The Companies Act 1985 (Investment Companies and Accounting and Audit Amendments) Regulations 2005

Explanatory Note

(This note is not part of the Regulations)

These Regulations amend the accounting and audit provisions of the Companies Act 1985 (“the 1985 Act”), and also amend the distribution rules for investment companies.

Part 2 of the Regulations (regulation 2) amends section 265 in Part 8 of the 1985 Act concerning the distribution of profits of an investment company. The amendments are in further implementation of Article 15.4 of the Second Council Directive 77/91/EEC (Official Journal No. L26/1 of 31st January 1977), on the co-ordination of safeguards in respect of the formation of public limited liability companies and the maintenance and alteration of their capital.

The Regulations amend section 265 to provide that an investment company may make a distribution out of revenue profits if the amount of its assets is at least equal to one and a half times the aggregate of its liabilities to creditors as shown in accounts of the company (previously the references were to “liabilities”). The amendments reflect changes in accounting practice whereby certain shares are to be classified as liabilities in a company’s accounts.

Part 3 of the Regulations (regulations 3 to 11) replaces the requirement in paragraph 4(2) of Schedule 4 to the 1985 Act (and the equivalent requirements in Schedules 8, 8A, 9 and 9A to the 1985 Act) for corresponding amounts in company accounts to be adjusted if not comparable with a discretion to make such adjustments. The requirement derived from the exercise of a Member State option in article 4.4 of Council Directive 78/660/EEC on the annual accounts of certain types of companies (Official Journal No. L222/11 of 14th August 1978). Part 3 of the Regulations also removes the requirements in Schedule 4 and the other accounting Schedules for disclosures of prior year amounts to be given in the notes to the accounts. As a result of changes in accounting practice, the issue of adjustment of non-comparable amounts and of disclosure of corresponding amounts in the notes to the accounts is to be left to accounting standards.

Part 4 of the Regulations (regulations 12 to 17) make amendments to provisions in Part 7 of the 1985 Act concerning small and medium-sized companies consequential on recent legislation. Regulation 12 amends section 246 so that small companies are not required to make the disclosure in section 231A concerning employees. Section 231A was inserted by regulation 3 of, and paragraph 9 of Schedule 1 to, the Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004 (S.I. 2004/2947).

Regulations 13 to 17 ensure that small and medium-sized companies which carry out certain activities for which permission is required under Part 4 of the Financial Services and Markets Act 2000 do not cease to be able to take advantage of special accounting and audit exemptions by reason only of carrying on those activities. The activities are defined in regulation 17. Amendments consequential to the amendments made by regulations 13 to 17 are made to the Limited Liability Partnerships Regulations 2001 (S.I. 2001/1090) by regulation 18.

Regulation 14 provides for small companies to be able to take earlier advantage of amendments made by regulation 6 of the Companies Act 1985 (Operating and Financial Review and Directors' Report etc.) Regulations 2005 (S.I. 2005/1011) to the cases in which the special provisions for small companies do not apply. They will be able to do so for financial years which begin between 1st January and 31st March 2005 (inclusive) and end on or after 1st October 2005.

A Regulatory Impact Assessment of the effect that this instrument will have on the costs of business is available from the Department of Trade and Industry, Corporate Law and Governance Directorate,1 Victoria Street, London SW1H 0ET (it is also available electronically at www.dti.gov.uk/cld). Copies have also been placed in the libraries of both Houses of Parliament.