Financial Transparency Coalition

Tax Research UK published a new report this weekend on the administration of the UK’s Register of Companies by Companies House, the agency responsible for it on behalf of the UK government’s Department of Business, Innovation and Skills. The report extended the review to look at the administration of corporation tax returns by H M Revenue & Customs, the UK’s tax agency. In combination these are the two main agencies with responsibility for registering and regulating companies in the UK. The Task Force on Financial Integrity and Economic Development funded the study.

The UK is an important location to study when it comes to limited companies. Firstly, it has many more limited companies than is commonplace. There were more than 2.7 million in 2009, for example – a ratio much higher at 4.5 per one hundred people than is found in Germany, France and the Nordic states, for example. Second, as the country responsible for a great many tax havens it would seem important that the UK set a clear example of good practice in the running of such a Register.

Unfortunately, as the research showed, the UK does not set a good example. In the year to March 2010 some 500,000 companies were removed from the Register of Companies in the UK with out being liquidated. They were, to use the terminology commonplace in the UK, ‘struck off’ the Register without being formally liquidated.  Of that number more than 325,000 were struck off at the request of Companies House itself, almost entirely because they had failed to submit documentation due for delivery to the Registrar, as required  by law.  In most cases the missing document was the annual return form, detailing the current directors, shareholders, share capital and trade of the limited company.  Research did also show, however, that only about 20% of the companies struck off at current trading accounts on file at the time they were dissolved. In combination these failures reveal that little effort is made to ensure that UK-based limited companies file the documentation that the law requires them to place on public record and which would ensure reasonable transparency with regard to their ownership, control, and trading. This widespread makes a mockery of the U.K.’s laws on corporate transparency

The catalogue of maladministration does not end with Companies House. The report also shows that H M Revenue & Customs requests corporation tax returns from fewer than 70% of UK companies and that just 33% of UK companies actually settled corporation tax liabilities in the year to March 2010. This is a ratio exactly consistent with that found in the USA  a year or so earlier when research on this issue was undertaken by the GAO.  In the UK this implied that, once more, at least 500,000 companies were likely to be ignoring their obligations to make Corporation tax returns and pay their taxes.

These failings have enormous implications. Together with other findings in the report they mean:

1. That UK companies can be easily used by those seeking to undertake tax and commercial fraud and other criminal activity without risk of their activities being disclosed even though UK companies are meant to publish their accounts on public record;
2. That UK companies can be formed without ever disclosing the real owners of the company and the real identity of the directors. These processes are facilitated by the fact that no signatures are now needed to form a company, no checks are undertaken on those forming companies to prove they are real people, and no proof that a company is really trading from the address given when it is incorporated is required. UK company formation is as a result akin to an invitation to undertake identity theft because of the opportunity it provides to undertake trade without being identified. The risk of fraud is high as a result.
3. That the UK is now a haven for those seeking to hide their identity behind a company in order to open secret bank accounts to move their funds around the world, hidden from regulatory view. This includes corrupt foreign politicians looking to launder stolen state funds, and terrorists seeking to fund their activities.
4. There is enormous risk of tax fraud at cost to the UK government in this process. Tax Research LLP has estimated the cost to the UK Exchequer from failing to administer companies incorporated in the UK at some £16 billion a year.
5. Those UK companies that do seek to comply with the law are likely to be trading at a competitive disadvantage to those that ignore their obligations. The market is distorted as a result.

The report, which has already attracted UK press coverage, seeks to do more than catalogue failings. Most importantly, it wants to create access to data so that regulatory authorities can ensure those who of their own free choice use limited liability companies to undertake trade fulfill the obligations imposed upon them when doing so. For this reason it makes a series of recommendations, the first of which are:

1. All banks in the UK must report to both H M Revenue & Customs and Companies House if they open or close a bank account for a UK limited company. If this information is known by H M Revenue & Customs they will know which companies are really trading in the UK, meaning that accounts can be demanded from all those that are trading;
2. No application for the striking off of a company which has a bank account should be accepted by the Registrar of Companies until it has received up to date accounts to support that application and is satisfied that H M Revenue & Customs has received all tax owing to it;
3. It should be illegal for anyone in the UK to assist, directly or indirectly, a UK company to open a bank account with a bank outside the UK without that person who provides assistance having notified both H M Revenue & Customs and Companies House of the fact that they have done so, with full details of the account opened being supplied ;
4. UK banks should be required to provide full and direct disclosure to H M Revenue & Customs of the bank statements of companies that fail to submit either their accounts to Companies House on time or their corporation tax return to H M Revenue & Customs on time. They should also be required to provide the full names and addresses of all those authorised to operate that account;
5. The tax liabilities of UK limited companies should become the personal responsibility and liability of their directors if their companies have failed to submit either their accounts to Companies House on time or their corporation tax return to H M Revenue & Customs on time, with this liability only being avoidable if all documents are filed and payment is made or if a proper liquidation of the company takes place with it being shown that the inability of the company to pay arose through no fault of the directors.

The focus of these recommendations is very clear: access to data held by those with reason to believe it is reliable must be created so that companies can be held to account for their actions.

It is only when companies (and other structures such as trusts and foundations) created y statute law can be held accountable for their actions by linking them to the bank accounts that they use, and to the people who really manage them, that we can tackle illicit financial flows in the world and local economies.

It is very clear that the UK has a long way to go in creating such a Register. It is equally clear that its failure is costing it dearly at a time when it is in desperate need of taxation revenue. The economic, ethical, legal and business cases for reform are compelling. That is why the Task Force on Financial Integrity and Economic Development took on this issue.

Download the report here