Two weeks ago, EU member states voted to let each EU country exempt very small companies, or micro-entities, from some financial reporting obligations. What this would mean, if the European Parliament agrees with the proposal, is that individual governments will be able to let companies with fewer than ten employees prepare and file simplified accounts.
This is by no means a new debate, but it is a very important area to get right. Firstly, this decision recognises that different EU countries have a wide range of different tax and legal regimes, and so a ’one-size-fits-all’ regime across all of them is not appropriate. Most micro-entities are local companies – they are not generally operating outside their national borders – so it is more appropriate to determine how they should report at a national level.
I believe there is a good case to be made for exempting very small businesses from the full rigours of the current European financial reporting regime. Simplification has the potential to help small businesses prosper. Both EU Commissioner Michel Barnier and UK Business Minister Ed Davey agree this will not only save money but also help small companies to drive forward the economic recovery. When a French Commissioner and a British Business Minister manage to agree it’s usually worth looking at the proposals!
But it is equally important to recognise that this would not mean that micro companies would not have to produce any financial reports at all. It would mean that each member state has greater choice over simplifying reporting regimes. Whilst simplification is important it must not have unintended consequences for the economy or for society. Any alteration to reporting requirements would, for the UK, mean changes to accounting standards and company law, and would have to be considered very carefully. It remains to be seen what effect this will have on proposals such as those mooted by Business Secretary Vince Cable in February to change reporting and audit requirements for small businesses.
There is another reason I believe this is a positive decision. With the EU recognising that micro-entities are a sector in their own right, with their own needs, this opens up the possibility of other legislative benefits for this crucial sector. With 1.5 million of these companies in the UK, and 5.2 million across the EU, this would be very good news indeed. We will be monitoring the ongoing EU legislative process closely.