The government has been accused of watering down efforts to combat economic crime after putting forward proposals that could reduce transparency around small company accounts.
It said it was reviewing the kind of reporting burdens faced by the UK’s smallest businesses in the hope of reducing the cost and time required to produce public accounts to a level of detail that it claimed was “only needed for larger companies”.
The business department said those requirements, which it said were originally part of EU rules, were distracting firms from focusing on growth and creating jobs.
“This will help the UK’s companies grow whilst bolstering investment, as we take advantage of Brexit freedoms to regulate in a more proportionate and agile way that works for British businesses,” it said.
However, critics said the government was exaggerating the burden on firms, and that the proposals risked weakening efforts to combat economic crime, given that small firms have been at the heart of a number of money laundering, fraud and tax evasion scandals.
“When you look at many of the scandals involving money laundering, what do we find? Lots of small businesses, small companies, used for that purpose,” said Lord Prem Sikka, emeritus professor of accounting at the University of Essex and the University of Sheffield.
“Many are implicated in PPE [personal protective equipment] scandals … and many small companies are used as umbrella companies, to evade employment law, evade tax, and not pay national insurance,” he added, referring to firms used by recruitment agencies and companies to cut temporary payroll costs, which are usually charged as fees to the workers instead.
The problem posed by umbrella companies costs workers and the government as much as £4.5bn a year in fraud and misappropriation, according to estimates recognised by the government.
Sikka explained that many small companies already compile the figures that are published in company accounts for lenders and tax officials at HMRC. He claimed that reducing the reporting burden would not result in cost savings.
“To fight illicit financial flows, tax avoidance and abuse of law, we need transparency. If the government are opposing that, they are not serious about any of the other claims they are making about fighting economic crime,” Sikka added. “It’s an own goal by the government, really.”
The government’s proposals will mean reviewing the definition of a micro-company, meaning more companies could be exempt from releasing detailed accounts. It will also consider the kind of reporting requirements for so-called public interest entities – which cover companies listed on the stock exchange, banks and building societies, and insurance firms – to try to attract high-growth firms.
The review will also consider whether there are “unnecessary restrictions” on paying directors in shares.
“Improving transparency at big corporates whilst easing unnecessary reporting burdens for small businesses is the right direction of travel,” said the Federation of Small Businesses (FSB) chair, Martin McTague.
But as rules for small businesses are relaxed, larger firms could see their audit requirements increase. As part of the same announcement, the government confirmed long-trailed plans to launch a new audit regulator that would have extended powers over larger firms.
The government has come under pressure to speed up reforms of the audit sector, after a series of company failures – including Thomas Cook, BHS and Carillion – that have been partly blamed on auditing shortcomings.
Ministers plan to replace the Financial Reporting Council with a new regulator, the Audit, Reporting and Governance Authority (ARGA), and expand the number of businesses who come under the regulator, including unlisted companies with more than 750 employees and a greater than £750m annual turnover.
ARGA will also be given powers to investigate and fine directors of large companies if they breach their duties around corporate reporting and audit.