There was an article in the Sunday Times yesterday on the creation of what are being called ‘burner companies'. The links are in this Tweet I put out yesterday morning but did not have energy to follow up on at the time:
As I've long argued, the UK government facilitates fraud and increases the tax gap by failing to regulate companies in the UK. It's almost as if they want corruption to flourish. No wonder we're a low growth economy. Cheats prosper unrecorded here. https://t.co/v21nKPDlGp
— Richard Murphy (@RichardJMurphy) November 27, 2022
I think this issue is as important as I did when I did research into the shadow companies (as I called them) that have for far too long been a feature of the U.K. economy. The reports I wrote on this issue in 2010 and 2014 (the more relevant one now) are still available.
Despite government promises, nothing has really been done on this issue since I last wrote a report on it. Whilst company formation agents should now supposedly prove the identity of those acquiring companies this is a completely meaningless control when anyone can register a company with absolutely no effective checks on any of the data supplied by asking Companies House - a government agency - to do it online instead.
As I noted years ago, the only data ever checked in the past was that the postcode supplied with regard to data was a real one. It seems from the Sunday Times article that even this is now circumvented by simply using any address picked off the web, which appears to be the theme of the Sunday Times article. People are finding their houses the supposed registered offices of companies they have no association with. It's a new variation on identity theft, long common in this area.
But let me also be clear: allowing companies to be authorised in this way and without any checks is all about the government officially sanctioning and licensing identity theft, because a company is a legal person hiding the identity of others unless strong regulation is in place. I have long accused the government of assisting identity theft because of its negligence in this area. And it is not just the UK that is impacted. I remember the time when I was told by a Norwegian taxicab driver that every taxi in Oslo was operated by a separate UK company because they were much cheaper that Norwegian ones, and no one enforced the law on tax or accounting on them.
No one enforces that regulation here either. As I showed in 2014, HMRC did then (and still does, as far as I know) accept absurd assurances from directors of new companies that they never intend to trade and then does not ask for a tax return, without any further evidence being required for up to five years.
As bad was the fact that my research showed that of the 40% or so of companies that they did actually ask for tax returns from (or around 2 million a year) maybe 20% never submitted a return and HMRC simply accepted that absence of a return as evidence that there was no tax to pay. They had not a clue whether that was true or not.
In 2014 I suggested how this problem of missing data on which companies were really treading or not could be resolved: this could be easily done by simply requiring every UK bank and financial services organisation to file an annual list of all the companies they serviced, stating the number, identified beneficial ownership, their addresses and either a) the sums deposited in their bank accounts in a specified annual period or b) their annual sales, and the likelihood that those companies that were trading and which actually had a tax liability could then be identified would have been transformed from being very low to very high. I even wrote legislation that was presented to parliament by the late Michael Meacher MP and then by Labour to achieve this goal, but the Tories were not interested.
The problem has got much worse since the last time I worked on this issue. The number of net companies in the UK has gone up in less than a decade from 3 million to 4.5 million or so, net of those being removed.
Staggeringly, the number of companies being formed a year has grown from around 480,000 a year a decade ago to little short of 800,000 a year now.
The number being dissolved a year has also nearly doubled, from a bit over 300,000 a year in 2012/13 to maybe 600,000 a year now.
Let me put this in context. There were 625,000 live births in the UK in 2021. There were coming on for 800,000 corporate births. This is utterly inexplicable for legitimate reasons.
The difference is that life expectancy of the corporates was much lower. Many only last a year or so. As my research has found, vast numbers never file any accounts or confirmation statements with Companies House before the Registrar of Companies removes them from the Register of Companies on the basis of an assumption that they have never traded, which could of course be totally misplaced. The consequence is that all their crimes are wiped from the record for them. You could not make a system so friendly to the criminal up.
I would, however, actually go further than say this careless attitude to the striking off of companies from the UK Register of Companies is the result of a misplaced assumption by the Registrar. I would describe it as reckless, irresponsible and criminal, in itself.
That is because there is no way that the UK needs to incorporate 800,000 new companies a year to support legitimate business activity in this country. The latest corporation tax statistics show that just over 1.5 million companies paid corporation tax in 2020/21. There were, of course, also loss-making companies, but it it is unlikely that many more than 2 million companies trade. Sating this, I also acknowledge the role of dormant companies, but many of them exist for long turn purpose and the problem within the corporate sector is not long-term dormant companies but the massive churn of newly formed companies.
Of course some of these companies with brief lives are innocently formed - and never do a thing. But to let people form companies and then be negligent about the legal responsibilities arising from doing so is an act of negligence by the state in itself, and those involved should have personal liability for penalties for non-compliance, which absurdly fall in the limited liability entity right now, meaning none of the fines due for non-compliance are almost ever paid, as my research also showed.
For exactly that reason proof of identity should be required of all company officers and major shareholders, and they should be liable for the failure of the companies they operate to file documentation, even if it has not traded.
In addition, the system of automatic information exchange from banks and other financial services companies I have noted above should be in operation so that those making false returns can be identified - and be held to account for it.
Because these things are not happening a near-perfect corporate criminogenic environment exists in the UK. As a result three things happen.
First, all regulation is undermined and honest business suffers, badly as a result. It is simply undermined.
Second, income and tax is not reported. As I have always argued, HM Revenue & Customs massively underestimate the amount of unpaid tax in the UK, which could easily be three times the £35 billion or so they admit to each year (the repetitive coincidence of which reporting makes it, in itself, very hard to believe).
Third, GDP is also seriously under-reported. That is because my sources suggest this issue is not taken seriously when GDP is estimated in the UK. Other countries include bigger estimates of their shadow economies: we deny the truth.
The net outcome of this denial is the perpetuation of a policy so opposed to the well-being of business and a crime-free society that I can say that in my opinion successive ministers have been and are criminally culpable facilitators of crime when failing to take action to address this issue.
If we want a decent society ministers have to take their duties to regulate, to tax and to stamp out criminal abuse seriously. Our government treats all three as a joke. Do you wonder that we are in trouble?
NB: I wrote this yesterday. As regular readers will know I have been suffering from long-Covid-related issues in the past week or so (again). If there are remaining typos I apologise.
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From my now somewhat distant memory of working in HM Customs and Excise if a business did not submit VAT returns estimated assessments were issued which kept increasing in value as time went on – whether this is the case now I do not know and whether any enforcement to try to collect the money is done I do not know – but in the “good old days” if 4 returns were not submitted we would make a visit to the premises which of course would reveal if there was a trading business there, nowadays of course HMRC has due to government negligence abandoned on premises tax visits with as Richard says resulted in the state we are in re tax collection and enforcement
We agree
VAT visits were vital for enforcement
If VAT visits have been discontinued, what is the current status of PAYE visits/audits which were the subject of a very effective video produced back in the 1980s by, I think, the ICAEW possibly in conjunction with HMRC? That video was very effective in frightening fraudsters (would-be or actual), but if the PAYE visits have ceased, it’s game on.
The Tory fixation with shrinking the state has already emasculated regulation in so many key areas and they’re not finished yet. I’ve thought about this ideology a lot and it never fails to get my “Auditor’s Nose” twitching. The apparent carelessness of failing to regulate in any meaningful way, backed up by the repetition of the lie about minimising the drain on “taxpayers’ money”, makes for a very effective camouflage for the real purpose of the ideology: creating an unregulated “free-for-all” where exploiters can fill their pockets with little chance of detection and all conducted under protection of government policy.
I have not heard of one fir a long time
Nor have I read much about them fir some time
But I am not regularly practicing now
Does anyone else know?
I have always thought this was a problem, but had not seen your reports. It seemed to me to be far to easy to set up a company at Companies House, which I have done (legitimatly of course) many times. I also thought it was a retrograde step when directors were able to use a service address rather than their private address as was once the case.
Its a pity you can’t (as far as I know) search an address on the company register to find out if someone has registered a company at your address. Mind you, I suppose you would get mail from CH which would alert you.
I wish you all speed back to full health soon, Richard. Your MMT community needs you.
Thanks fir the comment Nigel
Almost every change since 2015 at CH has been retrograde
You can enter a postcode in the Companies House search bar and it will show all registered businesses and people at or near that postcode. It says enter company name, number or officer name, but postcodes work. I check mine every month.
Thanks Cindy. That’s new to me. Useful piece of monthly housekeeping advice I would say.
A postcode search is revealing. There are 30 addresses that share my postcode however there are 45 companies whose registered offices share it. One address is the registered office of no less than 23 companies. I hasten to add that I don’t live in the middle of an industrial estate but in a quiet residential street.
Let’s also be honest, I think my house has five
One other thing about Companies House. The on-line registration system sees ‘Limited’ and ‘Ltd’ as being different. I found this out by accident when verifying a business who had approached us. So, you can have a company called AK Limited and one called AK Ltd. They are different entities.
Which is ridiculous
Companies House is all but useless, but I’d not heard of this one. Can you give an example, Allan? Was one an English company, and the other incorporated elsewhere?
Companies House does not, I think, agree with this claim
I sell businesses and have to make sure any potential buyer is above board. This was about 6 months ago. I entered the company name along with ‘Limited’ and it came up as being dormant. I went back to the owner and he said that it was ‘Ltd’. Checked and the business existed and was trading. Both were UK companies.
I accept what you say Allan, but that sounds very unusual. I won’t pry if you don’t want to divulge – but can you check and see if that is still the position today? Both English companies with different company numbers? And the same current (not former) name?
I can’t remember which company they were interested in. It also doesn’t help that I archive everything once a sale has completed. As nothing progressed, it was just a one-off.
All that matters to neoliberal ideaology is the single freedom of capital to exploit whatever profit-making opportunity it alights on. There are two ways a neoliberal Government can ensure there is no oversight of business activity, or no effective regulation; so that capital can make up its own ‘rules’ with no let or hindrance to its activities, however dangerous to public health or safety, or however dubious the activity.
First, Government can refuse to legislate for the regulation of business, or it can abolish existing legislation. Both carry political costs and risks for Government, especially if, in doing so, they merely draw attention to egregious public failures of Government to protect the public from well documented and established harms arising from Government negligence in this area.In addition, neoliberal Government requires Regulations (‘Red Tape’); as this supposed over-regulation is the principle argument it possesses to explain why neoliberalism (typically Conservatve Government) continually failes, over dacades to avoid austerity, improve general living standards, significantly reduce deprivation and poverty; or even produce any economic growth, or any serious uplift in productivity. Neoliberalism needs to have Red Tape to rail against, because it has no other explanation to offer why over a decade of effective 0% interest rates (i.e, money for nothing) it has so dismally failed to produce genuine ‘free market’ investment in a ‘free market’ economy that actually benefits ordinary people.
Second, what really works well for neoliberal Conservative Government is not to abolish Red Tape, but simply disarm it by stealth. This is achieved by what I term the ‘Grenfell’ protocol. ‘The ‘Grenfell’ failure, was not the lack of any building regulations at all, but surrounds their application in the real world, and the resourcing of Government administration and execution of the regulations or legislation. Governments destroy regulation by the simple, silent, unnoticed withrdrawal of resources to carry it out. Simple.
Every piece of legislation passed by Parliament should require the clear identification of the Government arm of implementation chosen; and the human and financial resources being allocated to undertake the execution. There should be a Select Committee requiring to report within two years with an audit of the implementation of the legislation, or regulations; perhaps with a dormant sunset clause that the Select Committee could have the power to reuscitate to ensure it the legislation is re-passed in Parliament, and bring the failures centre stage. Of course it will never happen – I draw attention to this because only though such control can such misuse of power by Government be prevented. We simply refuse to understand that the scale and depth of the pregorative power of Government to pursue its purposes is almost endless.
There has long been what I call constructive non-compliance in legislation
Constructively it can be claimed legislation exists to tackle an issue
In parctice it is non-compliant in that it has limited or even no effect in tackling the problem it was meant to address, except amongst those already compliant
The BBC reported that a street had been targeted by the ‘Scammers’ and companied=s had been registered to addresses in the road with the residents as directors.
In fairness Companies House were not very amused but explained that their hands were tied.
But they never ask for them to be untied
And let’s be clear that Companies House is an agency of BEIS so any minister could take the issue up, as I noted.
As a 16 year old I remember questioning why Limited companies could go bust owing massive debts that the owners did not have to repay while Private individuals/sole traders running a business were liable for every penny owed.
The answer I received was that a successful company helps provide many of the things needed by a successful society such as employment, tax payments, goods, services, etc. Therefore, in order to encourage individuals to take the risk of setting up a business, such enterprises were granted legal privileges not available to non-company-owning individuals, such as limited liability and the offsetting of costs against profits in order to minimise the tax paid by the owners, etc.
I am not sure if the answer I received was part of the original justification for Limited companies or whether it was a justification dreamt up after the event, but what is certainly now true is that the legal privileges enjoyed by limited companies, legal privileges not available to the private citizen, are now a primary source of tax evasion, corruption and other forms of criminality.
I am amazed that until you raised it Richard, this problem is never discussed in what now passes for our Democracy.
There is a long history to this
The idea was to aggregate capital from those with no idea what to do with it so that this with ideas on how to use it might out it to use whilst protecting those not involved in management from liability for the actions of those that were.
We have come a long way from that. What no one planned was that limited companies could be owned by limited companies – piling on levels of immunity from responsibility.
I would make two points about this. The first is that Companies House is simply not resourced to deal with non-compliance, let alone to adequately maintain its own database. When I worked in HMRC it was frequently the case that directors of multiple companies only showed up as being directors of a fraction of those companies they did actually direct (and often they only showed up as a director of Company A if you were looking at its record on the Companies House website; if you looked at Company B’s record, they would show up only as a director of Company B; and so on).
The second point is about what is shown in HMRC’s annual reports as its yield from compliance activity. As you have mentioned before, Richard, these figures are undeniably a much lower proportion of the “tax gap” than they claim to be, because the latter is consistently understated. But it is worse than that, because the proportion of compliance yield attributed to forcing change to future tax behaviour is getting higher year on year (and the actual cash collected is reducing). The whole thing is designed to prove the mantra of “more from less” which is the political justification for reducing HMRC budgets.
Re the second, I agree entirely
Re the first, insufficient resourcing is inexcusable when setting a reasonable annual fee (£200?) would allow more than enough to police the Register
The Tories claim that is a burden. How is an honest economy a burden?
Something I came across by accident is that the Australians seem to have a seperate register for company directors (who have their own ID numbers), that, I assume, readily permits cross referencing as to their companies. I wonder how many other countries have equivalants…
I Yve no idea why we can’t do this
And link it to a proof of identity mechanism at the same time
https://www.theguardian.com/business/2022/nov/29/wilko-owners-dividends-losses-emergency-funding-sales
Might be relevant to the discussion
I used to think this a well run company
I’m not sure what the connection is here – it is a private limited company, owned and controlled by the Wilkinson family.
The accounts for Wilkinson Hardware Stores Limited for the year to 29 January 2022 (filed yesterday) show they made a pre-tax loss of about £36m in that year, but still had substantial amounts of cash and P&L reserves – £58m of cash and £111m of distributable reserves. Quite sufficient to justify the relatively small dividend they paid earlier in 2022, it seems to me.
But that was a year ago. Like many retailers, I expect they survive on very thin margins – in the year to January 2021, an operating profit of £3m on a £1.3 billion turnover – and so they are vulnerable to economic bumps. And cash is king, in an environment of falling sales and increasing costs. As the accounts recognise, cash management and cost control are absolutely essential.
They are also carrying a £200m+ defined benefit pension liability (funded with around £200m of assets, but the liability and the funding each jump up and down from year to year).
They are showing signs of stress – that cash was based on a sake and leaseback, often the furst sign of the end
They have a portfolio of around 400 stores, many leased. They sold and leased back one site – a distribution centre – which raised about £40m, much of which was used to repay debt. I don’t know what other distribution resources they have, but no doubt the directors have a view on what shape their property portfolio will need to have when that lease ends.
Most of their creditors are trade-related. The balance sheet has relatively little debt.
But it is clear they have a close eye on cash-flow, and there is a long note about going concern (pages 8-9). Also quite a long note on their energy and carbon consumption (pages 14-16). See
https://find-and-update.company-information.service.gov.uk/company/08856837/filing-history
Retail always has a hard time in any economic downturn, and nowadays competing with online sellers (perhaps that is the link John was making?). I would not be at all surprised to see more distress and insolvencies on the high street, around the next couple of quarterly rent dates and particularly after Christmas.
I agree with your conclusion