A GROWING number of German directors of small firms are setting up limited companies in Britain in an effort to cut costs even though they have no intention of trading here.

Statistics collected by Companies House reveal that the number of German directors registering in the UK has risen over the past six months. Last month German directors setting up British-registered companies topped the list of foreign directors for the first time.

Accountancy firms say that the big increase in German domestic firms listing here will cause a headache for officials at Companies House as the directors are unlikely to realise that they must file an annual set of accounts and a tax return.

Steven Bruck, a partner who heads the German desk at Blick Rothenberg, the accountants, said that German firms that did not comply with Britain’s stringent regulations could face paying thousands of pounds in penalties and being struck off the register.

“The UK is being used almost like an offshore haven because it’s convenient for German firms to list here,” Mr Bruck said.

“But this will create enforce- ment problems for the authorities here. They will have a great deal of administration to chase for very little result.”

The flood of German company registrations comes after a series of decisions in the European Court that effectively removed domestic restrictions on companies operating in Germany.

Before last September, companies trading solely in Germany and controlled by a German board were prevented from becoming a limited company elsewhere. This regulation created problems for smaller firms, which often lacked capital to set up in their native country.

Now, however, firms that continue to operate only in Germany can register at Companies House in Britain, even if they have no plans to carry out any business transactions in this country. According to Blick Rothenberg, there are advantages to registering in the UK. “Over here it is much simpler to set up a company, it can all be done in a matter of hours for as little as £50,” Mr Bruck said.

The main advantage is the share capital amount stipulated by British authorities. In Germany the minimum share capital is €25,000 (£16,600). A business that is established in Britain need have only a nominal share capital of £1.

Mr Bruck said: “It really is a no-brainer for German firms. They can set up a German company at minimal cost and need have nothing to do with the UK.”

He added: “A hairdresser in Hamburg could be registered here, as could a bratwurst butcher in Bavaria.”

Companies House does not monitor new registrations to check whether they are shell companies, but it compiles a list of the number of foreign directors each month.

In April 1,477 German directors were listed at Companies House as heads of firms, compared with 1,340 Ameri- cans and 1,148 Irish directors.

In August 2003 new German directors lagged behind in fourth place at 666, while the number of American citizens registering as directors stood at 1,219.

British representatives of German firms confirmed that the numbers of directors registering here was rising.

The German-British Chamber of Commerce, which advises German companies looking to trade or establish themselves in the UK, said that, until recently, it received very few inquiries about British registrations for German domestic companies. Now it gets about five a day.