Draft Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015
The Committee consisted of the following Members:
† Bebb, Guto (Aberconwy) (Con)
† Campbell, Mr Ronnie (Blyth Valley) (Lab)
† Doughty, Stephen (Cardiff South and Penarth) (Lab/Co-op)
Farrelly, Paul (Newcastle-under-Lyme) (Lab)
† Hammond, Stephen (Wimbledon) (Con)
† Horwood, Martin (Cheltenham) (LD)
† Leslie, Charlotte (Bristol North West) (Con)
Love, Mr Andrew (Edmonton) (Lab/Co-op)
† McDonald, Andy (Middlesbrough) (Lab)
† Mills, Nigel (Amber Valley) (Con)
† Mosley, Stephen (City of Chester) (Con)
† Rotheram, Steve (Liverpool, Walton) (Lab)
Simpson, David (Upper Bann) (DUP)
† Simpson, Mr Keith (Broadland) (Con)
† Stride, Mel (Central Devon) (Con)
† Swinson, Jo (Parliamentary Under-Secretary of State for Business, Innovation and Skills)
† Wright, Mr Iain (Hartlepool) (Lab)
† Zahawi, Nadhim (Stratford-on-Avon) (Con)
Daniel Whitford, Committee Clerk
† attended the Committee
Eleventh Delegated Legislation Committee
Wednesday 18 March 2015
[Sandra Osborne in the Chair]
Draft Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015
8.55 am
The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Jo Swinson): I beg to move,
That the Committee has considered the draft Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015.
It is a great pleasure to serve under your chairmanship, Mrs Osborne. The regulations complete the UK’s transposition of the new EU accounting directive 2013/34. They apply to all companies required by company law to produce financial reports. The directive updates and consolidates a substantial body of existing EU legislation for statutory annual reports and accounts. It helps to deliver comparable information on company performance across EU member states.
The UK took an active role in negotiating the detail of the accounting directive. We have an accounting regime that is rigorous and well regarded. It was important to ensure that that position was maintained. As the main intention of the directive is consolidation, it does not set out to make significant changes to the fundamentals of EU financial reporting. Similarly, in implementing the directive, we are not fundamentally altering our approach to accounts.
In particular, the directive reflects the Commission’s better regulation programme to ensure burdens are proportionate. That is consistent with our policy on burden reduction and, where appropriate, we have taken advantage of the directive’s deregulatory opportunities.
Our consultation last summer demonstrated that we have broad support for our proposals. There were, however, two areas of concern for stakeholders. The first related to the proposal to permit small companies to prepare abridged accounts, and the second to the proposed small company audit exemption. We have listened to and responded to those concerns, and I will say more on that in a moment.
At this point I would like to acknowledge the contribution made by representatives from business, professional bodies and national regulatory bodies throughout the negotiations. That close working relationship continued during the implementation phase. As a consequence, the regulations we are considering today strike the right balance between ensuring sufficient protection for users of accounts, while enabling the preparers of accounts to take advantage of the deregulatory opportunities offered by the accounting directive.
I do, however, need to stress that regardless of whether a company is small, medium or large, it is still obliged to provide accounts that are “true and fair”. I know the hon. Member for Hartlepool will be pleased to hear that. That means that company directors will need to go
beyond the statutory minimum requirement if that does not present a clear picture of a company’s financial health.Let me turn to the detail of the changes introduced by the regulations. The regulations raise the thresholds for defining the size of companies. We have taken full advantage of the accounting directive’s option to increase the thresholds for defining a small company. That will enable 11,000 medium-sized companies to be re-categorised as small and so benefit from the significantly less burdensome small company accounting regime.
Similarly, the raising of the thresholds will enable more than 3,000 large companies to be categorised as medium-sized and so reduce their reporting obligations. There is a link between the thresholds for the small company accounting regime and that for small company audit exemption. We have therefore decided to allow the latter exemption threshold to rise automatically in line with those for the small company accounting regime, meaning that an estimated 7,400 companies will no longer be required to undergo annual auditing of their accounts.
However, as I have said, that was an area of concern during the consultation phase. A final decision on the alignment of those thresholds will be taken in the light of responses to the discussion document on the new audit directive and regulation issued on 17 December 2014. For anyone particularly interested in that document, the deadline to submit views is tomorrow. I encourage hon. Members to rush away and submit their thoughts as soon as this Committee is over.
Notes to the accounts play an important role in putting the numbers in accounts into context, but they are often time consuming for directors. The accounting directive provides a mandatory minimum of eight notes to the accounts, with a member state option to require a further five notes. With the support of business and regulators, we have opted for the more comprehensive set of notes to the accounts. That should ensure that information in financial reports is meaningful.
Even so, we have significantly reduced, to 13, the number of disclosures required of small companies. We will also permit small companies to prepare abridged accounts. However, those responding to the consultation expressed concerns on behalf of minority stakeholders who may need access to fuller information. That option will be possible only where the decision to prepare abridged accounts is supported by all the company’s shareholders, not just the majority. That will enable simplification while protecting minority shareholder interests.
In addition, we have taken the opportunity to provide some small companies in the same group as a public company with greater access to the small company regime. Clearly, there are some types of companies for which reduced levels of information would be inappropriate. Certain types of financial and investment bodies—for example, credit unions and hedge funds—and any company currently excluded from the small company regime, will continue to provide full accounts. Charitable companies are excluded from preparing small company abridged accounts, thereby retaining the higher level of transparency expected by those who donate to their causes. Some businesses can struggle with regulatory change to financial reporting. As I mentioned earlier, the regulations do not fundamentally alter accounts and audit in the UK. For
most companies, there is unlikely to be a need for significant systems and process change. Eligible companies that wish to reduce their reporting requirements can choose to do so or, if they prefer, carry on as before.Through our efforts in negotiating at EU level and our close working with representatives, I believe that the regulations strike the right balance between ensuring sufficient protection for users of accounts while providing for the deregulatory opportunities offered by the directive.
Nigel Mills (Amber Valley) (Con): I have a quick question for the Minister. Paragraph 66 on page 18 is on “Related party transactions”. I am sure she will be aware of the concern about multinationals abusing transfer pricing by having non-market rate transactions. Is there a way of having more disclosure of accounts where companies know they are paying fees overseas that are very different from the market rate for those fees? There is still an exemption in the provisions for wholly owned subsidiaries. Where a company is paying an excessive fee to their American payee, I do not think it has to disclose that. Surely, it would much more transparent and easier for Her Majesty’s Revenue and Customs if a company had to say in its accounts, “We are paying fees that are in excess of the market rate.”
Jo Swinson: I certainly agree that transparency is important. Companies that are part of a group do not benefit from the reduced reporting for small companies, in a sense for the very reason my hon. Friend outlines. That would not aid transparency. On the audit exemption, 7,400 companies benefit from that lighter-touch regime—a smaller number than the total number of companies that would benefit from the reporting regime.
Accounts still have to be true and fair. In preparing the accounts, the 13 notes that have to be added are not a maximum: if other additional notes need to be added for the accounts to be properly understood, that responsibility will still exist. I hope that reassures my hon. Friend. The Government are taking many measures separately to improve transparency—from the extractive industries transparency initiative to chapter 10 of the directive, although we are discussing chapters one to nine today. I commend the regulations to the Committee.
9.2 am
Mr Iain Wright (Hartlepool) (Lab): What a pleasure it is to serve under your chairmanship on this bright, sunny, Budget day, Mrs Osborne. I draw the Committee’s attention to my membership of the Institute of Chartered Accountants in England and Wales. In broad terms, the Opposition welcome the regulations but I have a number of questions.
On practical process and the consultation period, will the Minister explain why the consultation was only eight weeks, given the complexity of the issues and the possible repercussions for other parts of company law? Accountancy bodies and other professional bodies would want to discuss the consultation with their members. I know that the ICAEW—my institute—did so. Accountancy firms might want to discuss the issues with their clients. That would take time and require longer than eight weeks, so why was the consultation period so short?
We agree that the application dates can be effective earlier than from the mandatory date of 1 January 2016. That sounds sensible and provides some degree of consistency, or at least minimises the risk that a firm
could face two consecutive years of change to its financial reporting regime. On a practical point, the Minister said that she does not foresee any substantive or material hassle in respect of financial reporting, but has she checked with firms to ensure that their accounting software is capable of allowing companies to adopt early? I know that is not necessarily something the Government can do, but it would ensure that the transition to the new regulations is as seamless as possible.I know the Minister takes a great interest in there being a wider responsibility than purely financial reporting. Has she considered whether it would be beneficial—not necessarily in these regulations, but in the wider EU directive—for companies to disclose their environmental and social impact? What effect does she think that would have?
We strongly agree with the principle to adopt the maximum thresholds permitted by the directive for small companies, largely to ensure that UK firms do not suffer a loss of competitiveness with comparable firms from other EU member states that intend to take advantage of the maximum thresholds. However—the Minister touched on this—has she taken on board the concerns about providing appropriate levels of financial information and transparency? Has she considered the impact on the availability of information to support decisions on credit and access to finance? Does she accept that good financial reporting should not be seen as a burden on business to be swept away in a deregulatory fashion, but as a proper aid to better and more informed financial and business decisions?
As the Minister acknowledged, a contentious part of the regulations is the preparation of abbreviated accounts. The majority of respondents to the consultation were opposed to that, with good reason, as it can call into question the availability of sufficient financial information and whether a true and fair view is shown. I know that the Minister dealt with this, but I want her clarify the position and to confirm that it is still important that accounts show a true and fair view. Can she explain how that can be possible in practical terms, if the abbreviated accounts do not show all the items required for a full set of small company accounts? For example, how can a true and fair view be presented when turnover, that most basic piece of financial information, is not even required? For directors of small companies preparing their accounts, how has the task of preparing financial reports been taken forward proportionately and with regard to the true and fair view?
For the past half century or so, the use of accounting standards to provide guidance and standardisation, together with professional objective judgment from directors, accountants and auditors, has been universally accepted. However, that is now in conflict with the European Commission’s view and the directive. The logical conclusion of that is that the true and fair view no longer applies to small companies. Does the Minister accept that that point needs clarification? What work has she and her officials done to achieve that? Is she working with the Financial Reporting Council, which has produced some good work on this issue? I remember a very good document from 2011 on the true and fair view. Are the Government obtaining legal advice on its status?
The Government’s position in the regulations is to permit abbreviated accounts with the consent of all members of the company in question. What about
other stakeholders, such as potential and actual creditors, or potential investors? If an investor is thinking of investing in a small company, or if somebody is considering offering that company credit, what use will abbreviated accounts be? Has her Department seen any connection between the filing of abbreviated accounts and adverse impacts on a company’s credit rating? Was that considered when she laid the regulations?The hon. Member for Amber Valley made a pertinent point about the regulations. Is the Minister concerned that the exemption of small groups from consolidation would allow intra-company trading, which could enable such groups to avoid true scrutiny and transparency and to avoid paying tax that should be paid? How will that be dealt with?
We agree with the principle of discrete and clear regulations for small companies, but has the Minister considered whether the regulations affecting micro-entities—the micro-entities exemption regime in the small companies and groups regulations—are affected by the regulations before us? Does she not think it would be helpful to introduce a separate set of regulations dealing with the requirements applicable only to micro-companies, thereby providing a simple and sole point of reference?
The Minister will be aware that micro-companies are required to read the full regulations, complying with some parts and ignoring others, which often makes them hard to follow. Small companies similarly have to read the regulations and ignore the micro-entity elements. Would a single set of micro-entity regulations not be consistent with the FRC’s proposals for a separate accounting standard for micro-companies? What steps is she taking to bring that into play?
Similarly, will the Minister explain how these regulations or others within company law provide meaningful exemption for medium-sized companies? She will appreciate that mid-sized companies are the powerhouse of the British economy, providing growth and employment prospects. We need to move as much as possible to a UK version of the Mittelstand—that is very important. On financial reporting, what benefits by way of extending exemptions do the proposals provide here or elsewhere, and what does she have in mind for mid-sized companies?
Should the Minister be using the regulations as a means of simplifying and co-ordinating other elements? In other words, is this an opportunity to clarify the position regarding charitable companies and the application of charity law and company law accounting requirements? I appreciate that the charity sector is not the only sector subject to sector-specific financial reporting requirements.
Similarly, has the Minister considered the opportunity for introducing regulations relating to limited liability partnerships? LLPs fall outside the scope of the accounting directive, so what happens if a group structure contains both companies and LLPs? How will that be dealt with? What about co-operative and community benefit societies, which were previously known as industrial and provident societies? Is there scope, and do the Government have the will, to simplify and align financial reporting requirements for those different types of corporate bodies? Can the Minister clarify how the Government will work with the Financial Reporting Council and other relevant bodies, such as the Charity Commission, on that matter?
The regulations also touch on greater flexibility within layouts. How does that allow for a comparison of different sets of accounts, which is important because it gives a good sense of what a company is doing in a specific sector? When does the Minister expect the Financial Reporting Council to provide guidance on that matter? A time scale and an implementation date would be helpful and would give companies clarity.
The other contentious point is the threshold for accounting exemption and whether it should be the same as that for audit exemption. What is the rationale for having a separate consultation on that issue? Will it not create further confusion, opacity and unnecessary costs for small companies? How can we align accounting and audit exemption as much as possible to provide a clear path for companies?
Has the Minister considered having a single definition of a public interest entity? Different definitions are used for the provisions of the audit directive and the audit regulation.
In the impact assessment, the Minister said that the regulations provide
“a greater level of comparability and consistency of financial reporting across the EU, particularly for small companies”,
but I question that. Is that really so, given that, as the Minister has acknowledged, additional disclosures will need to be given on a case-by-case basis to give a true and fair view? There is no such thing as comparability and consistency of financial reporting across the EU, because it has to be done on an individual company basis. Can the Minister justify the statement she made in the impact assessment?
Finally, I was interested in the Government’s saying that the regulations give companies in the same group as a public company that is not listed access to the small or medium-sized companies regime. My understanding is that the current situation is established, settled and well understood and did not need altering. Given the changes the regulations will introduce, has the Minister considered that group structures could be contrived in such a way as to bring subsidiaries within the small companies regime? How will that be identified and stopped?
The regulations are sensible and strike the right balance, but I hope the Minister will answer the several significant questions I have about them, as she is often keen to do.
9.13 am
Jo Swinson: It is always a great pleasure to debate accounting with the hon. Gentleman, given his interest in the issue. I will do my best to answer the good number of questions he posed, but I will write to him if I realise that I have missed anything when I read Hansard later.
The hon. Gentleman started by asking why the consultation period is eight weeks. The draft directive was published in November 2011, and we have been in regular contact with businesses and professional bodies about it as it has progressed on its European journey, and when we introduced the regulations. Given that long-term engagement—indeed, those bodies were able to discuss the directive with their members—we felt that eight weeks would be a sufficient consultation period for the regulations and would allow us to get them right.
The hon. Gentleman asked whether firms’ software will be capable of allowing companies to adopt the measure early. Companies House works closely with software providers, and it will do so for these changes. The first accounts under the regulations will not be in until the end of 2016, which allows time to co-ordinate software updates. We are confident about that. He also asked whether it made sense for companies to have to disclose their environmental and social impact—
Mr Wright: I may have misunderstood, but on the commencement and application of the regulations, my understanding is that, as the Minister rightly says, they relate to
“financial years beginning on or after 1st January 2016”
“a financial year of a company beginning on or after 1st January 2015…if the directors of the company so decide.”
The implementation would therefore start a lot earlier than she suggests, would it not?
Jo Swinson: That is clearly a matter of choice. If companies wish that to be the case, they can so choose. If not or if, for example, there is a software problem with their systems, they can make the decision based on what their business requires. This is about giving companies the option, and they will need to decide what would be advantageous for them.
The hon. Gentleman mentioned environmental and social reporting. There has been a lot of progress in how listed companies and public interest entities report on those issues. The changes to narrative reporting that came in for annual accounts require information about the strategic issues that affect a business, as far as is important for understanding the business, which can include such issues. A non-financial reporting directive is also being negotiated separately, and will come in. Obviously, that will not affect all the companies we are discussing today, because it rightly involves the greater level of transparency reporting that is fair for larger companies.
There are also initiatives to encourage smaller companies in a light-touch way to make a virtue of the things they do environmentally or within their local community and society. I direct Committee members to the wonderful Trading for Good initiative, which, in a straightforward and simple way, enables small companies across five different areas of environmental and social reporting to set out clearly what they are doing and then use that as a marketing tool to encourage consumers in that area to support them. That can be useful, but we need to ensure that it is not burdensome for small businesses. It is therefore about making it possible for them to do it if they choose to.
I agree with the hon. Gentleman’s general statement that good financial reporting can be a business aid and not necessarily a burden. That said, the production of accounts takes considerable time. It is right that we look at whether the information being provided is the right set, whether it is all necessary and whether there could be reductions for some companies that would give them an advantage, as they would not need to spend so much time and money on their accounts, but would none the less maintain transparency.
The hon. Gentleman talked about comparability. There is a balance to be struck. I believe that the eight mandatory notes will make accounts across the EU more easily comparable, because a key set of information will make it easy to look from one company to the next. Member states’ flexibility to require additional notes and, indeed, the overriding principle that accounts must be true and fair, means that different sets of accounts will have a degree of difference, as is required for understanding a business. We have a good balance here between comparability through mandatory notes and ensuring that the underlying important information about a business that needs to be declared is still declared for all companies.
On the practicalities of the guidance that will be issued, the Financial Reporting Council is working on new accounting standards and is consulting on the changes to the standards that will be needed to underpin the new regime. To answer the hon. Gentleman’s question about the time scale, the revised standards are due to be published in the summer, which is long before the first companies using the new framework will start to prepare their accounts, even if they are using the early implementation for this year.
One key issue that the hon. Gentleman raised was the true and fair view. It is a requirement of section 393 of the Companies Act 2006 that accounts must be true and fair, and the regulations do not amend that: they in no way interfere with that requirement for small or, indeed, large companies. That key principle remains.
The hon. Gentleman asked how accounts can be true and fair if information on turnover, for example, is not required. That will apply to abridged accounts only if all shareholders agree. That shareholder transparency remains, whereas the vast majority of other companies must disclose turnover. Concern has been expressed that in some small companies—family companies, for example—the situation might not be harmonious and abridged accounts could be used to hide information. That is why we decided on the requirement that all shareholders have to agree, rather than just a majority. As that example illustrates, a minority of shareholders might be keen to ensure that such information was clearly set out.
Regarding adverse impacts on credit ratings, it is important to note that the opportunity to produce abbreviated accounts is a choice, not a requirement. Companies will choose what is most appropriate for their business needs and, in making that decision, will think about any impacts, such as on credit ratings when applying for credit. It is for the business to choose, and the regulations allow it to do so.
My hon. Friend the Member for Amber Valley raised the question of payments overseas. The 13 notes required for accounts include a related party transactions note—No. 10, if my memory might serves me right—which will be transparent and viewable. If a company is a small part of a wider group of companies, that information will be set out.
The hon. Member for Hartlepool asked why we do not have separate regulations for micro-companies. That suggestion has an attractive simplicity—[ Interruption. ] I meant that in a kind way. The point is that micro-entities are a subset of small companies, which is why it is right that they be dealt with together. We want micro-entities to grow into small businesses, so we do not want them to face massive regulatory change that could hinder
them or provide some kind of unintended incentive not to grow. We want them to grow, and using the same regulations supports that growth. However, the FRC accounting standards will be important in translating into practical information what can sometimes be somewhat dry legislation.Mr Wright: I absolutely agree with every word the hon. Lady is saying about wanting micro-companies to grow into small companies, but I want small companies to grow into mid-sized companies, too. Will she say a bit about the financial reporting requirements and exemptions for mid-sized companies and how we will aid such companies, which, as I have said, will be a real driver of economic growth and job creation in the economy?
Jo Swinson: The hon. Gentleman is absolutely right to highlight the importance of mid-sized companies; indeed, that part of our economy has been a success story in recent years. A tipping point at which there may be a perverse incentive not to grow into a medium-sized company is less likely in the case of companies that are relatively large—those with turnover of £10 million—and
although there are some helpful reductions in reporting requirements for medium-sized companies, greater transparency for those of a significant size is appropriate. We therefore need a system in which there is greater transparency for medium-sized and larger companies, and even greater transparency for very large companies.On the separate audit thresholds and whether the audit exemption should match the various accounting standards we are discussing today, there are differing views in the sector. Again, in a simplistic way it seems sensible to have such alignment, because that would be one less thing for people to be confused about, but there is no consensus on that yet. Some are awaiting more debate, and the discussion paper is enabling that. A separate decision will be taken on that in due course.
I hope I have answered the majority of the questions asked. As I said, I will avidly read the Hansard of our proceedings and ensure that I write to the hon. Gentleman—I am sure that other members of the Committee will also be delighted to receive that letter—with any further answers if I have missed anything. I hope the Committee will endorse the regulations.