Company size thresholds to rise

The Government has published The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024, confirming that increases to the company size thresholds will be effective for financial years beginning of or after 6 April 2025. This is part of a package of measures by Government to ease the regulatory burden for businesses on reporting.

The audit exemption thresholds are linked to the company size thresholds therefore these will automatically increase as well.

The changes are expected to see 6,000 large companies reclassified as medium-sized businesses with more proportionate reporting. 14,000 medium-sized companies are expected to be reclassified as small businesses allowing them to benefit from potential audit exemption and filing simpler and filleted accounts. Over 113,000 small companies will be reclassified as micro entities allowing them to prepare simpler accounts.

It is important to note that not all businesses will benefit from these changes and some companies, irrespective of size, may still need to have an annual audit. For example, those operating in certain regulated industries, publicly traded businesses, or entities which are part of a medium or large sized group.

Additionally, the new regulations include changes to the disclosure requirements of the Directors’ Report, removing obsolete or overlapping requirements. Large and medium-sized entities will no longer need to disclose in their Directors’ Report information on:

•  financial instruments;
•  important events that have occurred since the year end;
•  likely future developments;
•  research and development;
• branches outside the UK;
• policy for employing disabled people;
•  engagement with employees, suppliers, customers and others

The changes in detail

To qualify as a micro, small or medium, a business must meet two of the following three criteria for two consecutive years.

In the transition period, when considering whether the size thresholds have been met two years in a row, company size should be considered as if the new thresholds had always applied.

How will these changes affect my business?

Businesses that fall into smaller categories may no longer need to collect certain bits of information as reporting requirements change. Those moving from medium sized to small are likely to become exempt from audit and from having to producing a Strategic Report. Businesses transitioning from the large to the medium-sized category can benefit from exemptions to certain Strategic Report requirements. These include the Section 172(1) statement, which outlines how directors have considered stakeholder and other interests as specified in section 172 of the Companies Act 2006.

The timing of these changes coincides with amendments to FRS 102, effective for periods starting on or after 1 January 2026. These amendments require businesses to recognise operating leases on the balance sheet, which could push some companies above the audit threshold. However, the newly increased thresholds are expected to mitigate this risk.

Where businesses no longer need an audit, that does not necessarily mean they shouldn’t continue to be audited. If a business falls into the small business category but owners are planning for an exit down the line, having a history of audited accounts adds credibility. Similarly, if a business is considering external funding, with investors expecting to see fully audited accounts. It should also be remembered that businesses with bank funding may also find the terms of that borrowing are dependent on an annual audit.

To understand how these changes will affect your business contact Katie Harvard Taylor at Hillier Hopkins LLP.

Chartered Accountants in London, Watford and Milton Keynes (hillierhopkins.co.uk)