Considered in Grand Committee
We are today debating the draft Overseas Companies Regulations. They set out a simplified regime for registration of information at Companies House of companies incorporated overseas that operate their business in the United Kingdom through an establishment. We are talking not about UK incorporated subsidiaries of overseas companies, rather about overseas companies that are conducting their business through a local representative or have a small, permanently active base in the UK, such as a representative office, warehouse or shop. The regime concerns only obligations to file specified information in the UK at Companies House. The internal governance of companies incorporated outside the UK is for the law of the country of their incorporation.
In order to best protect UK creditors and the needs of law enforcement agencies, a regime has been prepared that continues to meet the EU requirements of the 11th directive for branches of overseas companies and also includes companies operating a place of business in the UK. The draft regulations include a revised accounting regime for overseas companies that is transparent, straightforward and up to date. Overseas companies will primarily file accounts prepared under the parent law of the country where the company is incorporated. However, where that is not applicable, accounts are to be prepared and disclosed in a manner compatible with the requirements for UK companies as set out in the Companies Act 2006. The regulations do not cover the law on the execution of contracts or the requirement to register the use of their assets in the UK to secure loans. These will be covered by a separate statutory instrument that will be made by negative resolution after these regulations have been made.
In line with the approach in the Companies Act 2006, the draft regulations apply to the United Kingdom rather than, as at present, to Great Britain only. This considerably simplifies the position for overseas companies that conduct business in both Northern Ireland and the rest of Great Britain by allowing them to register their presence in the UK once and therefore avoid the burden of duplicate filing. These draft regulations meet the concerns raised during the consultation process. They provide a single regulatory regime for the filing obligations of overseas companies operating in the UK. I commend this instrument to the Committee.
I cannot see anything in the regulations to object to per se. Indeed, if my reading is correct, according to the Explanatory Memorandum, the majority of respondents to the consultation exercise agreed with what is being done here, although in line with the comments made by the noble Lord, Lord Razzall, in the previous debate, it would be interesting to know how big the minority was and what its major concerns were.
My only question is on the regulatory impact assessment. I explained before in this Committee my scepticism of the figures put on costs and, in particular, the claimed benefits of certain regulations in RIAs. In the case of these regulations, the net benefit claimed is no less than £43,360,000. I have followed the calculations, which are based on a sweeping assumption that half the 7,847 overseas companies will be in a position to provide parent company accounts and the other half will not. A further assumption is made about the average costs for each of those categories of company. The whole of the annual saving so calculated is then, I think, subjected to a net present value calculation, which itself makes assumptions—for example, about the cost of capital—which must be, to put it mildly, fairly subjective in the current market. I do not disagree that it is helpful to have a regulatory impact assessment, but I wonder what value there is in a claim of benefit to corporate entities based on such huge assumptions. I wonder whether the Government have, in a wider context, given thought to improving the techniques followed for arriving at a cost-benefit analysis, or at least to giving an indication of the subjectivity.
My Lords, I join the noble Lord, Lord De Mauley, in agreeing that the regulations are appropriate. Clearly, it makes enormous sense to simplify the procedure for registration of an overseas company, so that the company no longer has to take legal and accounting advice about the form of registration it requires. That lifts the regulatory and cost burden on overseas companies establishing places of business in the UK, which is welcome.
I have only one technical question, on which I would welcome the Minister’s view. Clearly, what became known as Section 700 accounts were criticised by the company law review committee, and it is appropriate to move away from that. My question concerns the simplification of accounts procedures for non-European Union countries. They are straightforward in the EU because companies formed there comply with the accounting rules that have emerged by a series of directives, so it is clear what they will say. In the Government’s view, will the liberalisation—that may be the wrong noun, so let us say alteration—of the rules and the replacement of the Section 700 accounts make it marginally harder for creditors and people dealing with those companies to find out exactly what is happening or will it improve their position?
My Lords, the first question was a minority view, so to speak, as I understood the noble Lord, Lord De Mauley. Responses to each of the consultations on a simplified single regime for overseas companies consistently supported the approach. Almost all respondents supported the regime as set out in the draft regulations set out in December 2007, which was based on the concept of an overseas company with a UK establishment. Key stakeholders have continued to be involved in the finalisation of the draft regulations and have continued to support the concept of a single regime. It seems to be pretty well supported.
Impact assessment can be justified by the savings. The net saving of £4.9 million is measured in terms of new overseas companies registering a UK establishment under the new regime. It is rather difficult to quantify one of the main benefits of the regime, which is that these companies no longer have to decide whether their establishment in the UK is a place of business or a branch. This element of choice and the time and effort required will vary from company to company.
The PwC assessment of costs to business of UK regulation did not include an assessment of this choice. We believe that the simplification of the regime is a major customer benefit, and it is unfortunate that this saving cannot be counted. Instead, we have been able to quantify the benefit to companies of following the new simplified accounting regime and avoiding the existing Section 700 accounts requirements. PwC assessed the cost of preparation of such accounts to be just under £885 per company.
Many overseas companies will now be in a position to avoid this cost by filing accounts already prepared under the parent law of their country of incorporation. We have taken an indicative view that half the overseas companies that could benefit from this change will do so. It is difficult to be more accurate, given the range of countries involved, and the saving could be higher. Those companies unable to rely on parent law and still required to prepare accounts will find the new arrangements more straightforward, and we have estimated an average reduced cost of half that for Section 700 accounts assessed by PwC. We based the saving on the number of active overseas companies registered at Companies House that are non-EU companies with a UK branch or overseas companies with a place of business. EU companies with a UK branch are not subject to Section 700 accounts, so we have not counted them in the saving calculation.
For some existing overseas companies, there will be negligible increased cost. The regulations include transitional provisions that allow existing companies sufficient time to provide a set of accounts where they have not already been provided. Other information to be provided as part of the transition is negligible. We have allowed companies six months from 1 October 2009 to comply with a simple return to the registrar. Respondents to the December 2007 consultation did not challenge the figures used, nor did they offer any alternative approach. On the contrary, the majority supported the approach taken.
In response to the noble Lord, Lord Razzall, accounting by non-EU companies has been modernised, not liberalised. It will be easier for creditors because the resulting accounts will follow more modern accounting standards—so I am assured. I think that we have dealt with all the questions raised.