Companies House reforms: What’s changing and how to help your clients

Incoming Companies House reforms will create multiple challenges for your small business clients, and could even persuade some to disincorporate.

But that gives your accountancy practice an opportunity to further build stronger relationships with your business clients and guide them through the changes.

The new requirements are part of the Economic Crime and Corporate Transparency Act, which received Royal Assent and became law in October 2023, so you can expect them to come into force soon.

In this article, we provide an overview of the reforms, why they’re happening, and how you can support your clients with the changes.

Here’s what we cover:

An overview of the Companies House reforms

The Economic Crime and Corporate Transparency Act is a swathing piece of legislation aiming to cut economic crime that’s effectively hidden behind UK limited company structures.

The Act introduces several reforms to boost powers for tackling economic crime and improving corporate transparency. Improving the quality and accuracy of data available on the Companies House register is a key part of this goal.

Yogesh Dhanak, senior technical manager at ACCA, says the Companies House reforms are wide-ranging and include giving the register more effective scrutiny, investigation and enforcement powers to tackle the abuse of limited company status.

But the changes that will impact small and micro businesses and their accountants the most are new filing requirements on those companies, he says.

Why the reforms are happening

The government says the new requirements shouldn’t add a huge administrative burden for small and micro companies as they are already required to file their annual accounts to HMRC – but the extra work that is required will be in a good cause.

Organised fraud in businesses and the public sector costs the UK £5.9bn a year, according to the Home Office.

Many currently see Companies House – the register for limited companies – as a soft target for criminal abuse, for example by opening ‘shell’ companies through which they have the ability to launder money.

People have been able to set up companies with minimal checks or scrutiny, as illustrated by the fact that ‘Jesus Christ’, ‘Donald Duck’ and ‘Adolf Tooth Fairy Hitler’ have all reportedly been registered as directors of UK firms.

In response, the government introduced the biggest change to the role of Companies House since it was created in 1844.

Supporters of the reforms say the register’s tougher checking, tracking and investigation powers plus improved transparency and data quality will all be game-changers in the fight against economic crime.

On the small company reporting requirements, the government said the current minimal level of disclosure can attract fraudsters wishing to present a false image of their company.

Small and micro companies comprise most of the register, so any meaningful changes to Companies House must impact them.

The new rules for small and micro companies

The Act introduces different requirements for small and micro companies.

When the new laws come into force, they will remove the option for small and micro companies to file abridged accounts.

All small companies will need to file their director’s report and annual accounts including their profit and loss account.

Micro-entities “must” file their annual accounts, again including their profit and loss account and “may” deliver a directors’ report.

In addition to the above, any company claiming an audit exemption will need to give an additional statement from their directors on the balance sheet specifying which exemption is being claimed, and confirming that the company qualifies for the exemption.

The Act also introduces identity verification to deter people trying to start companies for illegal reasons.

This applies to:

• New and existing registered company directors
• People with significant control
• Those delivering documents to the registrar.

These people will be able to verify directly with Companies House using electronic ID checks, or use an authorised company service provider, such as an accountancy practice, as part of the Authorised Corporate Service Providers’ anti-money laundering processes.

The Economic Crime and Corporate Transparency Act will provide Companies House with additional powers to mandate HOW companies file their annual accounts.

Off the back of this, Companies House plans to transition toward filing accounts by software only and will eventually withdraw the option for web filing and paper filing.

This is expected to happen over the next two to three years.

Companies House is also expected to increase the use of iXbrl tagging of the data submitted in the annual accounts.

Financial or criminal penalties will be imposed for anyone found committing an offence under the Act.

3 company law changes for company directors and accountants to be aware of

On top of these more significant longer term measures, the Act will bring in a flurry of smaller ‘quick wins’ for Companies House to support it in its mission of improving corporate transparency.

There are three new rules that are expected to come into force from 4 March 2024.

They still require secondary legislation to be laid, so this date isn’t yet set in stone but they’re expected to come into force relatively imminently.

Company directors and their accountants need to be aware of the following:

• New rules for registered office addresses
• All companies required to supply a registered email address
• New lawful purpose statements

New rules for registered office addresses

Companies will need to have an ‘appropriate address’ as their registered office at all times.

An appropriate address is one where:

• Documents sent to the registered office need to come to the attention of a person acting on behalf of the company
• Documents that go to the address can be recorded by an acknowledgement of delivery.

These changes mean companies will no longer use a PO Box as their registered office address. However, if the conditions for an appropriate address are met, they can still use the address of a third-party agent.

A company’s registered office can be changed online – the company’s authentication code and the email and password used to sign up for the Companies House online service will be required to do this.

Any companies without an appropriate address from 4 March 2024 could be struck off the register.

All companies required to supply a registered email address

All companies will have to give a registered email address to Companies House – it won’t be published on the public register.

When they incorporate, new companies will have to provide a registered email address.

For existing companies, they’ll have to provide a registered email address at the time their file their next confirmation statement with a statement date from 5 March 2024.

The same email address can be registered for more than one company.

Companies will be required to keep an appropriate registered email address, in the same way as their registered office address. Companies that fail to do this will be committing an offence.

New lawful purpose statements

When a company is incorporated, the shareholders will be required to confirm the company is being formed for a lawful purpose.

On the confirmation statement, the company’s intended future activities will need to certified as lawful.

For existing companies, they’ll need to make a lawful purpose statement when they file their next confirmation statement with a statement date from 5 March 2024.

All companies on the register, both new and existing, have a duty to operate lawfully; the aim of the new statements is to make that clear.

When will the changes come into force?

Some of the changes in the Act have come into force immediately.

There are then those ‘quick wins’ listed above that are expected to come into force on 4 March 2024.

But the other requirements around small and micro business filing requirements, methods of filing and identify verification will be phased in over a longer period and again, secondary legislation is needed to implement many of the measures.

The timing of this secondary legislation is unclear, but filing implementation dates could be announced in 2024 and come into effect in early 2025.

Yogesh Dhanak at the ACCA says: “This creates a timing challenge for small and micro businesses as we don’t yet know when these new filing rules will apply.”

Challenges for small businesses

Whatever the exact dates, small business directors and their accountants will have to quickly get to grips with the new rules to ensure they are filing correctly, says Yogesh. They will also need adequate processes for meeting the administrative requirements.

The emphasis on digital filing will challenge those small businesses yet to transition to a fully digital way of working, he adds.

Accountants’ mentor and coach Della Hudson says another potential issue for small business owners is that unabridged filing means competitors will be able to see their full financial statements, including profits and losses.

And they are not the only ones who might take a keen interest in their financial and other information – think credit rating firms and ex-partners, for example.

The flip side is that business owners will also be able to see their competitors’ or anyone else’s financial statements.

Another potential issue is that the filing requirements will add to the growing administrative burden on small limited companies and may be the final straw that leads them to disincorporate, says Della, who also runs her own accountancy business.

“As there are now minimal tax benefits to being a limited company, we will be asking limited clients if they would prefer to switch to sole trader or partnership status to keep their commercial and personal information private,” she says.

How accountants can support small business clients with the changes

Yogesh says keeping track of legislative changes is always tricky for small businesses, so their advisers have a pivotal role in keeping abreast of these reforms and advising them what to do and when.

Also accountants should know their individual business clients well, so be well-placed to inform them where, when and how they will be impacted by any element of the Economic Crime and Corporate Transparency Act, he says.

“This creates good opportunities for accountants to work even more closely with their clients,” adds Yogesh.

“For example, it’s a chance to review what financial information the business generates, not just to fulfil statutory requirements but to support decision making.

“That includes assessing whether their financial system and reports are fit for purpose if the business is growing and looking for investment or additional finance.”

Final thoughts on the Companies House reforms

Limited companies have much to do in preparing for these reforms and a short time to do it.

This includes:

• Checking they have appropriate physical and email addresses and ensuring these have been appropriately communicated to Companies House
• Reviewing which people in their businesses must comply with ID requirements and how
• Ensuring they will have 3^rd party software in place to file accounts digitally
• Understanding the changes that will need to be made to the annual accounts.

Many will rely on their advisers to do much of this work and to educate them on the upcoming changes. So as an accountant, you are likely to be busy helping your clients get ready.

So prepare yourself now too – making sure you have software to handle the new digital filing requirements, and understanding the impact on your own client base.

Just make sure none of their directors are called Donald Duck.