Companies Registry should drop its pay wall

The Companies Registry has become a nice little earner for the government with last year’s net profit totaling HK$221.4 million. This went to the government as a dividend along with the HK$42 million the Registry paid in profits tax.

The number of companies on the Hong Kong register has grown sharply in recent years. In the year 2000 there were about 500,000. By the end of March 2015 this figure had grown to 1,298695, of which 10,029 were non-Hong Kong registered companies.

The Companies Registry Trading Fund (CRTF) has provided the government with HK$2.2 billion since the year ending March 31, 1999 with most of this from the fees it extracts for the annual registration of companies, the incorporation of companies, and the cost of searching CRTF data for information on companies.

Indeed, some say it is making obscene profits from the business.

The latest CRFT report notes that one of its financial objectives is to, “achieve a reasonable return on average net fixed assets employed, which is set at 6.7 per cent for 2014-15 by the Financial Secretary.”

Leaving aside whether this is an appropriate objective for a services company, a few lines further on in the report we see that this ‘reasonable return’ target has been massively exceeded. Last year the average rate of return on net fixed assets was a whopping 54.4 per cent and in the previous year 72.5 per cent. Meanwhile the registry’s retained earnings have been sitting at HK$517 million since March 2008.

Hong Kong Companies Registry: Significant Numbers

YearTurnoverOperating CostsNet ProfitProfits TaxRate of return (%)Tax & profit
LESS search fee
Totals 6,176,347,000 -3,700,945,000 2,221,776,000 408,137,000 1,297,073,000
1998-1999 276,413,000 -198,913,000 72,620,000 11,522,000 20 13,962,000
1999-2000 253,898,000 -202,116,000 49,599,000 8,285,000 14.1 22,142,000
2000-2001 244,470,000 -202,365,000 41,957,000 6,737,000 12.1 28,204,000
2001-2002 242,043,000 -204,194,000 35,057,000 6,492,000 9.6 30,368,000
2002-2003 242,283,000 -197,027,000 40,362,000 7,108,000 10.3 26,789,000
2003-2004 234,371,000 -185,329,000 48,245,000 1,495,000 10 30,082,000
2004-2005 270,002,000 -168,207,000 85,120,000 17,674,000 18.8 3,637,000
2005-2006 298,201,000 -170,981,000 114,123,000 22,264,000 24.5 37,128,000
2006-2007 322,169,000 -197,792,000 118,635,000 21,728,000 23.2 36,528,000
2007-2008 366,436,000 -229,484,000 130,145,000 23,942,000 26.8 39,958,000
2008-2009 389,325,000 -242,478,000 134,739,000 23,585,000 30.6 108,716,000
2009-2010 391,507,000 -230,184,000 141,289,000 26,618,000 35.3 114,906,000
2010-2011 476,052,000 -211,382,000 226,811,000 43,671,000 59.4 216,336,000
2011-2012 483,191,000 -239,882,000 216,586,000 40,964,000 54.9 196,420,000
2012-2013 532,135,000 -248,986,000 253,612,000 48,149,000 63.6 234,629,000
2013-2014 605,647,000 -271,657,000 291,481,000 55,946,000 72.5 277,698,000
2014-2015 548,204,000 -299,968,000 221,395,000 41,957,000 54.4 189,938,000

 

It can cost a private company no more than HK$105 annually to maintain its disclosure obligations, regardless of how many changes in registered office, directors and new share issues are involved. This is of course welcomed by business interests.

But for somebody wanting to find out a bit of company history it will cost HK$18 per annual return summary and HK$10 per filing of changes in directors and share capital.

So someone who needs to take advantage of the disclosure obligations to checkout a dodgy company could easily end up paying more than those on whom the obligation falls. And in the process contribute vast sums to the government’s general revenue.

Until 1844 in the UK companies could only be incorporated by Royal Charter or Act of Parliament, both of which were cumbersome processes. To simplify matters, companies were allowed to incorporate by registration. But a quid pro quo was that there should adequate disclosure so that people could know who was behind the company.

This point was recently demonstrated by David Webb on his website, where he showed that while seeking to uncover a pattern of deception by a particular individual the Companies Registry paywall served as a deterrent. Indeed, it could be argued that the government is pandering to business interests by charging search fees. The CRTF says fees for one -off searches are low but an investigation requiring numerous searches can soon mount up.

Fees as a proportion of Companies Registry total turnover

YearIncorporation Fees %Annual Reg %Search Fees %
Averages43.0529.2614.94
2000-200126.9044.0017.80
2001-200229.0036.3019.40
2002-200327.3036.9019.90
2003-200435.6029.0019.60
2004-200542.4025.1017.40
2005-200643.5027.6014.20
2006-200745.1026.6013.80
2007-200847.6024.4013.40
2008-200948.1026.4012.70
2009-201047.2027.1013.50
2010-201151.9025.3012.20
2011-201249.3026.8012.70
2012-201352.5025.8012.60
2013-201444.6031.9013.40
2014-201554.8025.7011.50

 

It is clear from the tables above that the Registry could easily afford to drop the search fee and still remain hugely profitable.

However, when HowardWinnReports put this point to the Registry it responded with the comment: “The fees of the Companies Registry Trading Fund (CRTF) are set on a cost-recovery basis.  The existing fees are set out in the Companies (Fees) Regulation, Chapter 622K of the Laws of Hong Kong, which was passed by the Legislative Council in July 2013.  As a trading fund, CRTF has to ensure that the expenses incurred in the provision of services, including capital expenditure for the longer term, and the financial liabilities of the CRTF can be met out of its own income, which is highly dependent on global and local economic conditions. We shall review the CRTF’s fees according to established mechanism having regard to the aforementioned factors.”

The response bears the hallmark of this excessively cautious government which would rather sit on piles of cash than leave it in the public’s pocket.

The Registry’s profits for the last 17 years indicate that it is in no danger of being blown off course by an economic downturn. Indeed, there is no reason why the government should be making profits from this service and should reduce its fees to break-even level.

The Registry’s response and track appear wildly out of line with the Financial Secretary’s remarks in his recent budget: “Unless justified on policy ground, all fees and charges for government services have been set in accordance with the ‘cost-recovery’ and ‘user pays’ principles.”

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