FRED82: Changing company size limits – further regulatory change

Simon Rothenberg discusses the latest changes to company law and the subsequent impact to reporting requirements and audit limits

For the first time in fifteen years, the thresholds that determine company size are being increased as part of a drive to cut complexity and burden from legislative reporting requirements.

Amongst others, ICAEW fed into the consultation process for these measures, encouraging ministers to simplify and streamline company size thresholds. We welcome the increase in thresholds, although we continue to see businesses struggle to interpret the rules, with the potential to make incorrect decisions due to its complexity.

Who does it affect?

All UK companies fall into one of four size categories – micro, small, medium or large. The size category impacts the reporting requirements of the company. The proposed changes will impact thousands of companies and simplify the reporting for many.

What do you need to know?

The current limits, introduced in 2009 as part of the Companies Act 2006 changes are:

Classification	Turnover	Gross Assets	Employees
Micro	£632k	£316k	10
Small	£10.2m	£5.1m	50
Medium	£36m	£18m	250

Under the proposed legislation changes, these limits (for periods commencing on or after 1 October 2024) will become:

Classification	Turnover	Gross Assets	Employees
Micro	£1m	£500k	10
Small	£15m	£7.5m	50
Medium	£54m	£27m	250

If a company breaches more than two of the limits in two consecutive years, then it fails to qualify in that size classification. While there is no change to employee requirements at this stage, the Government is to consult on whether the threshold for medium sized companies should increase to 500. In addition, it is to consult on whether the strategic report requirement should be mandatory only for large companies.

What does this mean?

It is estimated that 5,000 larger companies will reduce in size to be classified as medium, with 13,000 medium companies reclassified as small, and 113,000 small companies able to use the micro company reporting regime rather than full UK GAAP (FRS102).

Micro companies can report their financial information in line with a special accounting standard for Micro-entities – FRS105. This includes reduced reporting and disclosure requirements and some simpler accounting requirements.

Small companies are, currently, able to report with reduced disclosure and simpler reporting requirements under section 1A of FRS102. The accounting is largely in line with the requirements for full FRS102, however currently a small company is not required to file a profit and loss account with Companies House and there is no formal requirement to make disclosures on any profit and loss related items.

The biggest change for a company with regards to its reporting requirements is when it first qualifies as medium. This brings with it the requirement for the company to undergo a statutory audit on an annual basis, hence the increase in the threshold that will mean fewer companies will require an audit.

The Government intends that companies will be able to benefit from the changes for financial years beginning on or after 1 October 2024.

Impact of being in a group

It should be noted that if a company is in a corporate group structure, the situation is more complex. If the group exceeds the limits on a consolidated basis, then the company can report under the size criteria noted above in relation to its own results. However, it is unable to avail itself of the audit exemption. This is particularly relevant for international groups when setting up in the UK (or acquiring a company in the UK) because if the wider group exceeds the limits worldwide, the UK entity must be audited.

In a recent development, Companies House have been rejecting company accounts where they believe an audit should have been performed, and we have so far helped numerous businesses in this position.

What should you do next?

The changes to these limits could impact what reporting your company needs to do – you should ensure that the company currently meets its reporting obligations, including the audit requirement, and monitor these changes.

These changes are more important given the proposed changes to FRS102 and the additional accounting requirements. Companies which are currently small but will be deemed micro under these size limit changes will be able to avail themselves of some of the accounting changes.

We recently held a webinar designed to give further insight into the proposed accounting changes and what you can do to prepare. We will also be holding more events over the course of 2024 to help you get ready for these changes.

Contact us

If you would like to discuss the above matter, or to confirm how this impacts your company, please get in touch with your usual Blick Rothenberg contact, or Simon Rothenberg using the form below.