rose to move, That the draft regulations laid before the House on 3rd May be approved [18th Report from the Joint Committee].
My Lords, I beg to move the Motion standing in my name on the Order Paper. As noble Lords may recall, my right honourable friend the Secretary of State for Trade and Industry announced to the House on 4th April proposals to change the existing law on the audit of companies' accounts. We are here today to debate the regulations which will give effect to those proposals. These regulations are made under the powers in Section 257 of the Companies Act 1985. The purpose is threefold. First, they raise the threshold for audit exemption from its current level of £350,000 to £1 million. The Government are concerned that the regulations placed on business are not overly burdensome, particularly on small businesses. Hence the regulations that we are debating today reduce those burdens.
My right honourable friend made clear that the increase to £1 million is the first part of a two-step process. We were persuaded in the light of consultation that the balance of argument favoured moving the threshold for audit to the maximum turnover figure permitted under European rules; namely, £4.8 million. We made clear, however, that we wanted to move to this higher figure in the light of the proposals being developed by the independent Company Law Review. Specifically, the review is addressing whether some other less burdensome form of assurance might replace the full audit for companies with an annual turnover of between £1 million and £4.8 million. That is set out in the latest consultation document by the review, which was published in March. It is a question of weighing the costs and benefits of this "lighter" touch independent assurance. The Government have not taken a view on this as yet. The review will make its final recommendations to government in the spring of next year. We will then make a final decision.
Secondly, the regulations simplify the law relating to dormant companies; namely, those which are still on the register at Companies House but have no significant accounting transactions during a period. They dispense with the requirement that dormant companies must pass a special resolution to gain exemption from audit, but they allow 10 per cent or more of shareholders to require an audit. They allow certain payments required of all companies to be made to Companies House while retaining dormant status. Thirdly, they require a dormant company acting as an agent for a third party to disclose its agency status in its annual accounts. There is little doubt that these proposals will be warmly welcomed by the business community because they get rid of burdens and remove unnecessary irritations, but I emphasise that the changes reflect a careful assessment of the relative costs and benefits.
It may help if I provide a little explanation of how we reached our conclusions. I turn first to the increase in the threshold for audit exemption. The Companies Act 1967 introduced for the first time a requirement that all companies should not only file their accounts at Companies House but that those accounts should be accompanied by a report signed by a registered independent auditor. In the 1980s the then government on three occasions consulted on whether or not to keep the audit requirement for all companies. On each occasion it was decided to retain the status quo.
The first cautious step was taken in 1993 with the exemption of very small private companies from audit, while those with a turnover of between £90,000 and £350,000 were given the option of filing a simpler report in place of the full audit report. This regime was considered unsatisfactory and abolished in 1997 so that only companies with a turnover above £350,000 are subject to a full statutory audit. That is the present position.
We estimate that the increase in the threshold to £1 million will enable about another 150,000 companies to take advantage of exemption from audit. When my right honourable friend first proposed an increase, there were sharply differing estimates as to the cost of the statutory audit. For a company with a turnover at about the £1 million mark the cost ranged from £1,000 up to £5,000. The responses to the consultation suggest that the typical cost is around £1,200. Using that figure, our best estimate is that the potential savings for business are roughly £180 million in a full year. Some companies will, nevertheless, voluntarily continue to have their accounts audited; some will judge that they can make better use of specialist accountancy support; others may attach more importance to an overall reduction in their costs. The important point is that they will have the choice in the light of their own circumstances. The proposals do not change the existing safeguard for minority shareholders that 10 per cent of shareholders can require an audit.
I turn more briefly to the changes to dormant company status. Section 250 of the Companies Act 1985 draws a distinction between those companies that are actively trading and those that are not. Some 170,000 companies have dormant status--often they are incorporated to protect a company or brand name--whose only purpose is to own an asset such as the freehold of a building. Many dormant companies are within groups and would not otherwise be eligible for audit exemption. In March last year the Government published a consultative document on the legislative framework for dormant companies which set out proposals to reduce the costs involved in running a dormant company. A large majority of respondents agreed with the proposals for simplification of the law.
As to the proposals on "agent" companies, most respondents agreed that some action was needed to make it clear to a third party where a dormant company acted as an agent for another company. It is certainly legal to act in this way but it can be confusing or misleading to a third party. Just over half agreed with the proposal that companies acting as agents should be required to declare their agency status in annual reports.
I hope it is clear from what I have said that wide consultation on these proposals has led to a package of measures that are practical and appropriate, relieve unnecessary burdens on smaller companies and have the broad support of the business community. In accordance with the undertaking given by my noble and learned friend the Attorney-General in November last year, in my view the amendments to the Companies Act proposed in these regulations are compatible with the European Convention on Human Rights.
In our modern economy small companies are increasingly the vehicles for sustained economic growth and job creation. It is, therefore, vital that we reduce unnecessary burdens on these companies, and these regulations are a significant step in that direction. The regulations help to make an appropriate and equitable regulatory framework for business, and I commend them to the House.
My Lords, I am pleased to inform the Minister that we welcome these regulations, as we do any steps that reduce the administrative burden and expense on small companies. It is perhaps right that I should remind your Lordships that I have previously declared an interest, having been a member of the Small Business Bureau. I am also a director and shareholder of a number of family companies which will certainly benefit from the reduction in the audit requirements. I am glad that, following a speech that I made early in my career in your Lordships' House, the fee for filing an annual return was reduced from £36 to £18 and has since been reduced still further to £15--a considerable benefit to small companies. Following a persistent campaign by the Small Business Bureau, the Registrar of Companies has greatly simplified the annual return.
I regard the exemption from audit of companies with turnover of less than £1 million as another useful step in deregulation. It is likely to affect a very large number of companies, typically the small family business and the corner shop. The Government have claimed that this will save business some £180 million. That is a reduction on the figure of £500 million that they originally claimed. Both figures are disputed by the Institute of Chartered Accountants, but the theoretical saving is academic. Small companies will still require professional help because of their obligation to file statutory accounts at the Companies Registry.
The next step along this particular branch of deregulation may be to abolish the need for small companies to file statutory accounts, which in practice are totally useless. In small companies the shareholders are very close to the management--usually they are the management--so that the statutory accounts are of no use to them. The period of several months until the end of the financial year that is allowed for filing accounts makes them useless for the protection of potential creditors. I also expect that professional accountancy assistance will be required by many small companies to enable them to prepare accounts for the inspector of taxes. Therefore, the actual saving may not prove to be as we thought. Nevertheless, we certainly welcome the change and the benefits that it will bring. It is perhaps only just because of the regulatory burden that the Government have imposed on SMEs, which is estimated to be £10 billion per annum.
In a protest against working families' tax credit, the Institute of Chartered Accountants said:
"There are many other burdens that seriously restrict the ability of SMEs to operate and grow for the benefit of employment and the economy generally. We urge the Government to act as quickly as possible to reduce these much heavier other burdens on business".
We on this side of the House entirely agree.
While we welcome the increased threshold, I have to record our mild disappointment that the Government have not bitten the bullet and increased the exemption up to the £4.8 million, the figure permitted under the European Union regulations, a step which has been endorsed by the Institute of Chartered Accountants.
A further part of these new regulations is to alter the requirements for filing accounts by dormant companies which the Minister mentioned. Those accounts have already been greatly modified and are already simple. I assume that the Registrar of Companies may read this short debate. I should like, therefore, to take the opportunity to ask why dormant companies should have to file any accounts. The definition of a dormant company is one which has no significant transactions. There are some 170,000 companies with dormant status. Since there is no fee for filing their annual accounts, it is a burden on the Registrar of Companies to have to deal with them, to say nothing of chasing the many small companies which, by the very nature of their being dormant, fail to do so in time.
We give a welcome to those steps which reduce the regulatory burden on business and we hope that in the very near future it will be followed by many similar steps.
My Lords, the major change to these regulations is undoubtedly the increase in the turnover threshold for audit from £350,000 to £1 million. It is a substantial change and offers an audit exemption to some 150,000 additional companies. When my right honourable friend the Secretary of State first floated such an idea about a year ago, it was seen by some as premature. Yet, a year on, roughly three-quarters of the 150 respondents to our consultation consider that the balance of argument favours raising the threshold at least to the £1 million, with many agreeing also that the second stage, moving to £4.8 million in the way I described, is also desirable.
It is possible to criticise the change as being too timid or too bold. However, there are two powerful reasons for taking the matter in two stages. I have explained the link to the Company Law Review. We do not think that it is sensible simply to cut across a major element in that work. It is sensible to explore the idea of an independent professional review for those larger companies before making a second change. There are dangers in moving too far too fast; and I believe that taking this sizeable step now will enable us to assess the benefits.
Dormant companies are required by European law to file their accounts.
Finally, the question is not whether there is value in having an audit--for many companies that will remain the case--but whether it should be a statutory requirement for smaller companies. We have seen very little in responses to our consultation to show that the balance of costs and benefits points to retaining a statutory requirement which these regulations dispense with. The change will in many cases free up accountants working with small firms to work more positively and imaginatively to develop the business. I commend the regulations to the House.