UK economic crime and corporate transparency reform
(last revised: 12/10/22)

Background

It’s a sad truth that the UK has been a global hub for illicit financial flows for decades. This contributes to suffering across the world, but it also inflicts pain closer to home  – with the UK’s National Crime Agency estimating that hundreds of billions of ‘money laundering’ is flowing through the UK each year and that this costs the country more than £100 billion pounds per annum. However, the deplorable invasion of Ukraine by Russia has brought the issue of ‘Londongrad’ to a head, and it feels like there is now a once in a generation opportunity to both drive dirty money out of the UK and advance the cause of corporate responsible tax conduct. Not least as illicit financial flows and tax avoidance hurt the many businesses who quietly get on with doing the right thing, and who are currently forced to compete on an unlevel playing field.

To this end, we have been working with our friends in the tax justice and anti-corruption movements to press for change in a number of areas (see below). Most recently, in the context of the Economic and Crime and Corporate Transparency Bill that was published 22nd September 2022.

Small business financial disclosures

From its inception, the Fair Tax Foundation has championed the need for businesses of all sizes to make a full set of financial accounts freely available. This is a core component of our Fair Tax Mark accreditation standards. However, in the UK, for a number of years, small businesses have been allowed to file abbreviated accounts at Companies House that provide no information whatsoever on income, profits and taxes paid.

This is problematic on two counts:

• the vast majority of businesses registered at Companies House are small or micro, and number 3.3 million in total
• HMRC analysis finds that ‘small business’ accounts for the largest portion – nearly half (46%) – of the UK’s tax gap shortfall, at a cost of £15.6 billion per annum

We are therefore pushing for small business (including micro-entities) to publish at Companies House the fullest set of financial statements – neither abridged nor abbreviated versions should be acceptable. Moreover, that this should apply to all corporate forms, be that ltd, llp, reit, cic, coop or other. This stipulation should newly apply to unlimited companies as well. Our submission to the Corporate Transparency and Register Reform Consultation of 2020 is detailed here. If enacted, we would anticipate not only curtailment of illicit financial flows, but also markets operating more optimally as suppliers, creditors, consumers and other stakeholders would be better informed in their decision-making. Small business in particular would benefit, as they are more likely to rely upon Companies House data to inform business decision making.

We are delighted to note that the Economic Crime and Transparency Bill, that was published September 2022, sets out provisions that would:

• newly require small companies* to file a profit and loss account and a directors’ report
• newly require micro-entities** to file a profit and loss account
• remove the option to file abridged accounts

Where:

• A company is ‘small’ if, in a year, it satisfies any 2 of the following criteria: a turnover of £10.2 million or less; £5.1 million or less on its balance sheet; 50 employees or fewer
• A company is a ‘micro-entity’ if, in a year, it satisfies any 2 of the following criteria: a turnover of £632,000 or less; £316,000 or less on its balance sheet; 10 employees or fewer

Beneficial ownership disclosure

The Fair Tax Foundation’s focus is to encourage responsible tax conduct; but, an underappreciated key component of our Fair Tax Mark accreditation standards is the requirement that a business disclose its beneficial owners (which is taken to include persons with significant control, politically exposed persons and trust beneficiaries). Anonymously owned companies are one of the key tools used by money launderers and tax dodgers alike, with opaqueness allowing them to hide illicit gains and taxable assets from law enforcement and tax inspectors.

The UK was, commendably, one of the first countries in the world to introduce a public beneficial ownership registry, in 2016. However, it is vital that the same corporate transparency requirements apply to UK Overseas Territories and Crown Dependencies.

Unfortunately, the Economic Crime and Transparency Bill of September 2022 does nothing to address this matter, and implicitly seems to assume that UK Overseas Territories and Crown Dependencies will each advance robust public registers in 2023. This seems unlikely given that Britain’s offshore tax havens play a pivotal role in helping crooks and kleptocrats from across the world hide and use dirty money. To compound problems further still, Transparency International UK point out that the Bill currently makes no changes that would stop certain types of UK companies from being controlled by other companies based in secrecy jurisdictions, such as the British Virgin Islands. There is a wealth of evidence that these types of UK companies have been abused on an industrial scale, seemingly in large part because they can be controlled by opaque offshore entities in secrecy jurisdictions where there is little public information about who really owns them.

Financial crime expert, Graham Barrow, referring to Companies House, told the BBC that it was “quite hard to describe how bad and how enormous this problem is”. He estimates that about a fifth of all the companies set up in the UK in the last year were fraudulent in nature – that’s 150,000 companies.  He said the current system was “madness” and “completely the wrong way round”. “It should be check on the way in, not on the way out.

Companies House resourcing

Companies House is the UK’s ‘register of companies’, where business must provide details on their ownership and financial position. However, much of the data is inaccurate and unverified, which makes it easy for criminals to set up a company whose real owners or purpose are hidden. Companies House needs new powers so that it can verify information and challenge data where red flags are raised. To do this will require a substantial increase in resources, which we propose is financed by an increase in the (ludicrously low)  price of company incorporation, from £12 to £100. In parallel, the aim that companies can be incorporated in the UK within “24 hours” should be soundly dropped, as it all but makes it impossible for robust checks to be undertaken at scale (given that some 800,000 new companies were registered last year).

The Economic Crime and Transparency Bill of September 2022 does much to address the long standing substantial shortcomings of Companies House, and this is to be welcomed. For example, individuals who register companies, or file with the registrar, will henceforth need to verify their identity, as will the Person of Significant Control. However, there is still a way to go given anyone can set up a company for somebody else. To this end, Companies House should also be given the powers to review documentation connected to third parties’ ‘know your customer’ checks.

Next Steps

The Fair Tax Foundation will look to engage further on these matters through the coming months, and work towards the UK becoming an international exemplar of corporate transparency.

Note: as part of our UK public procurement reform campaign, we have also been pushing for a new requirement that all overseas companies bidding for public procurement contracts disclose their beneficial owners and that municipalities be allowed to factor ‘tax conduct’ into their decision making. Further details are on our UK public procurement reform page.

Note: The Fair Tax Foundation is now an organisation with an international remit. However, we are based in the UK, and the UK is currently a hotbed for criminals from around the world who want to set up companies to launder their illicit wealth and avoid tax. Criminals exploit the ease with which companies can be established, the raft of unethical enablers on hand and the access UK systems provide to even higher-risk tax havens and secrecy jurisdictions (such as the Cayman Islands and British Virgin Islands). We therefore feel it is incumbent on us to undertake best efforts to help clean up our backyard.

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