Small Companies (Micro-Entities’ Accounts) Regulations 2013

Baroness Donaghy Excerpts

Tuesday 26th November 2013 Grand Committee

[The Earl of Erroll (CB)]

My Lords, I will ask a quick question. This issue occurred in relation to something else where there were exemptions for small companies, SMEs or micro-companies. It is in the definition of companies that qualify as micro-entities. The third criterion that can be applied is the number of employees: not more than 10. It then talks about averaging the number of people in contracts of service. If you employ two people part-time—for instance, one who has young children and wants to take them to and pick them up from school, and the other who is retired, say, and happy to fill in for the rest of the day—you are employing two people, but you only have one full-time equivalent. In that kind of situation, or with people working seasonally or casually, this criterion could discriminate against small employers who are trying to get several people all doing a bit of part-time work for them, because the number of employees could then easily exceed 10. Therefore, it should probably be worded as full-time equivalents in future. I will not suggest anything here, but I want to flag up the general point to regulation-makers that it would be fairer on small entities if there was some way to bring it back to full-time equivalents.

[Baroness Donaghy (Lab)]

First, I welcome anything that makes life easier for small businesses. I have often felt that the definition of small and medium-sized enterprises that fits in with the European definition is somewhat misleading in our country because a medium enterprise as per the definition would be regarded as quite a large company in the UK, so to recognise micros in this way is more than welcome.

I have a question for the Minister that I suppose relates to the flexibility of the definitions of turnover, balance and staffing, referred to by the previous speaker. I hastily looked through both the impact assessment and the regulations and could not find anywhere how the updating of the turnovers and balances will take place. What length of time is considered reasonable? I believe that the issue of part-time equivalents is quite important, particularly for companies of this kind that might start off in a fairly informal way. It is actually written in to the regulations, which I presume means it is quite inflexible.

[Lord Cope of Berkeley (Con)]

My Lords, I just wanted to welcome this provision altogether. As my noble friend the Minister said, in some respects it is a first step that many people—myself included—have been urging for a very long time. It is particularly welcome because it flows from work done by the European Union and in Brussels, where there has long been an initiative to improve matters for small firms. “Think small” has been the watchword. It has not produced an awful lot of actual benefit, but this provision will produce a worthwhile benefit to a lot of very small companies.

I have no interests to declare in this matter. The only company of which I am a director is a charity, and, as my noble friend said, charities are excluded from these regulations. I think that is correct because, after all, one has to consider who has an interest in looking at the accounts. Obviously, those who have an interest, even in very small companies like this, include the shareholders, the employees and the others involved, as do those who might be thinking of lending them money or otherwise advancing credit to them and doing business with them. In the case of a charity, it is those who give money to the charity who have the biggest interest in ensuring that the money is spent on the charitable object that they have in mind when they give the money. Therefore, I think it is right in this statutory instrument to exclude charities, and I welcome it.

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[Viscount Younger of Leckie]

I suspected that that answer might disappoint the noble Earl. I will be delighted to recheck with officials on that specific question and write to him to clarify.

The noble Baroness, Lady Hayter, later asked about charities and what they feel about the exclusion of charitable companies. There were no responses to the public consultation from individual charities, but we worked closely with the Charity Commission throughout, as I said in my speech, and we continue to work with it to consider how burdens can be removed for this group. We will consult again. I hope the noble Baroness will be pleased when I say that that will be done as soon as 2014.

The noble Baroness, Lady Donaghy, asked how the updating of balances will take place and about the definitions of the criteria on how turnover, for example, will be met. The regulations are subject to review by the Commission on a regular basis. I have just checked what precisely that means, and it means on a five-yearly basis. As the directive updates the thresholds, the Government will reflect them in UK legislation to allow the greatest possible number to take advantage of the exemption.

The noble Baroness, Lady Hayter, asked about the Charity Finance Group, which has asked the FRC to consider the needs of small charities. This is another charities-focused question. The FRC will work with the commissioners and BIS to address their concerns. A new SORP—statement of recommended practice—for the preparation of accounts is being prepared to update the guidance.

The noble Baroness, Lady Hayter, also raised the issue of small trade unions and why other measures increasing the accounting regulations on them are being introduced. In fact, she alluded to Part 3 of the Transparency of Lobbying etc. Bill which, as she said, I take the lead on. I do not want to be drawn into that on this particular issue but it is important that we consider each policy carefully and on its own merits. The Government are working to reduce the burdens across a range of areas and will do so wherever possible. Micro-entity regulations, on which we are focused today, are an example of that.

Finally, I draw the attention of noble Lords to the important element of choice for businesses. Micro-entities will be able to choose whether to adopt micro-entity, small company or full accounts. The Government conclude that the regulation meets the requirements of the Act and I commend this regulation to the Committee.

[Baroness Donaghy]

I apologise for coming in again and thank the noble Viscount for clarifying the issue about a five-year review. I will just make the point that that could be quite a long period if inflation starts to increase by any substantial amount. That could have unintended consequences for the expansion of micro-businesses if they get to one or two of the magic limits set in the instruments, in particular where they refer to,

“a company in a year in which it satisfies two or more of the following requirements”.

One could read into that that as long as they stick within the turnover and balance sheet, they could employ more than 10 people, or other variations. It might mean that companies look more to those qualifying things than to simply expanding their business. If we cannot do anything about that today, can we make the point to the European Commission that a five-year review might be totally unsatisfactory?

[Viscount Younger of Leckie]

The noble Baroness raises an interesting point. As I said, I rechecked that the review period is five years. I quite accept what she said about things changing during the five years. That includes companies growing. That is of course a good thing for companies, but it might mean that the definition of the company changed from being a micro-entity to a small company—perhaps it is a bit much to hope that it might become a medium-sized company. I should, and would like to, write to the noble Baroness to not only reiterate what I have said today about the review period but also give her some greater reassurance about the definitions we have included, how they relate to the five-year period, and how they will be treated. That would be very sensible. I am on a learning curve, to that extent.