Companies House reforms – improving financial information

The legislation which will transform Companies House and change the way annual accounts are delivered continues its swift passage through Parliament and the House of Lords. Whilst there isn’t a timetable for when the Economic Crime and Corporate Transparency Bill will be effective from, this article explains how ‘improving the financial information on the register’ section may impact you as both a preparer and user of financial information, as well as practical tips for what preparers can do now.

Financial information improvements – what you need to know

1. Small and micro entities to file profit and loss account

Once the legislation is effective, small and micro entities will no longer be permitted to file abridged or filleted accounts, consequently, they will be required to disclose their statutory profit and loss account on the public record putting them at a significant disadvantage in negotiations as other users will now have insight into their financial performance, including gross profit. The only remaining filing exemption is that micro-entities may remove their Directors’ Report from the filing copy.

Whilst many respondents (including RSM UK) opposed this change, the requirement for all companies to disclose a statutory profit and loss account aims to improve the value and transparency of financial information by ensuring that key information such as turnover and profitability is available on the public register. This will help creditors and consumers make informed business decisions about that entity. 

As a result of this change, suppliers, customers, and employees will see information about your business such as turnover and gross profit. This may lead to more challenging conversations and negotiations, particularly where your business is concentrated on a few customers or suppliers. Those users will not only see how important their trade is to your overall business but also the margin you make.

Key considerations

• Small and micro entities should consider the categorisation of costs across the relevant statutory headings now to ensure the optimum allocation between gross profit, admin expenses, etc, remembering that adjustments to comparative figures may also be needed.
• Micro-entities that currently use FRS 102 section 1A may wish to consider whether the simpler micro-entity accounts format available under FRS 105 would give their primary users (e.g. shareholders and lenders) sufficient information whilst at the same time minimising profit and loss account analysis on the public record.

2. Digital filing – but at what cost?

In a drive towards a fully digital service, we expect the legislation will give Companies House the power to mandate digital filing of annual accounts. Many businesses will be familiar with the fully tagged iXBRL format that businesses will need to use from their HMRC filings; for others, such as LLPs, this will be a new experience. Nevertheless, putting digitally tagged accounts on the public record is not something that should be taken lightly as it creates additional risks and challenges resulting in more time and expense, compared to filing hard copy signed accounts.

Despite all of the risks, it’s very much a case of keeping a watching brief on what Companies House is proposing. Sufficient time will need to be given for software providers to create solutions for each of the different scenarios.

Key considerations

• The additional time and resources to tag the signed accounts and review the tagging will need to be factored into the annual accounts project timeline, this is particularly important for groups.
• The completeness and accuracy of the tagging will need to be considered – this information may go to a large number of users, including credit reference agencies. Additional comfort may be sought via an assurance review of the tagging. 
• The presentation or rendering of the electronically filed accounts will need to be considered – it may be different than the physically signed accounts due to the constraints of the software used in both tagging and rendering:
  • businesses that currently file with HMRC may wish to review their HTML version of the accounts to check they are happy with how they currently render; and
  • businesses may wish to consider hosting their "glossy" annual accounts on their website so that they control exactly how they look to users.

3. Dormant accounts

Dormant companies will be required to file an eligibility statement which will provide the Registrar with additional evidence to take stronger enforcement action for false filings in the future.

4. Shortening of accounting reference periods and filing deadlines

Currently, companies may only extend their accounting reference period once every five years unless it qualifies under one of four exemptions, the most common being that of alignment with a parent or subsidiary undertaking established in the UK.

Whilst there are no current limitations as to how many times a company may shorten its accounting reference period, under the new reforms it is proposed that the shortening of a company’s accounting reference period will follow the current rules to extending it, i.e. you will only be able to shorten it once in any five-year period unless a relevant exemption applies, thus closing a ‘loophole’ that allows an effective three-month filing extension by shortening an accounting period by a day.

The Government has considered reducing the period allowed to file accounts, however, recognises the challenges that companies are still facing as a result of the pandemic, and has decided not to make changes to these at this time. Nevertheless, they will be making changes to the law to facilitate future changes when they deem appropriate.

5. A ‘File Once’ approach

The Government is exploring options to enable companies to file their financial information once a year, instead of filing different elements of information with each department that requires it, at various times.

The Government believes that this reform will: 

• deliver significant cost savings for businesses whilst reducing the risk of missing a filing deadline and reducing duplication and unnecessary complexity;
• prevent different versions of company accounts from being filed with different departments; and
• prevent information from being obscured in filings that require minimal information to be disclosed. 

This will be the logical next step once Companies House mandates electronic filing of accounts, and could be via a file once approach, or through top-up information alongside the tax return.

What can you do now?

The changes proposed in the legislation do not, as yet, have an effective date. Some will apply as soon as the legislation receives Royal Assent, whereas others will require Companies House to update the Registrar’s Rules, which we would expect would happen quickly given the additional budget Companies House has received for its digital transformation. 

Businesses can get a head start on the iXBRL risks by reviewing the presentation of the tagged accounts that are produced for HMRC purposes this year, as this output will be similar to what users will be able to obtain from Companies House. 

Small and micro entities should consider if the allocations between gross profit and administrative expenses are currently optimised, making any necessary adjustments as soon as possible. 

If you would like to discuss these changes further, please get in touch with your usual RSM contact or for company secretarial matters specifically, Trish Sankey from our specialist team.