UK company size thresholds set for an increase

In March 2024, the Conservative government announced plans to implement various regulatory changes that are designed to ease the burdens placed on businesses in respect of non-financial reporting. One of those changes, which was of particular interest to accountants, was an increase in the thresholds that determine the size of a company.

The current company size thresholds have been in place since 2015, so it has been quite a while since they were last reviewed. Static thresholds mean that more companies are drawn into reporting requirements that may not be proportionate – especially given the effects of inflation since 2015 (and more so since 2020). In addition, the thresholds currently set out in company law are derived from EU legislation made in 2013, and are as follows:

The previous government indicated that the new size thresholds would have a planned effective date of financial years commencing on or after 1 October 2024. Since then, there has, of course, been a change in government. When Labour came into power, it was notable that there was no mention of these reforms in the King’s Speech in July 2024, indicating that it was a case of ‘wait and see’ if anything was to re-emerge where these plans were concerned.

On 14 October 2024, the Secretary of State for Business and Trade confirmed in a ministerial statement that the Labour government will take forward the previous government’s plans to increase the company size thresholds. Legislation is expected to be laid before Parliament before the end of this year and is expected to come into force on 6 April 2025.

The company size thresholds are expected to be increased by 50% as follows:

Many companies currently classed as medium-sized will be able to move down to the small category. This will potentially enable them to apply a less rigorous financial reporting regime (e.g. FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, including Section 1A Small Entities, if they wish). The government estimates that this will save companies more than £240m per year. It is expected that most newly small companies will choose to adopt a less rigorous reporting regime, provided there is no objection to doing this from stakeholders, such as banks or shareholders.

The other potential saving will come in the form of audit exemption as companies that are reclassified as small may be able to claim audit exemption. The audit exemption thresholds are directly linked to the small companies’ thresholds, hence any increase in the small company thresholds means that the audit exemption thresholds automatically increase at the same time.

Not all companies that are reclassified as small will be able to claim audit exemption, but most will. It should be noted that the current government also plan to make various technical corrections to the audit regulatory framework, which will be examined in a further article.

Changes to the directors’ report

The reforms will also make changes to the directors’ report in respect of non-financial reporting, aimed at removing several obsolete or overlapping requirements in respect of the directors’ report and the directors’ remuneration report (for large companies). Specifically, the proposals set out to:

• Remove the information requirements related to the employment of disabled people
• Remove the information requirements on financial instruments
• Remove the information requirements on branches
• Remove the information requirements on employee engagement
• Remove the information requirements on engagement with suppliers, customers and others
• Remove the information requirements on important events, future developments and research and development

Medium-sized companies

The previous government announced plans to consult on redefining a ‘medium-sized business’. This would have involved increasing the employee headcount criterion from 250 (as it currently is) to 500. In addition, the previous government announced that it would consult on providing an exemption from medium-sized companies having to include a Strategic Report in the annual report.

The Labour government announced that it would not be taking forward these proposals at the current time on the grounds that feedback suggests a more holistic review of the thresholds and the wider reporting framework is necessary.

Future of corporate reporting

The Secretary of State announced that the Department of Business and Trade would undertake a consultation on the Future of Corporate Reporting, aimed at simplifying and modernising non-financial reporting to better meet business and investor needs.

In addition, the proposals concerning medium-sized companies (as discussed above) would also be considered as part of the Future of Corporate Reporting consultation, as this is much broader.

The government plans to launch this consultation in 2025.

Conclusion

The increase in company size thresholds seems to be the ‘hot topic’ for accountants across the country and is likely to reduce costs to businesses, particularly where audit exemption can be claimed and a less onerous reporting regime adopted.

Further updates in these areas will be provided as developments progress.

Category: Accounting and standards, Audit