There was an article in the FT yesterday suggesting that the price of incorporating a company in the UK may be too low and that the reforms that the UK is introducing next month may be wholly inadequate to tackle the risks that the UK's almost non-existent company law administration regime has created.
As they noted, the UK creates the largest number of red flag money laundering risks with regard to company incorporations in the world:
This is unsurprising. Because companies can be formed for next to nothing in the UK and the annual fee for retaining a company is just £13 a year, the resources made available to Companies House have been far too small for it to have had any chance of administering the more than 5 million companies that exist in this country, which figure is way an excess of any reasonable needs as indicated by comparison with other equivalent countries in Europe, as well as in the USA.
What the FT did not mention was the extraordinary cost that this failure also creates within the UK. I estimate in the Taxing Wealth Report 2024 that maybe £12 billion of tax is lost each year as a consequence of the UK's failure to regulate companies in any meaningful way.
£6 billion of this cost arises because of HM Revenue & Customs' totally lax attitude towards corporation tax compliance.
The other £6 billion is the result of Companies House facilitating tax losses of all sorts, including of VAT and PAYE, that should be due by companies trading in the UK from which Companies House does not demand accounts and instead strikes them off its register, in the process aiding and abetting their fraud that then goes entirely unpunished.
The Labour Party has always, supposedly, been interested in creating a level playing field. If it was it would take up this issue because taking crooks out of the economy is the best possible mechanism available to any government seeking to support vibrant markets. I have not, however, ever heard anything from Labour on this issue. I presume, as a result, that it is not interested in level playing fields, vibrant economies, or taking crooks out of the economy, let alone in finding £12 billion of missing public revenue. Why not completely baffles me.
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Seems to me there are three reasons to set up a company.
1) Tax avoidance. Incomes can be smoothed, shared and dividends are taxed at a lower rate than unearned income.
2) Money laundering and tax evasion. As Richard notes, there is no policing of the activity of many companies.
3) It is a sensible way to run a complex business organisation…. and many, many of the registered companies are of this nature and comply diligently with all rules etc. – and should be encouraged.
The UK is no more sensible/industrious/entrepreneurial that other countries so No. 3 can’t explain the huge number we actually have…. it must be 1 or 2.
If we adopted the equalisation of earned/unearned income (see Taxing Wealth Report) no. 1 would cease to look attractive as £100 profit would attract corporation tax of (say £20) and any dividend would be taxed at the same rate as it would if the business were operated as a sole trader…. ie. a worse position (eg if tax were charged at 25% and all profit paid as a dividend the net pay via the company would be £60 rather than £75) as a sole trader. That would clear out a huge number of companies leaving it much easier to spot No. 2 type companies.
Indeed, as Richard has said before, a simple requirement for banks to report cash in/out of a company’s account would go a long way of flagging Type 2 companies.
But of course, this requires will and resources…….
Thanks Clive
You get it
You miss a fourth and very common reasons, which is “because that’s what you do”. A large number of small traders become Limited Companies without any clear understanding of the pros and cons of doing so (that was probably me, when I set up my first company).
This is why I advocate a ‘driving licence’ for company directors — an exam on directorial responsibilities that you need to pass before you can become a company director. This would stop people buying off the shelf companies, thinking that ‘only a hundred quid’ is the extent of the decision. It would also stop naive people being coopted as ‘useful idiot’ directors.
As importantly, it would provide a way to track directorships more accurately. At the moment it’s hard to know if JW Smith is the same person as James W Smith or J Wilson Smith, etc.
Agreed
I have sevreal entries at Companies House through no fault of my own. I wish they gave ne a company director number I could consistently use.
Probably me, too. Being a limited company is (almost) required to give me credibility with clients…. and, at a pinch, I would say that this approach is covered by “sensible way to run a business organization”.
One other genuine motive, not really a subset of (3), is that ‘Ltd’ in a company title may generally be thought to indicate a more substantial, reliable and generally respectable organisation. For small companies, especially in B2B business areas, that misperception may be a significant factor. And it’s not only in the minds of the possibly naive new proprietor: I encountered one largeish distribution company with an extensive trade credit business where their credit control really seemed to believe that a £100 off-the-shelf limited was intrinsically more credit-worthy than an unlimited partnership or sole trader. They should have known better; the potential customer put off by the lack of ‘Ltd’ maybe not so much.
Totally agreed
@Clive Parry: I agree with your list but would add (as have others) the ‘business credibility’ argument, not in terms of retail but when selling to larger corporate customers, who won’t let sole traders past some sort of vendor evaluation process. (I found this when selling services and software to large companies as an agent – strictly, the UK distributor – of a European company).
Also the Ltd meant I wouldn’t lose my house and all in the case of a huge loss, such as a liability claim. (Still needed PII of course, which was impossibly expensive in some cases so locked me out of some consulting opportunities.) I didn’t take loan finance; but if I had, there would have been risks of personal liability, since the company had negligible assets and a director’s guarantee would be demanded.
As I got to know my way around the local business scene and talked to other SME directors, I realised that there were a lot of people abusing the system! Fortunately, I didn’t operate much in that ‘space’ and only got stung by a couple and for small amounts.
Eh, limited liability.
Hmmm…………….for me Labour don’t bother with this because despite what Mandelson said still stands – despite him attempting to modify it – Labour are still obviously intensely relaxed about people getting rich.
End of?