Is it too easy to set up a company in England?

This question was already gaining momentum amidst the scandal over fraudulent CBILs claims and write-offs when the Ukraine crisis and Russian sanctions forced questions about questionable UK companies back to the headlines.

CBILs stands for Coronavirus Business Interruption Loan Scheme. It led to £20 billion of unsecured lending being made across 80,000 separate facilities between 2020 and 2021. It was intended to replace lost turnover with borrowing. However it is now being reported that huge numbers of these borrowers took advantage of the emergency situation and the limited due diligence by the banks to obtain (and then spend) this money fraudulently.

This borrowing could only be applied for by companies (not individuals).

In most other countries, incorporating a new company involves visits to a notary with proof of identification, thousands of pounds of capital investment and a specialist (usually a lawyer). In England & Wales it involves making up a company name, guessing a share structure and £12.

This is because the majority of new limited companies in England and Wales will be incorporated via the Companies House online portal, the fee of £12 is paid online and the company will usually be registered within 24 hours. The corporate documents “imposed” on any new company are the model articles, and these rules are determined with zero input from the new shareholders.

The website used to register a new company does have a side bar to suggest you check whether it is more appropriate to set up your business in another way (as a sole trader or a business partnership for example) but it doesn’t otherwise suggest any form of caution.

The promise of “limited liability” and the lure of the instant professionalism a company provides are often too strong to resist. At the start of 2021 the UK private sector business population comprised 2 million actively trading companies. However, there are more than 4 million limited companies registered in the UK and over 500,000 new companies are incorporated each year.

The more general question as to whether this disparity (between the number of companies incorporated and those actually trading) a cause for concern – is something to discuss another day. The more immediate concern is whether the lack of barriers to setting up a company in the first place is something that is more likely to trigger fraud.

In terms of risk to individuals setting up a company, these are pretty minimal. The nature of limitation of liability means that if the company goes into insolvency the liability of the shareholders is limited to the share capital of the company (usually £1 to £100).

When a company is up and running there are certain statutory requirements around director duties and directors can also incur personal liability in cases of wrongful trading (these are the rules around insolvent trading when a director knows the company couldn’t meet its debts) but these are risks of the directors rather than the shareholders.

On a personal level, many inexperienced new company owners have not realised that the registered address of a company must be on the public record. Many people use their home address, and that makes this information public. This tends to be annoying in terms of an increase in spam mail rather than causing any major loss.

For the general public, there can be much greater losses involved if a limited liability company goes into insolvency owing money – simply due to the nature of that “limited liability”. CBILs closed for new applications on 31 March 2021. However the concerns around flimsy companies has not disappeared. For those dealing with companies who are not Companies House obsessives (ahem), there may be a false impression of gravitas created by the existence of a company rather than a sole trader. A building quote from “Smith & Bentley Builders Limited” may be more likely to be taken seriously than a quote from John Smith. This might lead to a willingness to pay a deposit without looking into the business thoroughly.

There are also uncertainties as to what level of Russian funds are held in companies which do not appear to have any link to Russia.

For legitimate businesses, the simplicity and speed of setting up a UK company is something to be celebrated. The ease of access of information at Companies House is something that should be taught in schools and taken advantage of by everyone. But the recent BEIS white paper recognises that it is time to add some extra layers of confirmation of identity.

The white paper reports that £20 million was invested in Companies House in 2021-22, with a further £63 million announced up to 2024/25. Some of this money is to support new “investigation and intelligence functions”. Currently, Companies House is required by law to accept information if it is “properly delivered” and it has very limited powers to correct or query information. The white paper recognises that this needs to change.

One of the key elements needed is for Companies House to enhance the identity verification system. At present there is no proof required that you are John Smith other than that you say you are. There is acknowledgment that some additional layer of security is needed to establish this. No method is fraud proof but technology now exists where a person can take a photograph of their face and the identifying document. Likeness matching technology can now compare these and the Photo identification can be validated. As a starting point, this is a clear pathway to reducing fraud (and hence the risks).

The key takeaway is that if the integrity of Companies House is to be maintained, two steps are needed:

  • the role of Companies House needs to move from a passive to an active one; and
  • individuals need to be aware that the mere existence of a company is not evidence of a genuine business

For more information, please contact Helen Curtis, Partner in our Corporate team. 

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