The UK Corporate and Individual Tax and Financial Transparency Bill - promoted by Michael Meacher MP and which I drafted on his behalf - has a one if its key goals putting the real ownership of UK companies on public record. This is covered by sections 4 and 5 of the Bill, which I explain here. In a later blog I'll look at how this data will be used to promote good business practice in the UK and to ensure tax is collected, but for the moment let me concentrate on the mechanisms needed to achieve the goal of finding out who owns what in terms of companies in the UK:
Section 4 — disclosure of the beneficial ownership of companies
The disclosure of who really enjoys the benefit of limited liability is vital if it is not to be abused. This section aims to achieve this goal.
First it requires that a company properly identify anyone who owns more than 10% of its shares by amending the UK's money laundering regulations. And what it means is that when seeking to find out who owns that share the company must look through all other companies and trusts and identify the real, worm blooded person, who really does so.
Then by amending the rules for submitting annual return forms for companies in the UK to Companies House (which differ for large and other companies, meaning two changes are needed to achieve this goal) it requires any company to disclose if its legal owners differ from its beneficial owners — that is the people who really enjoy the income and gains resulting from owning shares in it.
The aim is to make sure that the secrecy that is currently available to UK companies, who can hide their true ownership behind the names of nominee shareholders, is ended.
Section 5 — the duty of UK financial institutions to report
The risk within section 4 of the Act is that companies will not do what is demanded of them. There is ample evidence to suggest that hundreds of thousands of companies a year do not provide the annual returns to Companies House that company law demands that they submit and as such the information on beneficial ownership that section 4 demands might not be available unless steps are taken to enforce the law. Section 5 provides an alternative mechanism to ensure that the beneficial ownership of UK companies really is disclosed on public record.
What section 5 demand is that UK financial institutions — the vast majority of which will be banks — must tell both Companies House and HM Revenue & Customs about the bank accounts that they open for UK based companies (including foreign companies registered in the UK and LLPs). They must also disclose the real trading address of the companies in question — which can at present be hidden behind a nominee registered office address — and the names addresses of those people that they have identified as required by existing money laundering regulations as the directors and beneficial owners of the company.
Banks must also give details of the actual bank account numbers they maintain — although to prevent fraud this information will not be published.
In addition, if this information changes then the banks and other financial institutions will have to tell both Companies House and H M Revenue & Customs that this has happened — providing a near real time updating service on this information.
The result will be that for every company that has a bank account (and if they have no bank account they are not likely to be significant for tax and other purposes) there will be independent information provided to our regulatory authorities on who controls a company.
The importance of this cannot be overstated: for the first time an independent check on the data at Companies House will be available provided by organisations that will not take the risk of getting this information wrong. We will, therefore, for the first time know just who really is running UK companies — and will be able to see if company and third party data agrees, which may be important.
Importantly, since banks are required to hold this data already under money laundering regulations and people are familiar with the need to prove their identity to banks now there is no significant additional cost to securing this data, which provides a massive benefit to society as a result at almost no cost to it.
This is a change in the law that needs to happen, now.
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Richard, I have a concern about clause 2(2) of the bill. Forgive me if you are going to write a post on clause 2 later.
When 2(1)(a), FTSE 100 companies, applies, I think the effect is the right one. The tax returns of all UK tax-resident members of the group will have to be published. And the company with which one starts in each group, the one to which related undertakings get attached, is the one that is listed – the top company of the group.
But what about the cases when a company is caught by 2(1)(b), (c) and (d)? Which is the large company in a group? Given the way the criteria are worded, we need to pick out one company in each group, so that we can then start to add its related undertakings and see whether the total puts the group in the top 50 by any of the criteria.
The obvious interpretation is that it is we take the top company of the group. But if we do that, only it will be a disclosable company, and only its tax return would be published. That might be a very dull tax return, with all of the action taking place in operating companies beneath it.
If there is a problem here, the remedy may be to re-word 2(1)(b), (c) and (d) so as to clarify which company in the group is used as the starting point for the computation of size, and then to say that if the group makes it into the top 50, that company and all of its related undertakings are disclosable companies. I guess that if anything needs changing, a proposal to change the bill could be announced at second reading, and formally proposed at committee stage.
I certainly believe that the wording says that the calculation relates to the company and its related undertaking – and all are disclosed if UK resident
That was my intention.
On a flimsy connection where I am at present I cannot check this – but if I have it wrong an amendment will be needed. Might you check whether you think I have succeeded, or not?
Such things happen – even in the Finance Bill. I can assure you writing legislation is not easy
Thanks for your comment
Yes, I would be happy to look at any revised text – but with the proviso that I am neither a lawyer nor a legislative draftsman, so my view will not count for much.
Alas, more complications have occurred to me, to do with residence.
In my previous post, I merrily suggested picking the top company. But when that is not UK resident, it might or might not be appropriate, and there might be no single top UK company (because there might be different UK operations held directly from overseas, rather than their all being collected together under a UK intermediate holding company). So one needs to think about how to get the desired effect, whatever that might be.
2(1)(c) makes it clear that when it comes to supplies, you want to catch the members of any group that makes it into the top 50 by virtue of its UK supplies, wherever in the world the supplying company might be (a well-known book retailer comes to mind). So we could start with the top company of the worldwide group, and add up all the supplies of all members of the group.
But then in 2(1)(b) and (d), you specify UK resident related undertakings. And presumably, for consistency with this, the company with which you start (and to which you would add related undertakings) would itself be UK resident too. Then we might need to go up the group to its overseas holding company, and back down again through some other part of the group, to pick up all of the related undertakings in the UK. And our rule for identifying the UK company with which to start would need to be unambiguous.
I wonder about the targeting of UK related undertakings, because you could have a non-UK company making profits in the UK (or would the branch then count as an undertaking)? You could also have a non-UK company employing people in the UK (or would that too create a UK undertaking)?
If something might slip through the net here, would there be grounds for extending the 2(1)(c) approach to profits and to PAYE: go through the whole worldwide group, add up all of their UK profits and UK PAYE, and then make all UK filings with HMRC for all companies in the worldwide group disclosable? But that might have knock-on effects that you have deliberately avoided by choosing the approach that you have chosen. Even if there are no such knock-on effects to worry about, this change would change the members of the top 50 from the ones that your approach catches. You catch members of the top 50 by reference to UK companies. My suggested change would catch members of the top 50 by reference to importance to the UK Exchequer.
If you do want to stick with UK companies in (b) and (d), and at the same time pick up all of the UK subgroups, would a different style of drafting do the trick, not starting with a lead company but starting with a set of companies, along the following lines:
“A company is disclosable if it is a member of any set of UK resident companies (including the set of which it is the only member), such that:
(i) if there is more than one member of the set, there is some company (whether or not UK resident, and whether or not itself a member of the set), in relation to which each member of the set is a related undertaking; and
(ii) whether the set has one or more than one member, the combined [profits/PAYE] of all members of the set [get the set into the top 50 of all such possible sets].”
(Sorry about that; I like logic and set theory.)
Finally, has this all been checked for not falling foul of EU law? We know how much trouble that can be, in formulating tax policy, and administrative burdens can get you into trouble with EU law, just like differential tax charges can. My initial hope is that you won’t have a problem here, because it would be the UK imposing burdens on UK operations, but that is only a hope, and if the point hasn’t already been checked, it would be worth considering.
My apologies for providing questions rather than answers.
I think the Bill is great. But how exactly are you going to get it passed?
OK it could be a stalking horse for an ongoing campaign, but in the end you will need support of Coalition MPs. How do you expect to get their consent please? I know you are a not a gesture activist (unlike many on the left) but I am not clear on your strategy on how to achieve fundamental practical change. I would like to know because I will shortly have the attention of a senior Coalition member and I would like to make a case he make common cause with.I can’t just swamp him with dogma.