Our guide to game-changing reforms!
Jun. 19, 2024, 10:46am
The Economic Crime and Corporate Transparency Act, enacted on 26 October 2023, has significant implications for businesses and regulatory practices. It introduces changes to help prevent economic crime and make corporate entities more transparent.
The Act builds on the Economic Crime (Transparency and Enforcement) Act 2022, introduced considering Russia’s invasion of Ukraine. Together, these Acts provide additional powers to tackle issues such as money laundering.
What are the changes?
Companies House
One of the key changes introduced by the 2023 Economic Crime and Corporate Transparency Act relates to Companies House. It is empowered to act as an ‘active gatekeeper’ in company creation and as a custodian of more reliable data.
Notable changes include:
- An individual must not act as a director of a company unless their identity has been verified.
- Individuals or firms delivering documents to Companies House must also have had their own identity verified.
- Businesses will be required to have an ‘appropriate address’ as their registered office (i.e. one where documents sent to it can be expected to reach someone acting on behalf of the company and be recorded by an acknowledgement of delivery).
- Companies House will have increased powers to issue notices for document inconsistencies, request the removal of inconsistencies, and change or remove names on the public register.
- Companies House will have the authority to remove companies from the register if they have reasonable grounds to believe the company was registered falsely.
- A company is no longer required to keep its own registers of directors, directors’ residential addresses, secretaries, and people with significant control. Instead, this information must be provided to Companies House.
Unsurprisingly, this will lead to an increase in the fees charged by Companies House to cover its rising costs. They have not yet published the exact details of the increases.
Limited partnerships
The 2023 Economic Crime and Corporate Transparency Act also introduces reforms for limited partnerships, tightening registration requirements, requiring a connection to the UK to be maintained, increasing transparency and giving greater power to Companies House to de-register limited partnerships, where appropriate.
Micro and small companies – accounting and reporting
From an accounting and business perspective, some of the biggest changes relate to small companies. Small companies will now have to file their profit and loss accounts and directors’ reports. Previously, small companies could claim exemptions from these.
Micro companies will also have to file their profit and loss statements, although they will still not be required to either prepare or file a directors’ report.
However, they have softened the initial proposals. While both micro and small entities will need to file their profit and loss accounts, they will have the option to request that this information not be visible on the public record. They have yet to confirm the process for this.
Nonetheless, these changes will likely be the main concern of small businesses that may reconsider whether the benefits of limited liability still outweigh the drawbacks in their particular circumstances.
Failure to prevent fraud offence
The 2023 Economic Crime and Corporate Transparency Act introduces a new offence where a large organisation can be held liable if someone associated with the organisation (such as an employee, agent, or subsidiary) commits a specific fraud offence intended to benefit the organisation.
This offence will only apply to companies and partnerships which meet at least two of the following criteria in the financial year preceding the year of the fraud offence:
- more than 250 employees
- greater than £36 million turnover and/or
- greater than £18 million in total assets on the balance sheet.
It is important to note that this offence is not limited to the UK. If a person connected to the organisation commits fraud under UK law or targets UK victims, the organisation can be prosecuted, even if both the organisation and the associated person are based overseas.
However, the organisation can defend itself if it has reasonable prevention procedures in place.
Register of Overseas Entities:
Just to remind you, previous changes to the legislation introduced the Register of Overseas Entities in August 2022. This aims to improve transparency regarding entity ownership. If an entity fails to declare its beneficial owner, it will face restrictions on selling its property. If a person violates the rules, they may face up to five years in prison.
How does it impact me?
It depends on the size/type of business – varying aspects of the Act apply to different entities in different ways.
The reporting and filing requirements for limited companies and limited liability partnerships will become stricter. It’s important to ensure that the information and documents you file, or that your accountants/solicitors file, are accurate and complete.
Businesses should consider whether they have reasonable anti-fraud procedures in place. Performing a risk assessment will likely be necessary. Although the ‘failure to prevent fraud’ offence will only apply to large businesses, having anti-fraud procedures in place comes with obvious benefits for businesses of any size, making it worth considering.
As mentioned above, this may also present the opportunity to consider if limited liability is worth the cost for your business, not only from increasing fees but also the need for small entities to publish a profit and loss statement. There will be many other factors to consider as part of that of course, such as the tax treatment of income/profits, requirements of banks and succession planning, however, this may be the time to start that discussion.
Does anything need to change?
For the changes to take effect, there will need to be further legislative changes, as mentioned below. Companies House also needs to make changes to its systems to enable it to deal with the new requirements.
Additionally, Companies House announced increases to fees, which came into effect on 1 May 2024 to fund their additional workload.
What are the timescales?
The 2023 Economic Crime and Corporate Transparency Act has already been passed into law by Parliament although not all aspects will take effect until the relevant statutory instruments have been made by the Secretary of State or the Lord Chancellor.
On 4 March a second statutory instrument came into effect which brings the first element of these changes into force. These initial changes relate to Companies House powers and include:
- greater powers to query information and request supporting evidence
- stronger checks on company names
- new rules for registered office addresses (including the prohibition of PO boxes)
- a requirement for all companies to supply a registered email address
- a requirement for all companies to confirm they’re forming the company for a lawful purpose when they incorporate and to confirm its intended future activities will be lawful on their confirmation statement
- the ability to annotate the register when information appears confusing or misleading
- taking steps to clean up the register, using data matching to identify and remove inaccurate information and
- sharing data with other government departments and law enforcement agencies.
While these initial changes should not be overlooked, as they will have implications for all companies, we are still awaiting details for some of the wider proposals set to be introduced by the 2023 Economic Crime and Corporate Transparency Act.
We are also still awaiting further details on when the more notable changes, in particular those around micro and small company filing requirements, will take effect.
Happy to Help.
For more information on the 2023 Economic Crime and Corporate Transparency Act and how it may affect your business, please contact our specialist team today. Call 01642 878555 or email: team@tindles.co.uk
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