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Economic Crime and Corporate Transparency Act 2023: significant Companies House reforms and their impact on businesses

Posted: 02/02/2024


The Economic Crime and Corporate Transparency Act 2023 (the Act) received royal assent in October 2023. The Act includes provisions that will, among other things, transform the role and operation of Companies House, and amount to some of the most significant changes to UK corporate transparency in 170 years.

The impact of the Act is far-reaching; all UK companies and other legal entities will be affected and non-compliance may even attract criminal liability.

This article considers several of the key changes and practical implications below.

Role and powers of the Companies House Registrar

Companies House has been granted a broader statutory function with clear objectives to promote and maintain the integrity of the register through the use of new discretionary powers. The Act aims to bolster the Registrar’s role from a passive gatekeeper of information to an active regulator, empowered to query, reject or remove documents submitted for filing if there is a reason to believe that the details are inconsistent with other information shown on the records held at Companies House.

The Registrar will also be able to request additional information, intervene in company names, change certain details, annotate a document on the public register if there is uncertainty regarding the information disclosed, require information to be filed digitally, and share data with other governmental departments and law enforcement agencies.

Notably, the Registrar will have a new direct power to impose financial penalties of up to £10,000 for breaches of the Companies Act 2006 (CA 2006) without first going through the courts. This will be in addition to existing powers to prosecute criminal offences under the CA 2006.

Administrative changes

Registered office address
Corporate entities must have and maintain a registered office (ROA) at an ‘appropriate address’, ie an address where a document addressed to the company and delivered there would be expected to come to the attention of a person acting on behalf of the company and would be capable of being acknowledged as delivered. The changes mean that corporate entities will not be able to use a PO Box as their ROA.

If the Registrar considers that the ROA requirement has not been satisfied, it will be empowered to change the registered office to a default address at Companies House; the entity will then have 28 days to provide an appropriate address with evidence of proprietary ownership, otherwise Companies House could start the process to strike the company off the register.

It is expected that from 4 March 2024 companies and LLPs will need to provide an appropriate ROA when they incorporate. Likewise, existing entities using a PO Box will need to change their registered address to an appropriate ROA by this date.

Registered email address
Corporate entities must also have and maintain a registered email address (REA) which is an ‘appropriate email address’, ie where emails sent to it by the Registrar would be expected to come to the attention of the person acting on behalf of the company. The REA will be kept private. Ideally the REA would contain a distribution list of relevant recipients within the business, rather than linked to just one person, in order to circumvent leaver issues.

It is expected that from 4 March 2024, companies and LLPs will need to give an REA when they incorporate. Existing entities will need to give an REA when they file their next confirmation statement, with a statement date from 5 March 2024 onwards. 

If a corporate entity fails to maintain an appropriate ROA or REA, both the company and its directors (or equivalent) will be guilty of an offence, punishable by a fine.

Company names
Companies will be restricted from being registered with names that, in the opinion of the Secretary of State, are intended to facilitate an offence that involves dishonesty or deception or suggests a false or misleading connection with a foreign government or authority. Companies will also be prevented from registering with a name that consists of, or includes, computer code. 

The Secretary of State and Companies House will be empowered to direct companies to change their names if they fall within any of the above categories. If a company does not change its name within a 28-day period, Companies House can remove a company’s name from the register and replace it with its company number. If the company continues to trade under the business name that Companies House has changed, it will be guilty of an offence and liable for a fine of up to £1,000.

It is expected that Companies House will start undertaking stronger checks on company names from 4 March 2024.

Lawful purpose statement
All companies will need to include a specific confirmation in their annual confirmation statement that their intended future activities are lawful. It is expected that this requirement will apply to all confirmation statements with a statement date from 5 March 2024.

Likewise, from 4 March 2024 applications for company incorporations will require an additional confirmation that the company is being formed for lawful purposes. The explanatory notes to the Act indicate that if it is proven not to be the case, a false filing offence will have been committed, enabling the Registrar to reject the filing, with the consequence that the company would not have been formed.

Identity verification measures

Scope
When the relevant sections under the Act come into force, identity verification requirements will apply to:

  • new/existing directors (and equivalents for other entities, eg LLP members or general partners of LPs): an individual will need to have their identity verified on appointment and will not be permitted to act as a director of the company (or equivalent) unless their identity is verified. A company is under an obligation to ensure that an individual does not act unless their identity is verified;
  • new/existing PSCs and RLEs: an individual who is a registrable PSC or a relevant officer (ie director) of a registrable RLE will need to have their identity verified – as companies are unable to compel verification, the relevant notification forms are expected to simply include an option to confirm that the identities of the relevant PSCs or officers of RLEs have been verified; and
  • ACSP/filers: anyone who delivers documents to Companies House on their own behalf or on behalf of another, including authorised corporate service providers (ACSPs).

There will be limited exemptions from identity verification, including on grounds of national security. In practice, however, the expectation is that exemptions will rarely apply.

Process
There will be two ways to undertake identity verification: directly through a new Companies House portal or indirectly via an ACSP (ie intermediaries such as accountants, legal advisers and company formation agents who are already supervised for anti-money laundering (AML) purposes).

ACSPs will be required to register with the Registrar and demonstrate that they are supervised for AML purposes. They will be required to declare that they have completed all of the necessary identity verification checks when they interact with the Registrar and Companies House.

Companies House envisages that verification will involve a digital process using approved photo ID (such as a passport or driving licence) and a photo of the individual's face, although a non-digital alternative will be available for those who cannot use or access the digital service.

Verification is expected to be a one-off requirement for all purposes (ie whether acting as a director, PSC, filer, etc), though regulations may follow to specify circumstances in which a person may cease to have their identity verified and require re-verification.

Impact
Companies House will not register new directors and other registrable entities without them having a verified account. New PSCs/RLEs - who can initially be registered without verification - will need to verify their identity within a set period of time after registration. There will also be a transition period for existing directors, PSCs and other registrable entities to comply with the new identity verification requirements.

Companies will be under obligations to ensure that an individual does not act as a director unless their identity is verified. The explanatory notes to the Act state that in practice this means that until their identity is verified, a director should not take any actions on behalf of the company in their capacity as a director.

Directors and PSCs/RLEs who do not verify their identity will commit a criminal offence, as will companies with an unverified director (and every officer of the company). Similar measures will apply to LLPs and LPs. In addition, incorporation of any new company without verified directors will be rejected and individuals whose identities are not verified will be unable to continue to file information on behalf of companies. The company register may be annotated to show that an individual is unverified, so that anyone viewing the register can make their own assessment of that entity’s risk profile. Directors who act without their identities having been verified (and those with a history of persistent breaches) could even be disqualified from acting as a director. However, failure to verify a director's identity will not affect the validity of that person's acts as a director.

Practical details of the identity verification process have not been confirmed yet. Once regulations have been finalised and relevant systems are implemented at Companies House, all relevant individuals will need to have their identities verified. In the meantime, businesses should make their existing directors and PSCs/RLEs (and equivalent) aware of the incoming verification requirements and consider whether they would benefit from engaging an ACSP.

Corporate filings

When the relevant provisions of the Act come into force, any individual delivering documents to Companies House on their own behalf will need to have had their identity verified and the document they are delivering will need to be accompanied by a statement confirming their verified status. An individual (A) may also deliver documents on behalf of another individual, but only if A’s identity has been verified or if A is either an ACSP or an officer or employee of an ACSP.

An individual will be able to file documents on behalf of a corporate entity, if:

  • the individual is a director, officer (including a corporate officer) or employee of the corporate entity and the individual’s identity has first been verified; or
  • the individual is an ACSP or an officer or employee of an ACSP.

When an ACSP makes a filing on behalf of a client, they will also have to confirm to the Registrar that they have completed all of the required identity verification checks.

While company secretaries will not technically be required to have their identity verified, the expectation is that they will, so as to enable them to continue submitting documents on their company’s behalf at Companies House.

Ban on corporate directors

Although not specifically addressed by the Act, the government has confirmed that it is intending to bring into force a ban on corporate directors, subject to limited exceptions. Corporate directors will only be permitted if their own directors are natural persons and their identities are appropriately verified before the corporate director is appointed. Further, it is expected that only UK entities with legal personality (eg companies and LLPs) will be allowed to serve as corporate directors.

Existing companies with corporate directors will be given 12 months to ensure their corporate directors are compliant with the conditions or have them resign. New companies or companies appointing a new corporate director must ensure they satisfy these conditions from the date the measure comes into force.

Different requirements will apply for corporate members of LLPs or corporate general partners of LPs. These entities will need to supply details of their director(s) or a managing officer whose identity must be verified. The government will consider whether any further restrictions should be imposed on the use of corporate members of LLPs and corporate general partners of LPs. 

In anticipation of the reforms being implemented, companies should review whether any changes to board composition may be needed and bear in mind the proposed restrictions if considering board appointments over the coming months.

Statutory registers and shareholder transparency

Centralised registers
Companies will no longer be required to maintain a register of directors, a register of directors' residential addresses, a register of secretaries, and a register of PSCs. Instead, all relevant information will be provided to, and maintained at, Companies House. This will increase the importance of making timely and accurate filings.

Register of members
Companies will need to maintain their own register of members (including some new requirements mentioned below). It will no longer be an option for private companies to store their register of members on a central register at Companies House. Likewise, the changes do not affect other internal registers, such as registers in relation to transfers, charges or disclosed interests in shares; these will continue to exist.

Registers of members will need to include the ‘required information’ about their members. For individual members, this means forename (in full, not initials) and surname, together with a service address. For corporate members and firms, their corporate or firm name and a service address will be required. In each case, the register must note the date the person was entered as a member.

A person who becomes a member will need to provide the required information and existing members must update the company of any change in the required information about the member, in each case within two months of becoming a member/any such change. Any person who fails to comply will commit a criminal offence. Companies must record the new information along with the date of change in the register of members. Non-traded companies must keep the old information in the register.

Companies will have the power to request, by notice, a member to provide any of the required information, and members must comply with such notice within one month of the notice being given. Notably, a person who fails to respond (or who provides information that is misleading, false or deceptive without a reasonable excuse) will be guilty of a criminal offence.

One-off shareholder statements
To bring the Registrar’s records up to date, there will be a requirement to provide a full list of shareholders in the case of non-traded companies (and, in respect of a listed company, those holding at least 5% of any share class). It is expected that this one-off statement will need to be provided with the first confirmation statement filing after the relevant provisions come into force.

In anticipation of the changes, companies should:

  • consider how existing administrative processes for updating registers may need to change and whether they will continue to maintain their own non-statutory records for internal audit and governance purposes (this may be particularly helpful for larger businesses or those with more complex structures);
  • review their existing statutory registers, obtain any additional information that may be required (for example, from members) and, in advance of the various other statutory registers being centralised, ensure that all filings at Companies House are up-to-date; and
  • if they are currently using the central register, begin forming their own register of members with all the requisite information.

Accounts

Companies will be able to file a single set of accounts in digital format with Companies House and HMRC to simplify the overall filing process and ensure consistency.

The option for small companies and micro-entities to file abridged accounts will be removed. All small companies will be required to file a profit and loss account and all other parts of their accounts, including a directors’ report, so they will actually file what they prepare for members and HMRC. Micro-entities will also have to file both a balance sheet and profit and loss account and will have the option to file a director’s report.

Directors of companies seeking to rely on an audit exemption (including dormant companies) will need to file an eligibility statement confirming the company qualifies for the relevant exemption.

Restrictions will also be introduced on how frequently companies can shorten their accounting reference date.

The changes are expected to be phased in over the next two to three years.

Limited partnerships

The Act introduces various reforms to the LP regime to improve transparency, including requirements to provide additional information relating both to a partnership and its partners (whereas previously partnerships, including LPs, had minimal filing and notification requirements), along with greater sanctions for non-compliance. The Act also modernises various aspects of the LP regime, including a new dissolution process and the ability for the Registrar to de-register an LP.

An additional six-month transitional period (from when the relevant provisions come into force) will be available for existing LPs regarding certain obligations, principally those relating to delivery of information about the partners, the requirements to have an ‘appropriate’ registered office and registered email, and for GPs to provide information on their registered officer and (if any) named contacts.

New and expanded offences

False statements
The Act makes it a criminal offence to deliver to the Registrar a document or statement which is false, deceptive or misleading, ‘without reasonable excuse’. The explanatory notes to the Act indicate that the offence will not apply where a company reasonably relies on information provided by others which turns out to be untrue, or where professional service providers have made an honest mistake.

Where a corporate entity commits a basic false statement offence, every officer who is in default also commits the offence and will be liable to unlimited fines. There is also a new aggravated criminal offence for any person to knowingly deliver a misleading, false or deceptive filing or statement, which can attract unlimited fines and up to two years’ imprisonment.

Notably, the Act creates similar basic and aggravated false statement offences where company members make a statement that is misleading, false or deceptive in relation to information provided in the register of members.

Economic crime
The Act also expands the economic crime regime by:

  • introducing a new ‘failure to prevent fraud’ offence aimed at large organisations – a corporate entity will be liable to unlimited fines where a specified fraud offence (to be detailed in secondary legislation) is committed by an employee or agent (such as contractors) for the corporate’s benefit and the organisation is found not to have taken reasonable steps to prevent fraud. The government has committed to publishing guidance on reasonable fraud prevention measures before this new offence fully comes into force. In scope entities will have to review (and bolster, where needed) their internal policies and training to show that reasonable prevention procedures are in place; and
  • widening the scope of the corporate criminal liability regime by reframing the so-called ‘identification doctrine’ to make it easier to attribute criminal liability to a corporate entity (and relevant individuals) for offences committed by ‘senior managers’. These new provisions came into force on 26 December 2023. Corporates should identify any ‘senior’ individuals who may now be in scope and consider training to ensure they are aware of any increased responsibilities. 

Conclusion

While the Act introduces significant changes to improve corporate transparency and tackle economic crime, secondary legislation is awaited to enact many of the measures – such as identity verification – and provide further details on how they will operate in practice, along with key operational changes at Companies House.

In the meantime, given the increased administrative burden that corporate entities will begin to face from March 2024 and the even greater importance that timely and accurate filings will have – underpinned by an emboldened Registrar - businesses should familiarise themselves with the range of upcoming changes and keep their governance frameworks under review to improve efficiency and reduce the risk of liability.

Companies House has launched a new website outlining the reforms (click here). A range of factsheets has also been published (available here). If you have any concerns about the Act or would like to discuss its contents in more detail, please contact our specialist corporate team. We will be monitoring developments and providing further updates in due course.


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