Filing exemption is a fix for something that ain’t broke

A lot of blog and column inches have been devoted to proposals by the government to exempt one-person companies and other micro-firms from having to file accounts at Companies House, in an effort to reduce the burden of unnecessary red tape, writes Sid Home, managing director of Safe Collections, a debt recovery and credit reporting specialist.

When simplification’s not so simple

So far so good we hear you say, simplification can only be a good thing especially for those of us operating in the freelance contracting market. But wait, unfortunately it’s not as simple as that.

The EU defines a “micro-business” as any company that does not exceed two of the following criteria:

  • An average of 10 employees over the year
  • A net turnover of €500,000 (£440,000)
  • A balance sheet of €250,000 (£220,000)

60% of Companies House affected, contractors too

Having reviewed the criteria and calculations, I can reveal that equates to as much as approximately 60% of the incorporated businesses registered at Companies House. That is hardly what we would call a small proportion of businesses and the potential implications of moving forward with this simplification are staggering. Yes most contractor companies will be under this threshold, and yes – these contractor companies will save on their accountancy fees as a result. But is that in and of itself enough justification for the freelance community to get behind the proposals?

Not in the long-term interest of contractor companies

We would say it is NOT, and for one very simple reason. Ask yourself, how many contractors and freelancers deal with companies above this threshold on a regular basis? In our experience of helping freelancers recover outstanding invoices and bad debts we would say, not many. So whilst you save money on your own accountancy fees, the potential costs to your business will be increased significantly due to the additional costs of identifying the credit worthiness of a potential new customer requiring credit.

So what would you do?

Imagine you are approached by a new client or agency that has opted for the new simplified accounting structure, how will you evaluate the potential risks and rewards of entering into this new business arrangement? Under the proposed new scheme, credit referencing agencies will have extremely limited data upon which to provide an opinion. Will you then need to request accounts and trade references from your potential client?  When this information is received who will review the accounts and take up the references on your behalf? 

While the proposals may assist in saving freelancers money on filing their own company’s accounts, there WILL be extra costs involved if business loses the ability to quickly evaluate a potential new customer’s credit rating and general credit worthiness.

The reckless, foolhardy and desperate

Remember that whilst banks and other big financial institutions often have the ability to access up-to-the-minute financial information, what about the hundreds of thousands of UK businesses that routinely supply customers with extended credit terms? These businesses need access to up-to-date information to assess the risks; without access to this information who will want to provide credit to customers? We would imagine that it would only be the reckless, foolhardy or desperate. Sensible SMEs (small and medium-sized enterprises) will always want to ensure that when they give credit that the risk is as ‘good’ as can be.

There is a case for simplification

We applaud the idea that government can help SMEs by simplifying and reducing the amount of red tape they have to deal with but, we wonder, would central government be better served by fixing the minefield that is UK tax legislation? After all, the credit reporting market is well served by some excellent providers. So with its filing exemption proposal, the government would do well to remember the old adage: “if it ain’t broke, don’t fix it!”

Tuesday 6th September 2011