Insight 2005 archives

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Key UK company law changes due in 2005

But reform is still a work in progress. By Louise Ross, advisor accountant, CIMA Technical Services

Sometimes a briefing is useful for developments that may not have appeared on everyone's radar. Sometimes a briefing is necessary because so much has been going on, that you wonder where we've got to, and what's coming next. Changes to UK company law definitely fall into the second category. An update seems timely, given that two key events take place this month, including House of Commons approval of the Operating and Financial Review, and that the Department of Trade and Industry (DTI) has recently published useful guidance on the changes.

First, a recap. During the period 1998 to 2001, an independent steering group reviewed UK company law, with the objective of simplifying the legislative requirements for all companies and especially for the smallest. The group wanted to make the law clearer and more responsive to future developments. Many of us remember not-so-fondly the weighty consultation documents issued. Ultimately, the group's findings formed the basis of a 2002 White Paper. At the same time, a requirement to change UK law also arose from the passing of three pieces of EU legislation ' the International Accounting Standards regulation; the Modernisation Directive and the Fair Value Directive.

Since the White Paper, the following has happened:

• The Companies Act 1985 (Accounts of Small and Medium Sized Enterprises and Audit Exemption) (Amendment) Regulations 2004 , SI No. 16 came into force in Jan 2004, changing the definitions for small and medium-sized companies and groups and thereby increasing the audit threshold to £5.6million turnover. The statutory instrument can be read on the HMSO website.
• The Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004, SI No. 2947, came into force on 12 Nov 2004 implementing t he IAS Regulation, the Accounts Modernisation and Fair Value Directives for British companies. The regulation applies for financial years beginning on or after 1 January 2005. The DTI has recently published useful guidance on these changes, which can be found the DTI website. Unfortunately, there is a glitch in the guidance ' not all the formatting works in the decision tree "Are you required to use IAS?" at Annex A.
• The Companies Audit Investigations & Community Enterprise Act (CAICE) was passed in November 2004 with various sections of it coming into force throughout 2005. Among other measures, it introduces independent auditing standards, and bestows new powers on the Financial Reporting Review Panel. There is more guidance on the DTI website.
• Draft regulations for a statutory Operating and Financial Review (OFR) were laid before parliament on 12 January and were approved by MPs in the House of Commons this month. They come into force with effect from 1 April 2005 . It is the ASB which is responsible for producing the detailed OFR requirements (in the form of a reporting standard) and their draft is currently exposed for consultation by the end of February. For further information visit the OFR section of the DTI website, which also directs users to recently published guidance (necessarily draft at this point) for companies on the OFR and changes to the directors' report.
• In January 2005, the DTI decided not to include in the proposed legislation new rules on directors' pay, since it felt that the disclosure rules introduced by the Directors' Remuneration Report Regulations 2002 were having the desired effect in enabling shareholders to scrutinise directors' pay, and improve the link between pay and performance. Research indicated that in many cases shareholder pressure had compelled renumeration committees to change their policies, and directors' notice periods are now rarely more than one year. For more information, please search the DTI website under press notices for 25 January 2005.
• But the new legislation may include the abolition of paper share certificates, as also in January, the DTI showed itself receptive to such a recommendation from the European Securities Forum in its report Better, Quicker And More Efficient Arrangements For The Individual Shareholder. For more information search the DTI website press notices for 11 January 2005.

It's fair to say that rewriting UK company law has not panned out quite as many observers had expected. When the White Paper was presented to parliament in 2002, the secretary of state criticised the existing legislation as "a competitive disadvantage ... encrusted with amendments and case law over generations" and concluded that it had "failed to adapt to meet the changing role of small enterprises, IT and international markets."

This led us all to expect a single ' albeit giant ' piece of legislation (a Company Law Reform Act 2005) to replace not only the Companies Acts of 1985 and 1989, but all the other associated "encrustances". The DTI expected the new legislation to be one of the biggest contributions towards its objectives to cut red tape and estimated that it would save businesses hundreds of millions of pounds of administrative costs.

Unfortunately, the problem with such a huge task is that it demands the dedication of a significant amount of parliamentary time. It also has a momentum of its own, which can't be hurried to take into account urgent concerns. The DTI has had to pre-empt the new act, and introduce legislation to deal earlier with certain issues such as the requirement for a mandatory OFR.

Can we expect an act this year? Possibly. For those of us not familiar with the UK parliamentary process, a bill is laid before both Houses of Parliament in succession, debated, and any amendments debated, before (sometimes) being approved. Then it must receive Royal Assent to become an act. The Company Law Reform Act is not now expected before autumn 2005 (assuming a Labour third term), so we might just make it.