David Norris (Independent) | Oireachtas source

Legislation cannot be enacted that, on the one hand, bestows the right to entitlement laid down by the EU directive and then removes that entitlement as a penalty, and that penalty is clearly disproportionate to the offence. Coupled with this there have been developments over the years, including the fact that nowadays there is a requirement to file these accounts electronically. They will not accept them in typed or handwritten form. They will accept them by way of an e-mail and they will only accept them being filed electronically. That is a further restriction.

Directive 2013/34/EU was signed off on 26 June 2013 and gave Ireland a transposition deadline of 20 July 2015. The directive introduced a number of changes to the financial reporting regime of member states. One of the primary objectives of the legislation was to simplify the accounting regime and in so doing reduce the red tape and administrative burden on micro and small companies. Any reduction in red tape would be welcome by small companies. I would point out to the Minister we are the only country in the EU that is introducing this penalty. Why not let us have a level playing field with other member states of the EU? Why are we going out on a limb? The Minister has put some statements on the record but I want to challenge some of them. I mentioned the intention of the EU to reduce red tape. The Minister in the Department's summary identifies that the key benefit for adopting the micro entity legislation is that if legislation is not enacted, the very smaller companies will continue to incur the cost of preparing financial statements to the same standard as less small companies. In regard to late filing causing small and micro companies to be subject to an audit, this flies in the face of the concept which the EU is trying to promote. Rather than reducing unnecessary red tape and boosting growth and confidence, linking late filing to the eligibility to avail of the audit exemption unquestionably reduces it.

The Minister has heard some of this before but I do not apologise for repeating the fact because it is important we have in our minds what this section is about, and it is quite a short one. When I raised this matter on 4 April this year in the House, the Minister, and I am sure she will remember this, replied that if we got rid of section 363, the compliance rate would be only 13%. I remember her saying that and I am sure she will remember saying it. That is totally misleading. It is a deliberate cloud of nonsense and I will tell her why. That statement refers to a situation that obtained 18 years ago. The 13% figure comes from a statement issued by a former Minister, Mary Harney, and since then the Companies Registration Office database has been fully computerised, tens of thousands of dead companies have been removed and 90% - not 13% or 30% but 90% - of small companies now file annual returns on time.

The Minister has heard some of this before but I do not apologise for repeating the fact. It is important that we have in our minds what the section provides, and it is quite a short one. When I raised this issue on 4 April this year in the House, the Minister, and I am sure she will remember this, replied that if we got rid of section 363, the compliance rate would be only 13%. That is totally misleading. It is a deliberate cloud of nonsense, and I will tell her why. That statement refers to a situation that obtained 18 years ago. The 13% figure comes from a statement issued by a former Minister, Mary Harney, and since then the Companies Registration Office database has been fully computerised, tens of thousands of dead companies have been removed, and 90% - not 13% or 30% but 90% - of small companies now file annual returns on time.

Article 211 of the EC treaty charges the European Commission with ensuring that member states observe and implement EU directives fully and properly. As I have said, where a member state fails to fully and properly implement a directive into domestic law, the European Court of Justice has ruled that although the member state and the national court may impose penalties on an individual or company who has not complied with a provision of EC law, this is subject to the condition that the penalties must not be disproportionate, as I have said, and must not undermine the entitlement to a basic community right. The case law is clear on this. The relevant case is 8/77 Sagulo, Brenca and Bakhouche and it was heard in 1977.

The statement about the 13% compliance rate was issued by Mary Harney when she was Minister at the Department, which was then called the Department of Enterprise, Trade and Employment. Her agenda was to clean up corporate Ireland which everybody would acknowledge was necessary at the time. In a press statement she said that the compliance rate for companies filing their annual returns with the Registrar of Companies was just 13%. That is no longer the case. That was 18 years ago.

The Companies Registration Office was totally paper driven in 1997. It was not computerised, therefore reminders would not issue to companies to submit annual returns, unlike what happens today. That is another significant change. Also, every single company incorporated under the then principal Act, the Companies Act 1963, was considered to be live on the register and that led to an enormous amount of dead wood on the companies register. Tens of thousands of companies would have either ceased trading, be dormant or otherwise redundant. Therefore, those companies which submitted returns would have been a small percentage of the total companies listed on the register in 1997. As part of the computerisation of the Companies Registration Office database and to tidy up the register of companies and eliminate these dead, non-active companies from the list, the Companies Registration Office wrote to all companies seeking a reply or otherwise the company would be struck off the register. Hence, as stated in a ministerial press, Ms Harney attributed the improvement in the compliance rate to the introduction of new strike-off procedures in the Companies Registration Office. The office is now striking off 500 companies every working day and 11,000 firms have been dissolved since the new hardline regime was introduced. That is a measure of the change. Some 500 companies a day are being struck off. These are the ones that were not making their returns on time. Tens of thousands of companies were removed from the register, so naturally the percentage of companies filing an annual return came up substantially because there is now a percentage of proper live companies.

The Minister stating in the Seanad that the compliance rate would be 13% in the absence of section 363 is grossly misleading. Also, the continuous reference to this compliance rate made by her Department over many years was misleading. The Minister and her officials also conveniently overlooked the establishment of the Office of the Director of Corporate Enforcement under the Companies Law Enforcement Act 2001.This is a significantly staffed office that oversees the enforcement of the provisions of the Companies Act on all companies. To set up such a body and not refer to it as having a significant impact on the 90% rate of corporate compliance is, to say the least, a little disingenuous and disappointing.

The costs and administrative burden of a full statutory audit are referred to in section 43 of the EU company law directive. The directive states: "annual financial statements of small undertakings should not be covered by this audit obligation, as audit can be a significant administrative burden for this category of undertaking, whilst for many small undertakings the same persons are both shareholders and management and therefore have limited need for third party assurance on the financial statements". The costs and burden are similarly referred to by the Companies Registration Office, CRO, in its reminders. The CRO points out that if a company's annual return is filed late, as a matter of law audited accounts must be filed in the current year and in the following year. It goes on to say that this loss of audit exemption could entail "considerable expense" for the company over a two-year period.

It is generally established that the enactment by a member state of an EU directive should be full and proper. My argument is that this enactment is not full or proper and that it is disproportionate. The removal of the entitlement to an audit exemption in the event of late filing is a penalty that is not applied in other EU member states because, quite simply, it is a right that cannot be varied. It is also a penalty that is disproportionate and it is for that reason that I move this amendment again on Report Stage.