Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015

Baroness Neville-Rolfe Excerpts

Monday 23rd March 2015 Grand Committee

Moved by

[Baroness Neville-Rolfe]

That the Grand Committee do consider the Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015.

Relevant document: 24th Report from the Joint Committee on Statutory Instruments

[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Neville-Rolfe) (Con)]

My Lords, I beg to move the Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015. These regulations complete the UK’s transposition of the new EU accounting directive 2013/34. The aim of this directive is to modernise long-standing requirements set out in the fourth and seventh company law directives. The directive reflects the Commission’s better regulation programme and builds on the EU’s “Think Small First” initiative.

The micros directive has already allowed us to relieve burdens for the very smallest companies. The accounting directive now provides an opportunity further to simplify the UK’s small company regime. This will help those companies to get on with running and growing their businesses rather than dealing with administration. The UK’s accounting regime is, I am glad to say, well regarded. In negotiations, we worked hard to ensure that this remains the case. In particular, we secured options allowing us to continue using the UK’s most common balance sheet format and to increase flexibility with a harmonised small company regime. This included securing the ability to require small companies to provide key information on matters such as arrangements not included in the balance sheet, post-balance sheet events and certain related party transactions. I am sure noble Lords will agree that this information is key to a proper understanding of a company’s accounts.

We have worked closely with the accounting sector and national regulatory bodies throughout this process from the earliest negotiations through to the implementation phase. We are grateful for the contributions made by accounting professionals and the UK’s chartered accountancy bodies. They include, to mention a few, the ICAEW, the ACCA, the ACA, the Financial Reporting Council and firms such as Baker Tilly and Deloitte, and the Charity Commission, as well as my own team, who have been working on the directive for four years.

I am aware that the regulations may strike noble Lords as a complex instrument. This is because they largely amend existing domestic legislation on financial reporting; that is, they amend the Companies Act 2006 as well as the supporting regulations which set out the frameworks for small companies, medium-sized and large companies. Marked-up versions of the affected legislation have been lodged in the Libraries of both Houses.

What do the regulations do? As I have just said, the changes affect small, medium-sized and large companies. The regime for micro entities is unchanged except that they will no longer be required to provide a director’s report which, for this size of company, adds no real value. The regulations raise the thresholds for defining the size of companies. This is the first time we have been able to do so since 2008. In raising the thresholds, we have taken up the option to maximise the thresholds for defining a small company. This will enable 11,000 medium-sized companies to be recategorised as small and so access the significantly less burdensome small companies accounting regime. Similarly, the raising of the thresholds will enable more than 3,000 large companies to be categorised as medium-sized companies and so reduce their reporting obligations.

The thresholds for the small company accounting regime currently also determine the thresholds for the small company audit exemption. We will allow the small companies audit exemption threshold to rise in line with that for the small companies accounting regime. This will mean that an estimated 7,400 companies will be exempt from annual audit of their accounts. However, consultation responses indicated that the link between thresholds was an area of concern to some stakeholders. Some think the thresholds should remain aligned, while others want more debate. Therefore, we will consider the link further in the light of responses to the Government’s discussion document on the new audit directive, which closed for comment last week.

We will also permit small companies to prepare abridged accounts. These are accounts whose formats are simplified from the general formats provided in the small companies accounts regulations. However, in response to stakeholder concerns about the availability of information to minority shareholders, abridged accounts will be possible only where the decision is supported by all the company’s shareholders, not just the majority. Of course, there are some companies for which the provision of reduced levels of information would be inappropriate. These include certain types of financial and investment bodies and all companies currently excluded from the small company regime—for example, banks and insurance companies. Such companies must continue to provide full accounts.

These regulations fulfil our obligation to transpose the directive and, importantly, provide thousands of UK companies with the opportunity to access a more flexible, less burdensome financial reporting regime. I commend the regulations to the Committee.

[Lord Young of Norwood Green (Lab)]

My Lords, once again I welcome the Minister’s full and comprehensive report. She mentioned the dreaded Companies Act 2006, in which I was not involved. I forget how many clauses it contains—something like 1,000.

These are sensible proposals which will help companies. I have only one concern. The Minister probably addressed it but there was a rather long list. It is a point about small companies being exempted from annual audits. If they do not have to submit an annual audit, when do they have to submit an audit? The information may be contained in the regulations, in which case I apologise, but that thought has crossed my mind. There was a safeguard for abridged accounts because, as the Minister has advised, they have to be supported by all the shareholders. I hope I did not mishear what she said about the exemption to annual audits but, in any event, it would be useful to have clarification on the record. With that question, I am happy to approve the regulations.

[Baroness Neville-Rolfe]

I thank the noble Lord, Lord Young, for his support for both this instrument and the previous one. We have worked together in these areas and, as he said, these are good changes. As to the question about exemptions, a small company audit is done at the request of shareholders or, as I explained, if it is a financial company. I hope that clarifies the point.

[Lord Young of Norwood Green]

If they do not submit an annual audit, when do they submit an audit? The Minister has said that it is at the request of shareholders, but I am still puzzled.

[Baroness Neville-Rolfe]

I hope this helps. A small company is exempt from audit unless the shareholders request it. If it is a financial company, there is an audit. I am not sure that that helps.

[Lord Young of Norwood Green]

I am not going to pursue the matter further today. Perhaps the Minister can write to me because at some point, small company or not, an audit has to be prepared. The Minister is shaking her head so I have clearly misunderstood.

[Baroness Neville-Rolfe]

There are companies which are exempt from audit because of their size and the simplicity of their affairs. I will write to the noble Lord setting out the circumstances in which companies are exempt from audit. Obviously directors’ duties and so on still apply, but some companies are exempt from audit.

Motion agreed.