Thursday, September 03, 2009

Companies Law - something that people don't get

For eight years now, I've worked in corporate tax for HM Revenue & Customs. I'm not one of those technical wizards, although when it comes to the administrative end of things, I'm fairly well regarded. These days, I have become something of an authority on e-filed company tax returns, partly because nobody else was interested, and partly because it is, as they say, the future.

One of my key roles is deciding whether or not a return is complete. Not a complex task, you might think, and yet I spend a lot of my time explaining to people their legal responsibilities under the Companies Act 1985 (currently being replaced with the Companies Act 2006). And these are not obscure ones either, but the basis of reporting.

Of course, there is some confusion. Companies House permit the filing of abbreviated accounts by small and medium enterprises, comprising of a balance sheet and notes. However, in order to qualify for this preferential treatment, a declaration must be signed, acknowledging the responsibility of the directors to produce accounts that comply with Section 226 of the 1985 Companies Act. So they do. Then, they file the same accounts with their company tax return. I then reject them. They then ring, or e-mail, complaining that "Companies House accept these, why won't you?".

So I explain. "Your accounts don't comply with Section 226.", I tell them. I then note that they have signed a declaration saying that they will comply. At this point, it usually becomes clear that they have signed the declaration without actually understanding what it means. It is, one should note, a legal declaration. Now I may be old-fashioned, but the idea of signing a legal document without having a grasp of what it means does disturb me a little.

Of course, the compliance weaknesses of small businesses have become more of a concern since the explosion in the number of limited companies being registered. With the current system of consecutive number issuance going back to 1862, it took one hundred and nine years for the millioneth company to be registered. By comparison, more than three million have been registered in this decade, with the seven million mark reached last month.

I would suggest that a significant minority of these need never have become limited companies, and it is clear that, from an administrative perspective, many rookie directors have little grasp of the legal obligations they have taken on. That said, the recent fortifying of the penalty regime for non-compliance, combined with the shortening of filing deadlines, will doubtless concentrate minds... or enrich the accountancy profession...

Meanwhile, I'll still be fielding telephone calls and e-mails from bemused company directors...


Millennium Dome said...

Of course a lot of those new companies are people who used to work freelance or as short-term temps but the Labour government didn't trust them to be declaring all their income, so they changed the law (income tax, not corporation tax, so not Mark's department) so that, basically, if a company paid money to a human being that person was deemed to be their employee and the company had, indeed has, to account for PAYE and NI on what it paid them.

Companies also have to pay employer's NI making these workers instantly 12.8% more expensive, plus there is a LOT of paperwork to fill in (and there was even more during the mad phase when the government made companies do all the work for tax credits too). The only way to avoid this assumption was if you were employing another company rather than a human.

So, essentially, all these people were compelled to wrap themselves up in limited companies or lose all their income because it was too expensive for the people they had been freelancing for to employ them any more. I imagine they did it just to carry on working and without much knowledge (or training) in the legal implications; I suspect that while a lot of people starting up a shop or a delivery company or an online training resource might think about the paperwork they need to fill in, but people who are told "you must do this in order to carry on working" may well be more likely to just sign the damn thing and get on with business as usual.

It's a classic example of how this government's instinctive mistrust and greed have made things worse for everyone involved. Including Mark, who gets stuck with the outcome.

PhilW said...

A really helpful follow-up to this post might be one entitled "10 most common Section 226 compliance errors that small businesses make when filing annual accounts" or similar.

It's all very well saying people don't know what they're doing, but I can say from experience that this kind of basic information is inordinately difficult to find on the Web.

When it typically costs a minimum of £1500 to have an accountant prepare limited company accounts, it's hardly surprising many small businesses try to avoid this cost.