16: Corporate transparency and register reform – impact of proposed companies house reforms on charities

On 18 September 2020, the government published its response to a 2019 consultation on proposals which, as the consultation noted, ‘if implemented in full, would amount to the most significant reform of the UK’s company registration framework since a register was first introduced in 1844, going to the core of the Companies Act’. For charities, the proposed reforms will have a significant impact for any charity established as a company or which has one or more subsidiaries which are companies (or other bodies subject to Companies Act transparency provisions), as well as for any charities which use the Companies House register for research purposes.

The 2019 consultation

The 2019 consultation was a hefty one, asking 44 questions across a range of areas arising from concerns over the accuracy of information on the Companies House register and the potential for UK companies to be set up and used for fraudulent purposes. Companies House offers a very fast system for setting up a company, but in doing so currently has very little in the way of checks, which can make it susceptible to exploitation. Among other things, the consultation asked for views on proposals for: new verification procedures for identifying those setting up, managing and controlling corporate entities; broader powers for the Registrar of Companies, including wider data sharing powers with law enforcement agencies; a potential cap on the number of directorships an individual may hold; curbing abuse of the power to shorten the accounting reference period; as well as proposals for changing the information sought on individuals and for allowing more suppression of certain information from the public register.

Underlying all those proposals was a major overhaul of the role of Companies House, changing it from registrar to regulator with a key role in helping the fight against fraud and economic crime. That role change would need to be supported by a massive change in Companies House’s processes and IT systems, to enable (and secure) the verification, data analysis and data exchange processes, while also equipping Companies House to offer a fully digital service capable of dealing with multi-million annual filings (11.8 million documents were filed in 2018-19) and multi-billion user requests (its services were accessed 9.4 billion times last year).

We submitted a response to the consultation, which can be accessed here.

The government’s response

Refreshingly, the response suggests that the government has genuinely listened to the consultation responses, with some proposals being taken forward and some not, with some suggestions from responses being reviewed further and a number of areas identified for further consultation.

The response is very detailed, so what follows is very much a broad summary. (The summary refers to companies, but the response explains that references to companies ‘should be understood as UK registered companies, Limited Liability Partnerships, Limited Partnerships and other bodies already subject to the transparency provisions of the Companies Act, directly or modified as appropriate’).

• Identity verification
  • The government plans to introduce compulsory identity verification for all directors and PSCs (People with Significant Control) of UK registered companies, as well as for all individuals who file information on them.
  • Importantly, a company (or director appointment) will not be registered until the relevant individuals have been verified, but it will be possible to verify individuals in advance of incorporation or appointment. Similarly, filings will not be accepted from unverified individuals or agents.
  • To effect this, the government will need to develop a ‘a fast, efficient, 24/7 digital verification process’ which is also fully data protection compliant. The government expects the majority of verifications to be conducted through digital processes and that ‘for most individuals this process will take a matter of minutes’. The government is aware that it will also need to address concerns over accessibility, usability and cost. Companies House is expected to undertake user-testing before the system is finalised.
  • As the requirement will apply to all current directors and PSCs (approximately 10 million entries on Companies House), there will be a transitional period to allow for compliance, and Companies House resources. However, penalties will apply after that period expires. The register entry will be flagged where there are unverified PSCs.
  • It is proposed that verified individuals will have a single Companies House user account, meaning that those holding multiple roles in the same or multiple companies can be linked.
• List of shareholders
  • There had been a proposal in the 2019 consultation for verification of shareholders (but not members of guarantee companies). The government has determined there is not a sufficiently strong case to proceed with that proposal.
  • However, it will proceed with a requirement that companies provide a full list of shareholders, which will need to be updated annually in the confirmation statement. It is understood that that requirement will not apply to members of guarantee companies but that will need to be clarified.
• Accuracy and usability of the Companies Register
  • It is proposed that the Registrar of Companies will have new powers to query information submitted to it, to remove information in some circumstances and to query and, if necessary, reject a company name before registration. The latter proposal will be considered alongside a review of the powers that are available to remove a company name once it has been registered and a review of the role of the Company Names Adjudicator. It is expected that there will be further consultation on the detail and scope of all these provisions in due course.
  • There will also be consultation on introducing full iXBRL tagging for submission of accounts to Companies House. A number of responses to the 2019 consultation called for consistency here with accounts tagging requirements of other agencies (including HMRC) and that companies should not require new software to tag information. The government response acknowledges the concerns expressed about additional burdens and promises to explore options to support small businesses.
  • We should also expect a further consultation relating to company accounts, including on processes for checking accounts filed at Companies House, proposals to ask for more accounting information, considering the accounts information displayed on the Register and reviewing the reporting timelines. A further suggestion which might be considered (but would require ‘a cross-government approach’ as well as primary legislation) would be to align the submission of accounts with HMRC ‘and other agencies’, which could include the Charity Commission. The response says that ‘BEIS and Companies House will work with other government departments to review these suggestions and look for opportunities to jointly take these forward’.
  • Companies are to be limited in the number of times they can shorten their accounting reference period to only once in five years.
  • A proposal to require companies to file evidence to demonstrate their right to use the registered office address is not to be taken forward. The rejected submissions each year account for a very small proportion of filings and it is expected that other measures, such as verification and cross-checking of data, will help in deterring fraud and addressing the small number of cases.
• Personal information
  • Limiting the information requested – Directors will no longer be asked to list their occupation. A process will be set up for individuals whose profession is currently shown on the public register to have that information suppressed.
  • Suppressing certain information on the public register – The government intends to introduce a process for individuals to request to have signatures, the day of date of birth and residential addresses (where it has been used as a company’s registered office address) suppressed from the public register.
  • The government is also considering how to take forward a proposal to allow a person who has changed their name following a change of gender to apply to have their previous name hidden on the public register and replaced with their new name. We should expect further details on that, as well as possible suppression of a name in other cases where individuals are at risk of harm and sufficient evidence can be provided, for example victims of domestic violence.
• Proposals not taken forward at this stage
  • In addition to some identified above, proposals not being taken forward (at least at present) include the proposed cap on number of directorships and a proposed requirement for companies to file full details of their overseas bank account(s) with Companies House.

When are the changes going to happen?

While the government is keen to proceed with the reforms, most of them are not going to happen imminently. They will be expensive, so proceeding with them at all is subject to funding being agreed in the forthcoming Spending Review. Most of the reforms rely on being underpinned by a substantial IT overhaul, which is bound to take some time to develop, test and implement. Major government IT projects have not always had a happy history, and the response acknowledges the ‘radical level of change proposed’ and the ‘importance of government taking its time to get the package right’.

The response also acknowledges that many of the reforms will require legislation to implement – so Parliamentary time would need to be found, amidst dealing with Brexit and the pandemic. Before reaching that point, the government intends to publish a ‘comprehensive set of proposals that will set out in detail how we think these reforms should be implemented. Subject to the views received we will then proceed to legislate where necessary when Parliamentary time allows’.

However, for the reforms relating to individual verification and user accounts, the response suggests that Companies House will (subject to financing being agreed) aim to have finalised system design and to start user testing in the next few months, by the end of the 2020/2021 financial year, which seems ambitious.

Exactly how or when may not be certain, but the Companies House regime will be changing. Charities which interact with Companies House should get ready.