Date posted: 1st Feb 2023
Entrepreneurship runs the risk of being stifled in the UK if proposals surrounding financial reporting become enshrined in law, warns a North East business expert.
Martin Hobson, Director at chartered accountants and business advisers Clive Owen LLP, has dubbed the Economic Crime and Corporate Transparency Bill 2022-23 the ‘biggest change in financial reporting in a generation’.
He also warns the proposed changes could hit inward investment from abroad with investors looking to plough their money into setting up businesses elsewhere in the world.
Under the proposed legislation small companies will no longer be able to file a compacted version of their accounts (often referred to as filleted, abbreviated or abridged).
Instead, they will have to file both their profit and loss account including supporting notes and the directors’ report putting many, currently undisclosed details, on public record at Companies House.
Martin said: “For many of our clients it is going to be the biggest change in their financial reporting in a generation.
“This Bill means turnover, profit margins, director’s remuneration/dividend details will be available for all to see, including customers, suppliers, staff, and next-door neighbours.
“This could make the UK a less attractive place to start a business as information will be all too visible to the competition and, therefore, could affect the viability of a business, particularly at the early stages of its existence.
“It may also have the opposite effect of what is intended and lead to less transparency. This is because business owners may set up separate companies/structures that spread profit out making it harder to work out the results of the core business.
“Whilst the Bill’s overall intentions are admirable and are designed to bring in stronger powers to tackle money laundering and other illicit activities, this element could have a detrimental impact on small businesses, which are the backbone of the UK’s economy.
“Encouraging a spirit of innovation, enterprise and entrepreneurship is essential to the country’s future success and its ability to bounce back from the current economic doldrums.”
Martin Hobson added: “There also is a risk that inward investment could be detrimentally impacted. For example, in the US and Japan there are very limited filing requirements, including filing nothing at all in some cases, so what is proposed in the UK is likely to be a barrier to attracting inward investment.”
“I also fear it further tips the balance of power towards larger businesses – I can imagine a big construction business looking at the profitability of its supply chain and using that information to put downward pressure on prices.”
While micro-enterprises will be required to file their profit and loss account, they will continue to have the option not to lodge a directors’ report.
The Bill, which is currently going through its remaining stages in the House of Commons, is expected to obtain Royal Assent this spring. However, some aspects may not be enforced immediately.
If you have any questions regarding the legislation, and what it could mean for your business then contact the team here.