New regulations that raise company size thresholds will be effective for financial years starting on or after 6 April 2025. We provide a guide to the implications for your business.
In December the Government published new legislation, The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024. These increase the monetary size definitions for micro, small and medium-sized entities.
It’s the first threshold change since 2016 and aims to reduce complexity, removing onerous reporting burdens on smaller entities and groups. It should also reflect price changes in the market since the last definition amendment.
The legislation explains the requirements for UK incorporated entities to qualify as ‘small’. The category means they can take advantage of certain financial reporting and audit exemptions under the small companies regime. To qualify, an entity must meet the size thresholds and also cannot be excluded from the small companies regime because of other criteria.
What are the size thresholds?
The table below sets out the current and revised criteria. To be considered small, a company must meet at least two of the three.
| Micro | Small | Medium | ||||
| Current | New | Current | New | Current | New | |
| Turnover not more than: | £632k | £1m | £10.2m | £15m | £36m | £54m |
| Balance sheet total* not more than: | £316k | £500k | £5.1m | £7.5m | £18m | £27m |
| Monthly average number of employees, not more than: | 10 | 10 | 50 | 50 | 250 | 250 |
* i.e. total assets
There is a transitional provision for these amendments which allows companies to treat them as having been applied in the previous financial year, when determining a particular company size. This relaxes the so-called ‘two-year consecutive rule’, which requires company size to change only when the company has met those thresholds in two successive financial years.
This means companies and LLPs can benefit from the uplift in thresholds as soon as possible after the legislation comes into force, even if they didn’t meet the thresholds in the previous year. For example, a company with a year end of 30 April 2025 and turnover of £14m, total assets of £7m and 40 employees in both the current and previous year, could use the new thresholds immediately. It would therefore be considered small. After the year of transition, the two-year rule will continue to apply as usual.
Qualifying as a small company
To be clear, the new rules do not alter the eligibility criteria which all entities must meet in addition to the size thresholds. Despite the size definition change, if an entity is ineligible in other ways (either in its own right or as part of a group), it will not be able to change the regime it can apply. Rules for the directors’ report can be the exception (see below).
But in most cases staying below the new thresholds means a company qualifies as small. In doing so, it benefits from audit exemption and can prepare reduced disclosure financial statements. A company will not be able qualify for the small companies regime, though, if at any time within the financial year to which the accounts relate it was ineligible (either individually or as a member of a group).
Ineligible entities include:
- public companies
- authorised insurance companies
- banking companies
- e-money issuers
- MiFID investment firms
- UCITS management companies
- companies that carry on insurance market activity
- funders of master trust schemes
- members of an ineligible group
An ineligible group would include:
- a traded company – one where any of its transferable securities are admitted to trading on a UK regulated market
- a body corporate (other than a company) whose shares are admitted to trading on a UK regulated market
- a person (other than a small company) who has permission under Part 4A of the Financial Services and Markets Act 2000 (c. 8) to carry on a regulated activity
- an e-money issuer
- a small company that is:
- an authorised insurance company
- a banking company
- an MiFID investment firm
- a UCITS management company
- a person that carries on insurance market activity
- a funder of a master trust scheme
AIM-listed companies do not meet the definition of a ‘traded company’ and therefore do not automatically trip the group into being ineligible.
What are the financial reporting implications?
Companies able to move down a size category will see a reduction in reporting requirements. It’s expected that this will exempt about 14,000 companies from the additional disclosures required by a medium-sized company. An estimated 6,000 will no longer qualify as large.
There are also significant benefits for entities moving into the small companies regime as a result of the changes. As well as being exempt from a statutory audit of their annual financial statements, they will not need to produce a strategic report.
Secondly, they will be able to apply the small companies regime to their financial reporting. This will reduce the level of required disclosures.
Entities moving from the large to the medium-sized category will be able to take advantage of exemptions from certain strategic report requirements.
New rules for the directors’ report
The legislation also makes changes to the directors’ report that aim to remove many obsolete or overlapping requirements for entities of all sizes.
Small companies will no longer need to provide disclosures that give information relating to the employment of disabled people.
Medium-sized and large companies will no longer have to include disclosures that provide information:
- about financial instruments
- about important events that have occurred since the end of the financial year
- about likely future developments
- about research and development (R&D)
- on branches
- relating to the employment of disabled people
- about engagement with employees
- about engagement with customers and suppliers.
What are the options for ineligible groups?
Where a small company is part of an ineligible group and is therefore unable to take advantage of the small companies regime, an audit of that company is usually required. But the subsidiary company may still be able to claim audit exemption via a parental guarantee.
Company law allows a parent entity to give a guarantee to one, some, or all of its subsidiaries, providing this exemption. Brexit led to significant changes in UK company law. For periods that began after the transition stage (ie from 1 January 2021), the parental guarantee is only available from a UK parent. Beforehand, the parental guarantee could have been given by a parent established under the law of an EEA state, with certain conditions.
What are the benefits of a parental guarantee?
Whilst the parental guarantee allows a subsidiary from an ineligible group an audit exemption, it doesn’t give them the small and medium companies disclosure advantages. The key benefit of a parental guarantee is a chance to rationalise the whole audit process and costs, by only seeking audits for subsidiaries of their choice, if any.
When deciding whether to opt for a parental guarantee, the size of the subsidiary is a key factor. The increase in audit thresholds will likely lead to more guarantees for those subsidiaries that would be classed as small if they weren’t part of an ineligible group. This should preserve investor and stakeholder confidence.
All in all the raising of the audit thresholds will give eligible groups the opportunity to reduce their financial reporting obligations, and therefore time and costs to the company. But this should be weighed up against the benefits of having an audit, such as additional comfort to key stakeholders.
If you would like further support on any of the issues raised in this article, please contact Imogen Massey and Ryan Davies.
