The recent Economic Crime and Corporate Transparency Act, which received royal assent on 26 October 2023, has introduced a range of measures aimed at enhancing transparency and combating illicit activities.
There are several consequences for businesses that will have a significant effect and need immediate attention - especially for small and medium-sized enterprises (SMEs).
In this article, I shed light on the new regulations and advise you on how to deal with them.
Changes to Companies House requirements
The new legislation will enforce considerable changes in Companies House processes, impacting business policies across the UK.
One of the most profound changes is the requirement for all companies to publish full accounts, removing the option for small companies to file 'filleted' accounts, which previously allowed them to withhold their Profit and Loss (P&L) statement from public disclosure.
This shift towards full transparency will mean that the detailed financials of SMEs will now be available for public scrutiny, including by competitors and employees.
The Government intends to deter fraud and promote transparency, but it may inadvertently lead to privacy concerns for small businesses.
Many will consider alternative business structures or practices to maintain confidentiality.
Reverting to historical practices
This move represents a reversion to practices predating 1985 when all companies were required to publish comprehensive financial details.
The potential consequences of these changes are complex, with businesses likely to explore various strategies to address the resulting loss of financial privacy.
These strategies may include:
- Business splitting
- Changing company names and other identifying details frequently
- Utilising holding company and subsidiary structures
- Creating new service companies for cost recharging, which could reduce the apparent profitability of the primary company
Some of these strategies can be compliance nightmares, so consulting with a qualified accountant is always advised.
Increased transparency for limited partnerships
For SMEs operating as limited partnerships, the Act tightens registration requirements and demands greater transparency.
This is likely to result in more stringent reporting obligations for your business.
Non-compliance could lead to penalties or, worse, intensive tax audits, which could disrupt business operations.
Strengthened anti-money laundering measures
The Act also enhances anti-money laundering regulations, necessitating a higher level of financial disclosure.
This increased scrutiny could uncover discrepancies in bookkeeping that may attract HMRC investigations - a situation most businesses strive to avoid.
The 'Failure to Prevent Fraud' offence
With the introduction of the 'Failure to Prevent Fraud' offence, businesses found complicit in economic crimes may face not just legal repercussions but also significant tax liabilities and financial consequences.
Preparing for the changes
In response to these developments, I advise businesses to take proactive steps:
- Conduct a thorough review of your financial reporting and consider the implications of full account disclosure.
- Assess your business structure and consider if changes are warranted to protect financial privacy.
- Stay informed about the Act and its ongoing developments.
- Engage with professional advisers to understand the full range of legitimate options available to maintain privacy while remaining compliant.
Scholes CA can help with all these issues and make the implementation of the Act easier to handle for your business.
Expertise at your service
Scholes CA is at the forefront of advising businesses on navigating these new regulatory waters.
Our team is ready to assist you in adapting your financial practices and policies to the evolving landscape.
We keep our clients informed through regular updates and ensure that their compliance measures are robust and effective.
For tailored guidance on the implications of the new Act, do not hesitate to reach out to our team.