EU ministers’ efforts to cut red tape slammed

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Measures adopted by EU business ministers last week to slash red tape for micro-entities were slammed this week from two sides: MEPs said they did not go far enough, whilst accountants complained they were too far-reaching.

In measures to modify the Small Companies Act – adopted by the Competitiveness Council in Brussels last week – micro-businesses are defined by their turnover and balance sheets.

An earlier draft agreed upon with the European Parliament at first reading set the thresholds at €1,000,000 and €500,000 respectively, but after wrangling in the Council these were halved to €500,000 and €250,000.

This means many more companies will continue to lodge accounts. The original proposals were watered down at the instigation of a series of countries including Austria, Belgium, France and Luxembourg.

Parliament to oppose Council draft at second reading

German MEP Klaus Heiner Lehne (European People's Party), who steered the original proposals through the Parliament, told EURACTIV: "As long as there is a majority in the Parliament in favour of the original thresholds, Parliament will maintain its earlier stance at second reading, rejecting the Council's proposals."

Describing the agreement as "an unparalleled admission of defeat," he argued that "the finance ministers have successfully torpedoed the big promises made by their leaders to the smallest companies".

The European Small Business Alliance’s spokesman said his organisation "fully agrees with the views of rapporteur Klaus-Heiner Lehne and will support them once the issue returns for second reading in Parliament".

Accountants: Measures go too far

Meanwhile, accountants criticised the proposals for going too far. John Davies, head of business law at the Association of Chartered Certified Accountants, said that last-minute changes to the proposals meant that those companies exempt from filing longer accounts would also be exempt from including accruals on their annual books.

Accruals are expenditures not actually paid but for which an obligation may exist. Davies said: "The question is whether it is in the interests of the users of the accounts – whether these be shareholders, bankers and all those other interested parties in the wellbeing of companies – that accruals which are such a fundamental part of accounts should now be abandoned by this class of company."

The initiative to slash the reporting obligations of micro-entities is part of a broader aim to cut red tape pushed by the EU's High Level Group of Independent Stakeholders on Administrative Burdens.

The proposals would not be obligatory and member states would have the option of exempting such companies falling within the definition from accounting reporting obligations.

Jeremy Fleming

"The member states have spoken out against freeing up micro-entities from EU accounting rules, and thereby steered away from the flagship project to dismantle bureaucracy. In its first reading the Council has only agreed some small relief to micro-entities from their accounting obligations," according to German MEP Klaus Heiner Lehne (European People's Party), who chairs the European Parliament's legal affairs committee.

He added: "Nothing substantial remains of the Commission's original recommendations. That is an unparalleled admission of defeat. The member states pump billions into the banking sector, but are incapable of offering savings to the real job motor of Europe. The finance ministers have successfully torpedoed the big promises made by their leaders to the smallest companies."

"The original thresholds would only have affected the bakery or florists on the high street, which only trade locally and play no part in European cross-border business. They ought not therefore be affected by harsh obligations, which were developed for larger undertakings," Lehne concluded.

"Although we are pleased that the deadlock in Council has now been broken and that Council is generally supportive of member states being able to exempt their micro-businesses, we deeply regret the Council's decision to accept a severely watered down version of what should have been the EU's flagship action towards cutting red tape for small businesses," according to Patrick Gibbels, Brussels representative of the European Small Business Alliance.

He added: "Many small businesses on which administrative burden weighs disproportionally heavy, now fall outside the scope of the directive, leaving them vulnerable as before. ESBA fully agrees with the views of rapporteur Klaus-Heiner Lehne and will support them once the issue returns for second reading in Parliament."

"I understand that the Council's proposal give member states the option to exempt micro-entities from including accruals in their accounts," said John Davies, head of business law at the Association of Chartered Certified Accountants.

He explained: "Accruals are expenditures not actually paid but for which an obligation may exist. If for example there is a debt outstanding of €1 million on a companies' books, according to normal accounting rules that should be included in the books as a liability. So full liability will not now be disclosed by those micro-entities included within the changed rules."

"The question is whether it is in the interests of the users of the accounts – whether these be shareholders, bankers and all those other interested parties in the wellbeing of companies – that accruals which are such a fundamental part of accounts should now be abandoned by this class of company," Davies concluded.

A High-Level Group of Independent Stakeholders on Administrative Burdens supported the idea of allowing member states to exempt micro-entities from EU financial reporting rules. 

The EU's economic recovery plan, issued by the European Commission in November 2008, called on the EU and member states to remove the requirement for micro-enterprises to prepare annual accounts (EURACTIV 27/11/08).

In line with the Commission's Better Regulation strategy, this proposal – like all major policy initiatives and legislative proposals – is accompanied by an impact assessment. The proposal would be a significant contribution to efforts aimed at reducing overall administrative costs by 25% by 2012. 

The Commission planned to ditch accounting requirements for the EU's smallest companies in an effort to ease the administrative burden and save each business up to €1,200 per year, or a total of €6.3 billion.

The proposal is subject to co-decision procedure and, now that the Council has agreed on draft wording, it will return to the European Parliament for a second reading.

  • Next six months: Proposals will return to Parliament for second reading, where they will meet opposition.

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