Draft Accounts and Reports (Amendment) (EU Exit) REgulations 2018

Bill Esterson Excerpts

Wednesday 12th December 2018 General Committees

[Bill Esterson (Sefton Central) (Lab)]

It is a pleasure, as always, to serve under your chairmanship, Mr Davies. Yet again—for the third time in a week—we are here to discuss the consequences of no deal and the changes that are needed to regulations. Yet again, we are told in the explanatory notes that they are relatively minor, but when we dig deeper we find that they affect quite a large number of pieces of legislation and that in combination, they are significant. The combined effect of these SIs, along with many other aspects of the way Brexit is progressing, demonstrates just how important it is that the Government rule out any prospect of no deal as urgently as possible. Businesses are crying out for that certainty. The more of these SIs we consider, the more uncertainty is created.

In this case, the reporting requirements will change significantly, in particular—but not exclusively—for companies where the parent company is in the EEA and subsidiaries are in the UK. The advice note produced last month by specialists Linklaters contains the heading:

“Brexit set to increase accounting requirements for UK entities with EEA parents or subsidiaries”.

That is not something that any Government or any business would want to read. It summarises the fact that this SI, along with the others, will lead to great potential difficulties for businesses and the economy.

I think the Minister quoted from paragraph 2.11 of the explanatory memorandum, which states that

“it is inappropriate to continue with preferential treatment for EEA entities, or UK entities with parents or subsidiaries from EEA States, or entities listing on EEA regulated markets, because that would amount to unreciprocated preferential treatment.”

I do not deny that that would be the case in the disastrous event of no deal, but we must be trying to avoid that. That prompts some questions, which I would like to explore with the Minister, about the impact of this SI.

Paragraph 7.4 sets out in a little more detail what is anticipated. It talks about the changes to the Companies Act 2006—at least, I think that is what it refers to:

“Section 399 CA06 set out conditions under which UK subsidiaries with EEA parents were exempt from the requirement to file group accounts. That exemption has been reduced in scope so that it applies only to UK subsidiaries with UK parents.”

How many companies are going to be affected? What proportion of the economy will be affected? I asked a similar question yesterday and I do not think we ever quite got the answer. Perhaps the Minister can have another go today. She may not have had the answer yesterday, and if she does not have it today, I am happy for her to say so and to write to me separately.

That also applies to the point about an impact assessment. As with previous SIs, the Government say that it is not relevant because of the limited impact. Let us get an honest assessment of the impact of the changes. How many companies will be affected? What size are those companies? What proportion of the economy will be affected?

My hon. Friend the Member for Edinburgh South asked an interesting question about the potential for businesses to move from the UK into the EEA after Brexit. What assessment has been made of that? What came back from the consultation about the prospect of that happening? Presumably, if a company that is registered in the UK at the moment wants to avoid additional reporting requirements, it would be tempted, if it has an EEA parent, to re-register in the EEA. What are the consequences if that happens?

What consequences have the Government considered, in terms of the feedback from the consultation and any assessment they have carried out? If no assessment has been carried out, why on earth not? This could have quite serious consequences. I can think of a very sizeable business located in my hon. Friend’s constituency that might be affected by such a desire to shift registration, and I can imagine the consequences of shifting that registration and the business operations associated with it. Some answers would be very much appreciated, if we are to do justice to our scrutiny of the regulations.

How was the consultation carried out? How many businesses were consulted? What business organisations were consulted? What were their responses? Paragraph 10.2 of the explanatory memorandum describes it as an informal consultation, but that does not give an indication of its scale or scope, or what the responses were. In order to make sure that we are properly assessing the impact, scale and consequences of the regulations, we need answers to those questions as well.

I have made the point about the Government’s decision that the regulations do not justify a full impact assessment. Frankly, if this is of a more sizeable scope and if the potential for businesses to relocate is significant, there will be a significant impact. I am surprised that the Government have decided that an impact assessment is not required.

I turn to other matters. How will the new arrangements operate? What will the arrangements be for companies listed in the EEA that have subsidiaries in the UK? What will be the reporting arrangements to replace what happens at the moment? It was not clear from the Minister’s initial remarks how that will work, so perhaps she can confirm that. Will Companies House be sufficiently resourced to address the additional accounting requirements that Linklaters refers to in its analysis? For that matter, will businesses be sufficiently resourced to address the additional work? Will additional funding be required for Companies House, or will it just have additional responsibilities without extra resources to discharge them?

Specifically, will the Minister describe the impact of the regulations on extractive industry companies registered in the EEA? How will they be affected? I understand from the explanatory notes and analysis that there is a particular issue about the effect of the changes on country-by-country reporting by extractive companies, such as those in the mining sector. As Linklaters tells us, there will be significant issues in respect of the exemption from the requirement to prepare consolidated accounts. There will also be significant impacts when it comes to the exemption from the requirement to prepare a non-financial information statement, the ability to change accounting frameworks on de-listing, the dormant company exemption from producing accounts, country-by-country reporting by extractive companies in mining, qualified partnership accounts and overseas company regimes.

Those significant changes go substantially beyond what the Minister said in her opening remarks about the scale and scope of what we are being asked to approve. Will she give that her detailed attention, with any support that her officials can deliver this afternoon? Will she write to the Committee to answer the questions that I have raised?

On their own, but especially with the other statutory instruments we have been asked to approve, the regulations are an indication that significant changes are being made to the legislative framework of this country as a result of no deal planning. I accept that we have no choice other than to address the regulations this afternoon, but that does not mean we have to do so without adequate scrutiny.

--- Later in debate ---

[Kelly Tolhurst]

Actually, I think it is quite right that as a Government we are preparing for no deal, and we will continue to do so. That is why I am here presenting a statutory instrument—so that in the event of no deal we will be able to give business confidence and clarity on what the outcome will be, whether it is liked or not, in a no deal scenario.

I will try to answer some of the questions that the hon. Member for Sefton Central posed about the statutory instrument. He asked about the total number of companies that might be affected. There are approximately 3.8 million active companies on the UK register as it stands, and 98.5% of them happen to be micro or small businesses. There are approximately 35,000 medium-sized businesses and 20,000 large entities on the register. We have assessed that fewer than 20,000 companies will be affected by the statutory instrument, with a range of sizes and set-ups.

I was asked what assessment we have made of de-listing. As I have outlined, we did not carry out a full assessment, because we established from the data we have that the burden and cost to business will be below £5 million. The burden on business will relate to the potential costs of having to file accounts and make preparations, where they had been exempt. Obviously, that is a small cost to a limited number of organisations.

Obviously the de-listing is very difficult to assess. It is very difficult to assess how many companies would take the decision to leave the UK based in a no deal scenario. As I have said, as a Minister I have not been made aware of any companies that have registered an interest in leaving the UK, based on the changes that we are considering. We estimate that the number of organisations that might decide to de-list would be very small, but it is a very difficult number to assess.

[Bill Esterson]

The Minister said that nearly 20,000 businesses would be affected by the regulations. The explanatory memorandum states that there is “no significant” impact on business. I just wonder whether she can tell me how many businesses it would take for the Government to decide that it was a significant number worthy of an impact assessment.

[Kelly Tolhurst]

As the hon. Gentleman knows, because I have just outlined it, we are talking about approximately 20,000 businesses that would be affected, out of the current 3.8 million businesses that are registered in the UK. That is a small number of businesses in relation to the total number of registered companies. However, we are talking about the cost, and the burden will relate to the potential extra costs in relation to accounting and reporting.

We must remember that, as Members will have read and as I have mentioned, dormant companies for example have been exempt. They will no longer be exempt, so there will be a cost to that under the regulations in a no deal situation.

--- Later in debate ---

[Kelly Tolhurst]

I am going to carry on, because I have given as full an answer as I am prepared to give.

As I highlighted in my introduction, and as I have reiterated, we are not changing the way in which we ask companies to report. We will work with Companies House, as we do already, to ensure that we identify all the companies that are affected by not having the exemptions, that we have the data, and that any guidance that is needed is issued well before the SI comes into effect.

On the extraction industries, the hon. Member for Sefton Central is right that currently the EU Commission has the power to grant equivalency to third countries. We are not changing any of the criteria for that; rather than the EU Commission having that power, the Secretary of State would have the authority to make those decisions in a no deal situation. As I outlined, the SI will correct the deficiencies in EU retained law.

[Bill Esterson]

Will the Minister give way on that point?

[Kelly Tolhurst]

I give way.

[Ian Murray]

It is called scrutiny.

[Bill Esterson]

I think my hon. Friend has anticipated my question. Will the Minister explain what the scrutiny process will be for the Secretary of State’s decision making in the event of no deal?

[Kelly Tolhurst]

I thank the hon. Gentleman for that question. As I outlined, the European Commission has the power to grant equivalency, and we are not changing any powers here. Having looked at this, we believe that it is small enough for us to have it in an Executive power. If the European Commission has those powers currently, it is right they would be transferred to the UK Secretary of State in a no deal situation. Scrutiny would operate exactly as it does currently.

[Bill Esterson]

Really?

[Kelly Tolhurst]

Absolutely, because the Secretary of State would make those decisions and grant those powers. Granting equivalency to third countries is obviously a small part of it.

Effective financial reporting underpins the success of every business. It helps to inform decision making, to improve performance and to promote confidence in a company’s future. As the UK exits the EU, it is paramount that we maintain the integrity of the UK system of accounting and reporting. The regulations will ensure that it remains coherent, operable and understandable for companies, users of accounts, and the general public, who rely on the transparency that it provides. I commend the regulations to the Committee.

Question put.