The Companies Act 2006 - What Does it Really Mean to the Small Business
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Originally Published 14th April 2007
The Companies Act 2006 – The ‘Modernisation’
On 8 November 2006, Parliament enacted the Companies Act 2006. The content
is based on the recommendations of the Company Law Review Steering Group, Modern
Company Law for a Competitive Economy, published in July 2001 and the White
Paper, “Modernising Company Law” published in July 2002. The group recommended
a major revision of company law to make it more accessible to small businesses,
with requirements as unrestricting as possible and easy to understand. So has
this been achieved?
The Act amends and restates many provisions of the 1985 Act with two thirds
of that Act repealed. Its provisions will cover companies registered under the
new Act and the 1985 Act. Implementation is expected to be in stages commencing
in October 2007.
After Commons Committee stage the Bill contained 1226 clauses and 16
Schedules as a result of which it will be the longest Parliamentary Act in
history. The list of parts, chapters, clauses and schedules at the start of the
Bill runs to 58 pages which could be described as “accessible”.
The Audit Report and the Criminal Offence
The principal direct impact of the Act on practitioners concerns the framing
of the audit report. There is to be a new criminal offence, which will apply
where the auditor knowingly or recklessly includes in his audit report any
matter which is misleading, false or deceptive in a material particular or where
he omits any required statement within the report, e.g. the statement which
confirms that the accounts are not consistent with the accounting records and
There is an irony between the Companies Act establishing an incorrect audit
report as a criminal offence at the similar time as the APB has issued an
ethical standard on the provision of non-audit services such as taxation.
Tax services cannot be provided to an audit client where this would involve
acting as an advocate for the audit client, before a tax appeal and/or court
tribunal, in the resolution of an issue material to the financial statements, or
where the outcome of the tax issue depends on an audit judgement. This is a
complete prohibition – there are no safeguards considered adequate to counter
the perceived threat that arises through representing a client to the General or
In dealing with the threat arising from the provision of non-audit services,
the APB has made a distinction between companies with informed management and
Companies House proposes to offer businesses the option to incorporate online
The implications of the Companies Act “Business Review” requirements have
been well documented.
Accounts for the years ending March 31, 2006 onwards must contain:
- A fair review of the business and company; and
- A description of the principle risks and uncertainties facing the company.
Small companies escape the business review.
The requirement for all companies, other than those meeting the small company
criteria, to include a business review in their Director’s reports is now set
out in section 234ZZB of the 1985 Act and is effective for financial years which
begin on or after April 1, 2005.
“Key performance indicators” (KPIs) are factors that measure effectively the
development, performance or position of the business of the company, (s234ZZB
(5) CA85). This definition is rather vague and leaves it open to the directors
to set such KPI’s as they see fit. Whilst undertaking this task the tax
position of the company or LLP cannot be overlooked. The DTI guidance says that
it is for the directors to decide exactly what information to include about
their particular company provided that the information is relevant to an
understanding of the business. In the absence of a requirement to use the same
KPIs on a year-by-year basis it leaves scope for abuse, such as selectively
using those KPIs that show the company’s performance in a favourable light and
this includes tax.
Transactions with Directors requiring approval of members – the loans and
The Companies Act 2006 provisions govern approval by members on the following
Long-term service contracts, substantial property transactions, loans, quasi
loans and credit transactions and payments for loss of office brought together.
Loans, quasi-loans and credit transactions (defined as in the 1985 Act) to a
director or connected person of the company of holding company are no longer
illegal for relevant companies but must only be made if approved by the members
of all companies. In the light of the previous detail on connected parties (for
the definition see below) this might raise some interesting considerations on
the exact definition of family relationships.
The resolution to be approved by the members must set out:
- The nature of the transaction with the director
- The amount of the loan or quasi-loan and the purpose for which it is
- The extent of the company’s liability under any transaction connected with
the loan or quasi-loan (clauses 198-203).
Approval for Loans
No approval of the members is required for the following Loans:-
- Loans, quasi-loans, credit transactions and related guarantees or security
to meet expenditure on company business: The total value of transactions
under this exception made in respect to a director and any person connected to
him must not exceed £50,000 (previously to be repaid in six months by a
private company and limited to £20,000 in a relevant company) (clause 203)
- Money lent out to fund a director’s costs for legal proceedings:
proceedings in connections with negligence, default breach of duty or breach
of trust by the director in relation to the company) (clause 204) or in
connection with regulatory action or investigation (new) (clause 205)
- Small loans and quasi-loans: as long as the total value of such loans and
quasi-loans made in respect of a director and any person connected to him does
not exceed £10,000 (no time restriction on quasi-loans and all extended to
connected persons) (previously £5,000) (clause 206(1))
- Small credit transactions: as long as the total value of such credit
transactions made in respect of a director and any person connected to him
does not exceed £15,000 (previously £10,000) (clause 206 (2))
The Companies Act 2006 has focused on the legality, approval and disclosure
of the loans to directors as set out above. How will the tax legislation deal
with these changes?
Tax efficient withdrawals from the company
Where does this leave tax compliance and tax planning for the average owner
Can it be said that this revision to company law does make it more accessible
to the small business? On the basis that UK GAAP (Generally Accepted Accounting
Practice) = tax treatment then where will this leave the tax treatment of loans
The effect of accounting standards on taxable profits has been well
documented. Will this accounting standard stamp the tax treatment of these
Copies of the Act and some excellent explanatory notes may be downloaded by
clicking here (external site). Further information of CICs, including a copy
of the draft regulations can be found by
clicking here (external site).
How will the companies requirements surrounding withdrawing monies from the
Company impact upon tax planning and the whole subject of tax efficient
withdrawals from the Company and the role of the tax adviser?
Persons connected to a director will include under the 2006 Act:
- The directors spouse or Civil Partner;
- Any other person with whom the director lives as a partner in an enduring
family relationship excluding grandparents, grandchildren, siblings, uncles,
aunts, nephews and nieces – this is similar to, although less strict than, the
FRS 8 concept of ‘family members or members of the same household who may be
expected to influence or be influenced by’ and more strict than the IAS 24
concept of ‘family members’
- The director’s children or step children;
- The children of any other person with whom the director lives in an
enduring family relationship who are not the director’s step children and have
not attained the age of 18;
- The director’s parents;
- A body corporate with which the director is connected (as defined in
section 254 – interested in 20% of share capital or entitled to control 20% of
- A person acting in his capacity as trustee of a trust-
i) the beneficiaries of which include the director or a person who by the
family link is connected with him, or
ii) the terms of which confer a power on the trustees that may be exercised
for the benefit of the director or any such person, other than a trust for the
purposes of an employees’ share scheme or a pension scheme;
- A firm that is a legal person under the law by which it is governed and in
i) the director is a partner,
ii) a partner is a person who, by virtue of the family link etc is connected
with the director, or
iii) a partner is a firm in which the director is a partner or in which there
is a partner who by the family link etc is connected with the director.
This will involve much greater transparency and much harder work for all
concerned – directors and auditors.
The related party transaction
What of the need to disclose related party transactions in the notes of
accounts? How easy for an enthusiastic HMRC officer to obtain vast information
from the notes to the company accounts? Perhaps some family companies have
enjoyed the ability to direct company profits to various (previously distant)
family members/connected parties in a very tax efficient manner. Will the
disclosure of connected parties help the detection thereof?
The Nervous audit/accounts clerk and the enduring family relationship
Please also feel some consideration for the innocent (possibly nervous) audit
clerk who, ever mindful of the Companies Act 2006 disclosure requirements, has
to ask the confident (and possibly scary) managing director the status of civil
partners and the children of the people with whom the director lives. It might
just be that senior members of the accountancy practice have failed to leave
full notes on the director’s ‘household’ needed for Companies Act 2006
compliance. Perhaps the questions should be delicately asked by the partner in
charge of the audit…
About the Author
Butler & Co specialise in the
farming and equine industries, focusing on preparation of accurate, detailed
accounts combined with expert tax advice and planning, particularly in the
fields of Inheritance Tax and Capital Gains Tax.
Julie Butler FCA can be contacted by Tel: 01962 735544 or Email;
Butler & Co.
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Article Published/Sorted/Amended on Scopulus 2007-04-14 23:43:44 in Tax Articles