Companies House Reform
Under the ECCTA, the role of Companies House is changing more fundamentally than at any point since it was created in 1844. The Registrar is being turned from a largely passive recipient of data into a much more active regulator of company information.
The Registrar of Companies has four new statutory objectives designed to enhance the integrity and accuracy of information held:
- To ensure that any person required to deliver documents to Companies House delivers those documents properly;
- To ensure that the information held by Companies House is accurate and complete;
- To ensure that Companies House records do not create a false or misleading impression to the public; and
- To prevent companies and others carrying out or facilitating unlawful activities.
To achieve these new objectives, the ECCTA gives Companies House a broad range of additional powers (some of which will require additional regulations to be made by the Secretary of State in due course):
- Querying and rejecting filings: Companies House will have the ability to query information that is filed with it, as well as to request further information either before or after accepting a filing. Failure to comply within the timescale set by Companies House will be a criminal offence. Companies House will also have the power to refuse to accept a document that appears to be inconsistent with information already on the register.
- Removing information from the register: Companies House will have greater powers to remove information from the register more quickly and in wider circumstances than is currently the case.This power will include the ability to remove items from the register which had legal consequences when registered, such as reductions of capital or changes of name.
- Changing information on the register: Companies House will be empowered to change certain information on the register. This will include, for example, the power to register a new name for a company in certain circumstances, as well as the ability to change acompany's address where its registered office is not at an"appropriate" address.
- Intervening in company names: The company names regime is being tightened and additional categories of name will be prohibited going forwards, including those that may facilitate the commission of a dishonesty or deception offence. Companies House will have the ability to direct a company to change its name for failure to comply with the new company names regime, and to change the company's name if that direction is not complied with.
- Mandating electronic filing: Companies House will have the power to require all information to be filed electronically, including requiring companies to file accounts in iXBRLformat and tagged.
- Imposing fines: Companies House will have the power to impose civil financial penalties (of up to £10,000) for most offences under the Companies Act 2006. These powers will be in addition to existing powers to prosecute criminal offences under the Companies Act 2006.
To support Companies House’s powers on ensuring integrity of the register, the current criminal offence of providing misleading, false or deceptive information is being expanded. It will now apply where any person provides misleading false or deceptive information without reasonable excuse (rather than where a person does so knowingly or recklessly). There is also a new aggravated criminal offence for knowingly providing false, misleading or deceptive information.
Changes to Filing Requirements
This is probably the issue that will be most visible to owners and accountants acting for small and micro-entities.
Small companies will no longer have the option to prepare and file abridged accounts. The act also removes the option to file ‘filleted’ accounts. Instead, small companies will be required to file both the profit and loss account and directors’ report.
Micro-entities will be required to file their profit and loss account (although there is no requirement for a directors’ report in a micro-entity’s financial statements, hence there will be no need to lodge one at Companies House). However, the act includes provisions which allow the Registrar to make the profit and loss accounts of small or micro-entities (or parts thereof) unavailable for inspection. This may provide some element of relief for those concerned about trading information becoming publicly available which could be deemed‘ commercially sensitive’.
In the past, it has been difficult for Companies House to determine whether an exemption taken by the company was valid. For example, whether the entity is, in fact, a micro-entity, or not, because the profit and loss account was not lodged with the Registrar so one of the criteria for taking the exemption was unavailable. The Registrar was therefore reliant on the two remaining criteria (being balance sheet total and employee numbers) so provided these were within the limits, the Registrar had to accept the exemption was available.
The change in filing requirements will now enable the Registrar to verify that companies are filing the accounts correctly (ie, the company is, in fact, a micro-entity or small hence relevant exemptions taken by the entity are valid). We are currently waiting on the regulations, so there is still uncertainty concerning how this will be finally implemented.
Small companies and micro-entities can currently claim audit exemption. Where advantage of audit exemption is taken, a statement under s477 of the Companies Act 2006 is required to made on the balance sheet. The act includes a further requirement where companies (including dormant companies) claim audit exemption. This additional statement must identify the exemption being taken and confirming that the company qualifies for the exemption.
Enhanced Identity Verification Checks
The verification requirements will apply to:
- new and existing directorsand PSCs; and
- any person who delivers documents to Companies House on their own behalf or on behalf of another, so normally this will mean company secretaries and their deputies/teams will need to have their identity verified. The government considered but is not proceeding with the requirement for shareholders who are not PSCs to verify their identity.
An individual's identity can be verified either:
- with Companies House directly; or
- by an authorised corporate service provider (ACSP) confirming to Companies House that it has carried outthe verification process.
A person can apply to Companies House to become an ACSP if they are subject to the UK Money Laundering Regulations and their identity has been verified. This means that generally overseas entities will not be authorised to carry out identity verification.
The requirements for the verification process are not contained in the ECCTA but will be set out in separate regulations. Based on details in the government's White Paper on Companies House reform, it is expected that the process will involve digital facial verification using approved photo ID (such as a passport or driving licence) and a photo of the individual's face. A non-digital alternative will be available, though will inevitably take longer.
It is anticipated that it will take Companies House 12-18 months to have its own verification systems up and running, as these systems will permeate through every function/aspect of Companies House's work. If companies want to get the verification process underway before Companies House is ready to take on this workstream, they may wish to liaise with ACSPs to see when they might be able to start work.
Identity verification checks will be required:
- On incorporation - the statement of proposed officers delivered to Companies House must include a statement that the identity of each individual listed is verified.
- Where a new director is appointed
- Post-incorporation - the company will need to be able to confirm that their identity has been verified as part of the notification of appointment delivered to Companies House. This notification needs to be delivered within 14 days of the person becoming adirector.
With regard to PSCs, companies may include a statement that the identity of each PSC is verified when notifying Companies House in relation to the PSC. If this statement is not provided to Companies House by the company, then the Registrar will contact the PSC and direct them to verify their identity and specify the time period for doing so.
The transitional arrangements for existing directors and PSCs are not contained in the ECCTA but will be laid out in separate regulations. It is anticipated that the verification process for these existing directors/PSCs will be linked to submission of the annual confirmation statement. It is also expected that identity verification will only need to be done once for each person in-scope and that once verified, this will be annotated on the register and that person will then be verified for purposes of any UK incorporated company in relation to which they are a director, PSC or person delivering documents to Companies House.
Consequences For Failing To Conduct Identity Verification
Any individual who acts as a director without having had their identity verified, and the company (and its directors) for which they act, will be committing an offence. The validity of any acts carried out by that individual as a director however will not be affected. Directors who act without verification will also be liable to be disqualified.
As the register will be annotated to indicate that a person is verified, any person who is not verified will be unable to be appointed as a director for a company seeking to incorporate.
It will also be an offence for any person to provide misleading, false or deceptive information without reasonable excuse and there is a new aggravated criminal offence for knowingly providing misleading, false or deceptive information. In both cases this would include any statement made in relation to identity verification.
Failure to Prevent Fraud
A new offence of ‘Failure to Prevent Fraud’ has been introduced by the act. This will hold an organisation to account if it profits from fraud committed by its employees. This new offence is unusual and significant because it is a strict liability criminal offence.
This new offence builds on the existing offences offailure to prevent bribery under the Bribery Act 2010 and a failure to prevent the facilitation of tax evasion under the Criminal Finances Act 2017. Secondary legislation is awaited where this new offence is concerned (in particular guidance is awaited on the ‘reasonable procedures’ defence to the offence).
This offence only applies to larger companies and partnerships which meet at least two of the following criteria in the financial year preceding the year of the fraud offence:
- More than 250employees
- More than £36m turnover and/or
- More than £18m in totl assets on the balance sheet
An organisation which is the parent undertaking of agroup will also be within scope of the offence when it meets at least two outof the following criteria in the financial year preceding the year of the fraud offence:
- an aggregate turnover of over £36m net (or £43.2m gross)
- total assets over £18m net (or £21.6m gross); and/or
- morethan 250 aggregate employees.
Under the act, such an organisation will be liable if it fails to prevent a specified fraud where:
- an ‘associated person’ of the organisation commits the fraud; and
- the fraud is intended to benefit the organisation or a person to whom services are provided on behalf of the organisation
An ‘associated person’ is defined as an employee, agent or subsidiary of the organisation (as well as any others who perform services for, or on its behalf). This is broader than the definition in the Bribery Act 2010, which includes a rebuttable presumption that an employee is an associated person, but in relation to agents and subsidiaries applies a test to determine if the associated person performs services for, or on behalf of, the organisation in the circumstances.
An important point to emphasise where this offence is concerned is that it is not confined to just the UK. If an associated person commits fraud under UK law (or targets UK victims), the organisation can be prosecuted even when the organisation and associated person are based overseas.
Schedule 13 to the act contains specific fraud offences which includes
- fraud by false representation
- fraud by abuse of posiion
- fraud by failing to disclose information.
Secondary legislation can be passed by the government which can add or remove offences from Schedule 13.
An organisation will have a defence where it can show it had either ‘reasonable procedures’ in place to prevent the fraud; or that it was not reasonable for the organisation not to have such procedures in place. As noted earlier, the government will need to publish guidance on what it considers to be ‘reasonable procedures’ in this regard.
Organisations caught under the scope of this new offence will need to carry out a risk assessment to re-examine their fraud detection and prevention procedures.
Changes to the Register of Members
The register of members must contain standardised information on each shareholder, including their forename, surname and service address. Companies will be empowered to require members to provide this information where necessary and members who fail to respond to such requests will be guilty of a new criminal offence punishable by a fine or imprisonment. Nominee shareholders will also be required to declare under whose control their shares are held.
Members who provide information to a company for the purposes of the company's register of members that is misleading, false or deceptive without a reasonable excuse will be guilty of a criminal offence, punishable by a fine. There is also an aggravated criminal offence for any members who knowingly provide misleading, false or deceptive information, in this case also punishable by a fine or additionally imprisonment.
Private companies will no longer be able to keep their register of members at Companies House (a reform originally introduced in 2015). Any company that currently uses the central register will be required to enter into its own register all of the information that would have appeared there, had it not elected to use the central register.
Changes to Other Registers
Going forwards, companies will not be required to keep a register of directors, a register of directors'residential addresses, a register of secretaries, or a register of persons with significant control (PSCs). However this information must still be provided to Companies House, as is the case now.
Companies will have a new obligation to notify Companies House if they serve a notice on a possible PSC, or third party who may have information about a possible PSC, and no reply is received (or a reply is not received within the statutory one month). If a company fails to notify Companies House in these circumstances, both the company and its directors will be guilty of an offence, punishable by a fine.
It will also be an offence to act as a director unless the director's identity has been verified and Companies House has been notified within 14 days of their appointment.
Additional information to be provided to Companies House
- One-off list of shareholders: Companies will be required to provide a full list of shareholders in the first confirmation statement following the relevant provision of the ECCTA coming into force. This obligation applies to all companies, whether public,private or traded. However, companies whose shares are admitted to trading on the LSE's Main Market or AIM, and which are subject to DTR 5, will not be required to provide a one-off list.
- "Appropriate" registered office: Going forward, a company will need to ensure that it is registered at an "appropriate" address. This means an address where it can be expected that the documents sent to it will come to the attention of a person acting on behalf of the company, and where it is capable of having delivery and receipt acknowledged. Companies House will have the power to change the registered office of a company where it is not satisfied that this requirement has been met. If a company fails to maintain an appropriate registered office address, both the company and its directors will be guilty of an offence, punishable by a fine.
- Email address: Companies will be required to provide an email address (which will not be publicly available but) through which they can be contacted by Companies House in the first confirmation statement following the relevant provisions of the ECCTA coming into force. The email address must be "appropriate", meaning that ordinary course emails sent to that email address will come to the attention of a person acting on behalf of the company. If a company fails to maintain an appropriate email address, both the company and its directors will be guilty of an offence, punishable by a fine.
- Confirmation statement: Every confirmation statement will now include a specific confirmation that the company's intended future activities are lawful. If a company fails to deliver a confirmation statement, both the company and its directors will be guilty of an offence, punishable by a fine.
Changes to Company Incorporation Requirements
Under the ECCTA, those incorporating companies will be required to provide additional confirmations when incorporating a new company so that there is greater transparency around the company, its directors and others involved in the company, including that:
- They wish to form the company for lawful purposes;
- The initial subscribers, proposed directors and the company's PSCs are not disqualified from acting as directors; and
- The proposed directors have completed identity verification. The identity of the company's PSCs can either be verified prior to incorporation or within 14 days thereafter.
Other Changes Introduced In ECCTA
Limited partnerships – The ECCTA also contains provisions introducing registration and transparency requirements for limited partnerships. The changes follow reforms proposed in April 2018 by the government to UK limited partnership law to strengthen the legal framework and limit the risk of limited partnerships being used for illicit activities.
Corporate criminal liability for economic crimes – The government has used the ECCTA to introduce a new strict liability corporate offence of failure to prevent fraud where a company does not have reasonable fraud prevention procedures in place. The ECCTA also amends the so-called ‘identification doctrine’ (where companies can be held criminally liable for the acts of their officers or employees if they represent the company's ‘directing mind and will’ such that their actions can be attributed to the company concerned) for economic crimes.
Timing For The Implementation Of The Reforms
The provisions of the ECCTA will come into force at a later date to allow companies and Companies House time to prepare for implementation. In a blog post on the ECCTA receiving Royal Assent, Companies House noted that, whilst some of the measures in the ECCTA will need processes to be developed and secondary legislation before they can be brought into force, other measures can be brought into force sooner. These early-implementation measures include the power for Companies House to query or reject information filed with it, revisions to the company names regime and the requirement for companies to provide the registrar with an email address. Companies House anticipates that these early-implementation measures will come into force in "early2024".
On the economic crime changes, the amendment to the identification doctrine for economic crimes will take effect two months after Royal Assent (i.e. December 2023). The government plans to consult on guidance on "reasonable procedures" in relation to the new failure to prevent fraud offence in 2024, so it is not anticipated that the new offence itself will be in force before 2025.
Changes to Companies House Fees
Much of the additional cost for the changes in Company Administration will be met for significantly increased fees for Companies House services. The table that follows details the announced fees which will be levied from 1st May 2024 onwards
