Small Business, Enterprise and Employment Bill

Lord Phillips of Sudbury Excerpts

Monday 19th January 2015 Grand Committee

[Lord Flight (Con)]

My Lords, I declare my interests as set out in the register.

At Second Reading, I expressed some unhappiness and concern about the compulsory public register provisions. One of my main objections is to the inclusion of, and the impact on, small companies. Generally, I think that it is a wonderful thing that this country has had an explosion in entrepreneurship over the past five years, the likes of which I have not seen in my lifetime, with lots of young people happily getting on with setting up their own businesses—and, as I have said before, that is not just confined to London and the south-east. One of several reasons for that is that, compared to other countries, the Government have made it relatively easy to set up your own business: forming a company is extremely easy; the nature of the financial accounting returns has been made simpler for small businesses; and, whereas there are major hurdles in setting up a new SME in, for example, Italy, in this country it is pretty straightforward. That has been a huge success.

Prima facie, I am not happy with additional regulatory burdens, particularly on small businesses, unless they add some clear advantage. Here I cannot see that a small business, as defined in the Companies Act 2006, will have the resources to be engaged in terrorist funding, nor do I see much prospect for at least material avoidance or for a security risk. Therefore, my Amendment 37A calls for the exclusion of small companies as defined in the Companies Act from the application of compulsory public registers. One of my concerns is that there are huge numbers of new small companies—1 million last year, I think, and nearly 2 million over the past two and a half years—and they are almost invariably run and controlled by the entrepreneur who set them up, so he will almost certainly fall into the category of having control through owning 25% or more of the company. I think it extremely unlikely that small businesses will know about this legislation, as it is pretty unlikely that they will be employing lawyers who could warn them about it, so I also see the danger that large numbers of entrepreneurs will quite innocently not keep this register and thereby commit a criminal office. I do not think that any Members of this Committee would want to see entrepreneurs prosecuted for the criminal offence of not keeping their public register.

I believe that this is an unnecessary piece of additional bureaucracy on small businesses. I believe that it will be substantially ignored out of ignorance of the requirements. I really do not see that there is any need to include small businesses within the public registers legislation.

[Lord Phillips of Sudbury (LD)]

Can the noble Lord assure the Committee that taking small businesses out, as he requires under this amendment, will not take out shell companies, which are the major tool by which major international and, indeed, national frauds are effected?

[Lord Flight]

It depends on whether a shell company falls within the Companies Act definition, so it will depend on what funds there are—what the shell company is capitalised at—and the other issues in the Companies Act that determine what is a small business. There is not necessarily a black-and-white answer, but I would have thought that if the Government graciously accepted my amendment they could add to it significantly by carving out that shell companies are not excluded.

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[Lord Mitchell (Lab)]

My Lords, as a champion of small companies half of me has a lot of sympathy with this amendment but the other half is worried. We define a small company as one that has a turnover of less than £6.5 million, a balance sheet of less than £3.26 million and fewer than 50 employees. The questions that have been raised today are: what is to prevent such companies from getting up to the activities we are seeking to prevent, and is size really the sole determinant of illegal activities? Maybe we should have a definition of a micro-company—a small, start-up company that has criteria much below the numbers I have given. We need to keep bureaucracy and red tape out of it, but it is quite clear that in the right hands a coach and horses can be driven through this and we need to have some degree of protection.

[Lord Phillips of Sudbury]

My Lords, I reiterate what the noble Lord, Lord Mitchell, has said. I spent the best part of my very long legal career acting for small businesses and start-ups, and nobody could be more in favour of them from virtually every point of view. However, we absolutely cannot leave a gap through which coaches and horses will ride with impunity. I am sure that the noble Lord, Lord Flight, does not need reminding of the fact that shell companies are a vehicle of choice for huge fraud. It is reckoned now internationally that fraud amounts to £27 trillion to £35 trillion, while our own fraud figures are rising at a startling rate. The amount of tax evasion—I shall not use the word “avoidance”, because it is discredited—is staggering and rising exponentially. The principal vehicle by which fraud, evasion, irresponsibility and immorality are effected in our country is the shell company. I am sure that I do not need to tell your Lordships that Barclays, I think it was the year before last, paid some derisory proportion of tax on its profits by using over 100 shell companies, in a huge chain, switching through virtually every tax haven on the globe.

If there is one thing that we really must do, and which I believe everybody in this House is determined to try to do, it is to prevent the evasion of the intention of us as legislators over a whole raft of measures—particularly tax but not by any means confined to tax. At present, because of such companies largely using the considerable wits of thousands of lawyers and accountants in the City, with the aid of the tax havens throughout the globe that sit with open mouths looking for funds to pass through them, we are in a parlous state. The highly beneficent intention of this legislation is to do something about that, and I hope that we will not be engaged in yet another legislative self-delusion, of which I have sat through so many. I hope that the noble Lord, Lord Flight, does not misunderstand me—I totally go with his basic proposition—but we cannot leave this Bill in a state that facilitates the very thing that all of us are determined to try to deal with.

Even if we got the legislation right, for us to rely on the proper implementation of the law that leaves this place would be another self-delusion. Our implementation agencies are so terribly underresourced that it is not David and Goliath in this country—it is so often David without his sling and Goliath. To my mind that means that, when we are in doubt, we should screw the template tighter to the intention that we have for this legislation. I am afraid that that leads me to be unhappy with the amendment.

[Lord Leigh of Hurley (Con)]

My Lords, I draw your Lordships’ attention to my entry in the register of interests, which includes directorship and ownership of a number of small companies within the thresholds.

I agree with the noble Lord, Lord Phillips, that the measure’s intention is clear and its purpose very noble and needed. However, like the noble Lord, Lord Mitchell, I am keen to ensure that bureaucracy on small companies and SMEs is minimised. The case of a national bank, which I shall not append by name because I am sure that there are many others, using lots of subsidiary companies to avoid tax, is not caught here, because a subsidiary company would not be a small company.

My concern is the small family company where, perhaps by the second or third generation, there are multifarious ownerships, possibly through a trust or directly. Indeed, the Institute of Chartered Accountants in England and Wales, of which I am a fellow, helped clarify my thinking by giving the example of a number of family members who own a company but one of them habitually votes in accordance with the directions of his or her spouse. In such a case, would the spouse be a significant controller and what lengths would the company need to go to so as to establish that? This is just an extra layer of complication and administration that our SME companies should not have to face.

[Lord Phillips of Sudbury]

Is the noble Lord sure of what he just said? He said that a subsidiary company in a chain of subsidiaries would not be a small company. I would want to be absolutely certain of that. My impression is rather the reverse: if it has minimal paid-up capital, as indeed it could, how would it be caught?

[Lord Leigh of Hurley]

As I understand it, if it is a subsidiary of a much larger company then it is not a small company as defined in the Companies Act. I stand to be corrected but that is how I understand it.

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[Lord Borwick (Con)]

My Lords, I also declare my interests in the register and take issue with the suggestions of the noble Lord, Lord Phillips. When it is said that HM Revenue & Customs does not have the resources to pursue these matters, is the suggestion that it does not have the powers to ask the question of a taxpayer or company, “Who controls the company?”. I am very nervous about requiring all the millions of honest small companies to do some extra work which is unnecessary because HMRC already has the powers to ask that question.

[Lord Phillips of Sudbury]

My Lords, I do not know whether it is for me to answer that question, but it is very germane. I fear that the truth is that the implementation of so many of our laws is just grotesquely inadequate. Large parts of many of the statutes we pass in this place are never implemented. Prosecutions under a plethora of criminal provisions have never been made. That is under implementation. Frankly, I do not know how to answer the noble Lord because it is an entirely fair question. All I know is that one without the other leaves us in a mess. I accept what he says: one does not want, because one has no implementation, to create such a barbaric forest of bureaucracy that it becomes counterproductive in another way.

[The Deputy Chairman of Committees]

My Lords, this is Committee and it is perfectly in order for noble Lords to speak as many times as they wish. I also remind noble Lords that it is customarily the case that they address the whole Committee and not merely the noble Lord who asked the question.

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I believe that it is important that these matters are dealt with in primary, not secondary, legislation, as that would help in ensuring that the full chains of ownership are recorded in the register. If the Minister has other ideas as to how this might work effectively, I would be interested to hear them, but I urge the Minister to prioritise tacking this issue before this important piece of legislation completes it progress in this House. I beg to move.

[Lord Phillips of Sudbury]

My Lords, my name is on the amendments in this group, but I shall speak, if I may, to Amendment 37A in particular.

Amendment 37A defines “intermediaries”, which is the term used in Amendments 39, 41 and 43. As defined in Amendment 37A, “intermediaries” would catch, I think and hope, all the links in the chain of shell companies—as they usually are—that enable a fraudulent scheme to be effected. It may well be that the drafting of Amendment 37A is defective because, as I think we all know only too well, the combination of the details of the amendments in relation to this Bill and in relation to the Acts of Parliament that the Bill amends is pretty hair-raising even for a lawyer. Therefore, I apologise in advance if the Minister guns me down on the wording of Amendment 37A, but the purport of it is clear enough and I am convinced that it should be there.

It is no good allowing the many devices utilised by the people and corporations that use the very lax system of international control now prevailing, so we are trying here to do something really effective. I pay tribute to my noble friend the Minister and the Government for grappling with these issues at all, because, as the noble Lord, Lord Watson of Invergowrie, said, we are the first to try to get a grip on this. We all realise that we cannot effectively get a grip of the problem on our own, but at least we are in the field and showing our mettle. As the noble Lord, Lord Watson, mentioned, initiatives are being taken in consultation with some of these tax havens, but it is not a very happy tale: only one decision has been taken so far, by the Cayman Islands, which is to have nothing to do with all of this. I have a terrible suspicion that the others may come back with a similar response, because it is their bread and butter to be the handmaids of the world’s great fraudsters and shysters. But we are doing our best, and I hope that Amendment 37A will commend itself.

I will make just one more short point, on Amendment 37. As the noble Lord, Lord Watson, said, when a similar amendment was discussed in the other place, the Minister there said that the Bill includes a new power, amending the Companies Act, that will allow amendment of the frequency of the provision of the information, which is currently annual. Amendment 37 would allow ad-hoc inspections, so it would allow the person having the authority to make a lightning swoop, if you like, on the company or person concerned in order to extract up-to-date, current information on what they are up to. As I understand what the Minister in the other place said, it is not enough simply to have a general power to amend the timing of all this; we need an ad-hoc power to move against particular individual companies at any time. That would be one of the effects of Amendment 37.

[Lord Mitchell]

My Lords, I rise to speak to Amendment 37, to which I have put my name. I pay tribute to my noble friend Lord Watson of Invergowrie for the work he has done in this area and for that very clear exposition of the relevant issues. He has made the important points, so I shall try not to repeat what he said.

Amendment 37 would give the Secretary of State power to make regulations ensuring that the PSC register is current and accurate. My noble friend Lord Watson explained the importance of that, but I shall echo his arguments. It is vital that the register be up to date if it is to do the job we expect of it and shine a light on some of the murkier examples of using anonymous shell companies to obscure the true ownership of an asset. I believe the Government see the register as providing something of a snapshot of the beneficial owners of a company, but in this day and age where technology has made instant communication the norm, rather than the exception, there is no reason why the PSC should not be kept up to date.

In this context, it is worth considering the evidence put before the Committee in the other place by the Institute of Directors, which said that the PSC,

“will be updated once a year and a fair number of people said in our consultations, ‘It’s going to be out of date within minutes of being published.’”—[Official Report, Commons, Small Business, Enterprise and Employment Bill Committee, 14/10/14; col. 19]

In your Lordships’ House there is an obligation on each of us to maintain our register of interests, which is not allowed to be more than one month out of date. Why should companies have an annual requirement? It simply does not make sense in this electronic age. In their response to the consultation, the Government said that they will continue to work through the principle that information will be provided to the central registry to ensure that there are no loopholes or unintended consequences. My concern is that this could be a loophole, so I would like the Minister to address it.

My second point is about accountability. As my noble friend Lord Watson said, this amendment requires the Secretary of State to ensure that the right regulations are in place so that what is on the PSC register is accurate and complete. Parliament will be able to scrutinise these regulations to check that they are capable of delivering an accurate register.

I shall pick up a remaining point from the debate about this group, and I hope the Minister will be able to put our minds at rest. Too little progress has been made in encouraging Overseas Territories and Crown dependencies to have public registers. If we return to the original Lough Erne agreement, it is clear that making progress on this issue is an integral part of fulfilling its spirit. I hope the Minister can update us on whether the Government will consider making such registers obligatory.

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[Lord Phillips of Sudbury]

Surely my noble friend understands that one is not looking for every company to have to make intermediate or particular requirements on its register. We need a power for the registrar—although it could be someone else—to say to a company, “Show us your books”. That would have a huge deterrent effect. However, we are not suggesting the whole kaboosh should be responsible in that way.

[Baroness Neville-Rolfe]

My Lords, I am grateful for that clarification. I was hypothecating the use of third parties to verify data before the data went to Companies House. It seems there is agreement that this would not be desirable for the reasons I have stated.

I have listened carefully to the arguments on the benefits of requiring up-to-date information to be filed at Companies House and the Government have listened to similar arguments during the negotiations we have been having on the fourth money laundering directive. Noble Lords may, however, not be aware that we already have the power we need in the Bill to allow us to increase the frequency with which information is filed at Companies House. This was inserted in the event that the statutory review mandated by Clause 79 demonstrated a need for more up-to-date information. I will, however, in the light of the conversations we have had today, reflect further on whether there is a case to use that power once the register goes live and the new system has bedded in.

Turning to Amendments 37A, 39, 41 and 43, I understand the desire for more information on every layer of the ownership chain. However, we must keep in mind our fundamental objective, which is to know who ultimately owns and controls our companies. Requiring additional information risks confusing companies and users of the register. There will also be cost implications in asking a company to hold and keep up-to-date information on every company or individual in its ownership chain. We believe we will have the information we need for investigation and prosecution.

More importantly, this is not a requirement of international standards or the soon-to-be-adopted fourth money laundering directive, which I am glad will bring the major benefits of these reforms to other member states. Noble Lords will, I am sure, share my concern to avoid gold-plating.

The noble Lords, Lord Watson, Lord Mitchell and others, asked why we are not including the overseas territories and Crown dependencies in this legislation. The Prime Minister made clear that he would like a publicly accessible central registry of company beneficial ownership information to be the new international standard. We would therefore like the overseas territories and Crown dependencies to match our policy. We respect, however, the fact that the overseas territories and Crown dependencies are separate jurisdictions with their own elected Governments, under which they are responsible for fiscal matters. We are working closely with the overseas territories and Crown dependencies and keeping them informed of our policy as it develops so that our decisions can feed into their policy thinking. At the Joint Ministerial Council in December last year, the UK and territory leaders agreed to work together on raising international standards and to meet ahead of the G20 meeting of finance Ministers and central bank governors this February to agree a way forward on implementation of the G20 principles.

I hope my noble friend and other noble Lords have found some reassurance from my response and that the noble Lord will agree to withdraw the amendment.

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[Lord Borwick]

I support my noble friend Lord Flight’s amendments. I declare my interest as before. I understand why my noble friend the Minister is proposing this, although I am not sure that I agree with it. The task is surely to design these rules so that they have the least impact on honest taxpayers. The tax legislation that we have is so enormous, and growing at such a vast rate every year, that I would be amazed if anybody knows of any human being who has actually said they have read all of it. There are not only enormous complexities in our tax legislation but vast powers for HMRC to enforce it. With this legislation, we are in danger of producing a group of citizen tax collectors who believe that it is possible—that it is their right—to go through the register and come out with an opportunity to accuse a company of paying insufficient tax. The effect of that would be that a newspaper or other media outlet, or an NGO, will pursue the case, and I am afraid that, as a result, the duties on HMRC to look into it will be rather greater than they are at present. Rather than reducing the burden on HMRC, as was mentioned earlier, I have a feeling that this legislation will increase it rather dramatically. This whole area of legislation is rife with unintended consequences.

My noble friend mentioned activists. An animal rights activist, for example, was convicted and sentenced to six years in prison last year, I think, for attacking people connected with Huntingdon Life Sciences—sending incendiary devices, hoax bombs and other such stuff. The anti-fracking demonstrators in Balcombe threatened similar activities. All of this legislation is open to abuse in a most remarkably comprehensive fashion, which is why I believe that this information should only be available to those people listed in my noble friend Lord Flight’s Amendment 44H.

[Lord Phillips of Sudbury]

My Lords, my name is on two of these amendments, Amendments 44 and 47. My noble friend Lord Watson has introduced them very fully, but I would like to add a few further points. As a first general point, some have commented—the noble Lord who has just spoken made the point that this is imposing a huge liability on limited companies—and asked why any member of the public should have access to the information on this register. The answer is simple but has not been referred to. Too often we overlook the fact that limited liability is an entirely state-provided privilege—and what a privilege it is. It protects those who own companies from the normal results of one’s own lack of success and, in some respects, even worse. Major conditions must surely be attached to the enjoyment of such a privilege. I believe that the Government are correct in the general purport of the provisions that we are now talking about. However, the way in which they have been constructed and, indeed, some of the drafting, leave a lot to be desired. I support some of the proposals made by my noble friend Lord Flight and the noble Lord, Lord Leigh of Hurley.

I want to concentrate on new Section 790O, from which Amendment 44 would remove the last lines. That removal is justified on the grounds that what is required by this subsection is unrealistic and, I would say, impractical. How does one provide information about the future which may not be in one’s control? I refer to new Section 790O(4)(d), which says that where a member of the public requests access to the company’s PSC register to see what is in it, they must say with that application,

“whether the information will be disclosed to any other person”.

How on earth can one do that? One could say, “I want it for this and that reason”, but one cannot tell whether in future it will be disclosed by someone else, or if one would want to disclose it for a purpose as yet unknown to a person as yet unknown.

It then it goes on to say that in making the application for access to the PSC register, one must give,

“the purpose for which the information is to be used by”,

any person to whom it is disclosed. Again, that is not realistic. For those reasons alone, it is entirely right that this part of the section be removed, as the amendment requests. There may be some residual need for something that is currently within that subsection and my noble friend the Minister may want to highlight that. Indeed, a lot of what we say today needs reflection and it may be that she will come back on Report and say, “Okay, we will remove sub-paragraphs (i) and (iii) but we need sub-paragraph (ii) and something else”.

Then, new Section 790P(3) says:

“If on an application under this section the court is satisfied that the inspection or copy is not sought for a proper purpose”—

without defining “proper purpose”, which is not good enough. These are important provisions. There are remedies and consequences for not complying with the law. Not to have a definition of a “proper purpose” must be wrong. Having said that, I am not entirely happy with the definition provided by my noble friends Lord Flight and Lord Leigh of Hurley, but I will not detain the Committee any longer. I just confine myself to those points. However, the drafting of this whole area of the Bill is extraordinarily opaque in places and lacking in proper clarity. I am concerned at the bureaucratic effects of some provisions while strongly in favour of the general purport of the Government in producing this part of the Bill.

[Lord Leigh of Hurley]

My Lords, I just make the point that this amendment is not in my name, as was previously suggested, although I rather wish it was. I thank my noble friend Lord Flight for that back-handed compliment.

It is worth recalling that the PSC register in the UK in fact relies on self-reporting information that is not subject to independent verification. My noble friend the Minister indicated that it will be accurate because it is public but I struggle to rationalise that. The important point is that it is not subject to independent verification and, as my noble friend Lord Flight mentioned, that does not comply with Financial Action Task Force recommendations 24 and 25. None the less, that is the chosen route of Her Majesty’s Government and one has to consider the ramifications of allowing full public access to this unverified data. It means that people will take as read information supplied by companies, which of course could be completely incorrect, and they will assume that, as it is on an official register, it has validation when it is not the case. While recognising that tax and law authorities must and should—