hope that hon. Members will recognise the importance of these reforms in reducing burdens on the very small businesses that we all like to support in our constituencies. I commend the regulations to the Committee.
6.12 pm
Toby Perkins (Chesterfield) (Lab): It is a great pleasure to serve under your chairmanship, Mr Havard. As Labour continues to fulfil the determination of my right hon. Friend the Leader of the Opposition to show itself as the party of small business, we are delighted to support any moves that will ease the cost burden on micro-entities during these tricky economic times. That is entirely the thinking behind our plans to freeze energy bills until 2017, which will save the average business £1,800 a year, and to cut the business rate bills of 1.5 million small firms. So it is good news all round.
On that basis, we give a robust welcome to the move to implement directive 2013/34/EU of the European Parliament and Council on annual financial statements
of micro-entities. That has the potential to be a significant easing of the burden on micro-entities and, importantly, establishes the distinct role of micro-entities in our legislation. That is a cause for optimism, although it requires caution as we take it forward.My hon. Friend the Member for Streatham (Mr Umunna) has been at pains to stress the importance of recognising the difference in needs, challenges and burdens on businesses that are lazily bracketed as small and medium-sized enterprises. As someone who worked for a firm of 150 members of staff and also ran two small businesses, I am well aware of how varied the challenges and resources available to these different entities are and how unhelpful that broad SME definition can be.
I have spoken to many small business owners and membership groups who have expressed their disappointment at how feeble the Government’s draft deregulation Bill was after all the noise that Government Members made about the need to deregulate. It would be a huge irony that the most deregulatory move taken by this right-wing, fairly Europhobic Government—the Minister is an honourable exception—should be forced on them by moves in the European Parliament to reduce the burdens on SMEs.
Many hon. Members will find it a strange experience to push through with such enthusiasm an EU directive that reduces red tape on our smallest businesses. I hope it might lead them to consider more closely the rhetoric they hear on Europe from those who have not yet made it into the House of Commons. I am left to wonder whether tomorrow’s Daily Express front page will angrily recoil at these Brussels bureaucrats forcing us to make life easier for our small firms. I rather doubt it, but it would be a significant credit and a welcome development if indeed it did happen.
It is welcome that the regulations recognise the unique challenges of micro-entities and make a special effort to remove the unnecessary burdens of financial reporting, which often serve no practical purpose. It is also welcome that the implementation of the remainder of the new accounting directive could see further reductions in financial reporting rules in the future.
It is vital, however, that the important precedent established by the regulations is used cautiously and judiciously in future. There will always be calls from certain quarters for far greater freedoms for micro-entities on subjects such as employee rights and health and safety legislation. It is important that the benefits that are won are not undermined by reductions in workers’ rights or in the safety of consumers, customers or employees. Those of us who run small firms know how difficult it can be to persuade good employees to recognise the opportunities created by working for small firms or the challenges that small firms face in winning new customers. A desire to reduce those burdens on small businesses should not come at the expense of small firms being turned into second-class workplaces.
We also support the need to maintain transparency for charities—the Government were right to exempt small charities from the regulations—while recognising the importance of removing burdens on charities wherever possible. The need under the regulations for businesses
to have two years of figures before their qualification is changed seems sensible. We support the exemption for holding companies or firms that are part of a group, because the nature of such businesses is clearly different. We support what the Government have said about partial accrual accounting.We welcome the proposals, but will the Minister respond to five quick questions? While she has chosen to exclude charities from these benefits, what other steps will she take to cut burdens on very small charities? Secondly, will the regulations count as an “innie” or an “outie” with the Government’s arbitrary one-in, two-out policy? These appear to be new regulations that reduce red tape, so do they not demonstrate the nonsense of an arbitrary approach to deregulation, attractive as it may be?
Thirdly, are there any worries about the impact of the regulations on micro-entities’ capacity to secure credit from suppliers in future? Has there been any consultation feedback on whether there will be any unintended consequences for companies that avail themselves of that credit? Fourthly, can the Minister confirm that the Government will not allow this admirable precedent to be part of any broader plan to reduce workers’ rights or consumer safety in micro-entities?
Finally, will the Minister confirm that the directive demonstrates that our membership of the European Union often leads to strong nations working together to make life easier for all our firms? Will the Government continue to engage constructively with our colleagues in the EU, ignoring the dissident voices that highlight only problematic aspects of our membership? Joining the EU was, as we well know, the biggest deregulatory step this country has ever known, in a stroke opening up free movement of goods and labour across the world’s largest trading bloc.
The Chair: Thank you, Mr Perkins, for that entertaining and inventive contribution.
I call the Minister, who will doubtless give a short answer to question five.
6.18 pm
Jo Swinson: Thank you, Mr Havard. I am happy to respond to the hon. Member for Chesterfield, who I think deserves top marks for getting across his key political points. Perhaps we should send a copy of Hansard to his right hon. Friend the Leader of the Opposition in case he is keeping track of what is being said in all the Delegated Legislation Committees.
The hon. Gentleman was absolutely right to highlight the important point that SMEs are not homogenous. The term is used in a blanket way, but there is huge variation within that. I worked in a small business that had between 10 and 15 employees. Happily, it has grown significantly since then. It is listed on the alternative investment market index and now has more than 50 employees. That business is different from when I worked there 10 or 12 years ago, but it is still classed under the same SME umbrella. It is important for us to look at micro-entities specifically.
The hon. Gentleman was right to highlight the positive role that the European Union can play. However, it would be simply untrue to suggest that the regulations have been forced on us by the EU. In fact, if anything it
is the leading role that the United Kingdom played in negotiating this directive that we should be celebrating. In particular, I pay tribute to the work of my predecessor but one—my right hon. Friend the Member for Kingston and Surbiton (Mr Davey)—who was absolutely instrumental in pushing this directive forward in Europe. It just goes to show that we can shape matters and be constructive within Europe, and play a leading role in helping to create deregulatory measures within Europe.Of course, the hon. Member for Chesterfield is right to the extent that the market, in having similar rules across different companies, can be hugely beneficial to companies, particularly those that operate across borders, in that they do not have to deal with different systems in 28 different member states but have much more consistency.
I am afraid that I cannot tell the hon. Gentleman what will be on the front page of The Daily Express tomorrow. However, I note that unfortunately we do not have any esteemed members of the press who have decided to turn up to this SI debate today. My prediction would be, sadly, that I doubt this will make the front page of The Daily Express. As is often the case, sadly, positive news, whether it is about Europe or anything else, is far less likely to be reported than any kind of negative news.
I will deal with the other specific questions that the hon. Gentleman put; I think that I have dealt with his final one on Europe. Regarding charities, we always want to ensure that we can make things easier for them. We are working with the Charity Commission to consider what reliefs might be given, although exempting charities from this directive is not actually cutting burdens on them. However, it is right that, where we are dealing with money that people have donated, a higher level of transparency is required than where there is someone who has set up their own company and is effectively working for themselves in a very small business, where there is less of a need for transparency because those who have contributed to it and invested in it are not so divorced and separate from the decision making.
On the “in or out” point, I have to say that, given the methodology that the Government use to establish whether a measure is a regulatory “in or out” measure, the EU directives that have to be implemented do not count under that particular methodology. Therefore this measure is not counted as either an “in” or an “out”, although it will reduce costs to business and that is very welcome.
Toby Perkins: It would be helpful if the Minister clarified something. I thought a moment ago that she was saying that she did not have to do this; it was
something that we had led and it was nothing to do with the fact that it had come down from Europe. Now she seems to be saying the opposite.Jo Swinson: I will certainly clarify that. I am saying that we were not forced to do it; we were actually leading. We wanted to do this and we wanted everyone else in Europe to do it. We have to do it, because it is an EU directive, but it was something that we were fighting for having to do, if you like. As a result, as I say, it does not count for the in-out regulatory measures that are totted up.
As for the impact on whether micro-entities will be able to get credit, although the measure very much reduces the burden of what information has to be provided to Companies House, any potential investor who would like to loan money to a business can always ask for additional information, and any business that is seeking investment—whether it is a loan or investment from any other body, whether that is a bank or a private investor—will look at what information it needs to provide for that purpose. The change is about what has to be provided to Companies House on an annual basis as of right, and clearly we can reduce the information that has to be provided.
The hon. Gentleman also raised the issue of workers’ rights and consumer safety. This particular directive has no impact on those things, but the Government undertake a variety of other measures that will enhance safety for consumers, not least the Consumer Rights Bill, which has been published in draft and which is currently being scrutinised. We hope to introduce it next year.
To provide clarity for the Committee, we have fought hard for this directive. We are implementing the flexibility it offers us. We have flexibility to work out which of the measures we choose to implement, and that is indeed what we are doing in using the maximum flexibility possible, within the scope of what is allowed—although there are the few areas where we have ensured that there are exemptions, which I outlined to the Committee earlier. I think that I have answered the various points that were made by the hon. Gentleman, and I encourage the Committee to support the regulations wholeheartedly.
The Chair: Thank you, Ms Swinson. I am glad that, even though it is in the Oxford English dictionary, you did not claim this as a “selfie”.