Reduced red tape has its downsides

Tom Welsh
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BUSINESS minister Jo Swinson has revealed that 115 regulations on the day-to-day running of a company are to be scrapped, merged, or simplified. Good news for start-ups, many will agree. Firms with fewer than 10 employees will be allowed to file reduced accounts, and there will be a smaller number of regulations on the use of company names on official documents.

There are various estimates of the economic cost of regulations on small firms. In 2011, the British Chambers of Commerce suggested that employment legislation alone would burden small companies by £22bn over four years. The government itself also points out that small businesses typically have fewer resources available to comply with its various rules.

But while efforts to reduce red tape are to be welcomed, smaller companies should think through the implications of filing shortened or abbreviated accounts. Bobby Lane, partner at accountancy firm Shelley Stock Hutter, points out that both credit rating agencies and other businesses will tend to judge your firm solely on publicly-available information.

“There could be serious implications,” Lane warns. First, your credit rating may not accurately reflect your firm’s true ability to pay back any loan. This, Lane suggests, is why different ratings firms may judge your company’s credit rating in strikingly different ways. One firm he studied in 2011, for example, was given credit limits of £5.6m, £400,000 and £850,000 by three different agencies.

Limiting your accounts could also put other companies off doing business with you. “Shortened accounts may not reassure a potential customer or supplier that you are fit for business,” Lane says. This won’t break an existing commercial relationship, but could affect any new links you are trying to form.

But, perhaps most importantly, filing full accounts (like doing a full yearly audit) is an important discipline in itself. It’s a chance to weigh up profit and loss – to work out whether it’s worth opening the doors in the morning.

Tom Welsh is business features editor at City A.M.