Effective from 6 April 2025, the UK government is implementing changes to company size thresholds, impacting financial reporting and audit requirements for businesses across the nation. These adjustments, introduced through The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024, aim to simplify compliance and account for inflation since the last update in 2013.
Here’s what you need to know about the new regulations:
Revised Company Size Thresholds
The new thresholds redefine the criteria for micro, small, and medium-sized entities. For information on what the previous threasholds were, have a read of this article. A company or Limited Liability Partnership (LLP) will qualify for a size category if it meets at least two of the three specified criteria:
| Size Category | Turnover (Not more than) | Balance Sheet Total (Not more than) | Average Number of Employees (Not more than) |
|---|---|---|---|
| Micro | £1 million | £500,000 | 10 |
| Small | £15 million | £7.5 million | 50 |
| Medium | £54 million | £27 million | 250 |
These changes represent a substantial increase of approximately 50% in the turnover and balance sheet total thresholds, while the employee thresholds remain unchanged.
How Audit Changes Impact Exemptions
The audit exemption thresholds have been aligned with the small companies’ thresholds since 2012. Consequently, the increase in small company thresholds will automatically raise the audit exemption thresholds. This means that more companies may qualify for audit exemptions, reducing the administrative burden on smaller entities.
Benefits for Reclassified Entities
With the revised thresholds, many entities will transition into smaller size categories, leading to significant reductions in reporting and audit obligations:
- Micro Entities: Exempt from preparing a Directors’ Report and can utilise simplified accounting options.
- Small Entities: Exempt from statutory audit requirements (subject to group membership considerations) and the need to prepare a Strategic Report. Simplified accounting options are available.
- Medium Entities: Exempt from specific Strategic Report requirements, such as the Section 172(1) statement regarding stakeholder engagement.
The government projects that these changes will result in approximately 113,000 companies and LLPs moving from small to micro-entity status, 14,000 transitioning from medium-sized to small, and 6,000 shifting from large to medium-sized.
Transitional Provisions
To facilitate a smooth transition, the legislation includes a provision related to the “two-year consecutive rule.” For financial years starting on or after 6 April 2025, preparers can treat the new thresholds as if they had been in effect during the prior financial year. This allows companies and LLPs to immediately benefit from the increased thresholds following the legislation’s implementation.
Streamlined Directors’ Report Requirements
The new regulations also simplify Directors’ Report requirements for medium and large entities by removing the obligation to report on:
- Financial instruments
- Significant events occurring after the financial year
- Likely future developments
- Research and development activities
- Non-UK branches
- Employment of disabled individuals (this also applies to small entities)
- Employee engagement
- Customer and supplier engagement
These changes aim to reduce the reporting burden on businesses, allowing them to focus more on core operations.
Audit Changes Don’t Need To Be Overwhelming
The upcoming changes to company size thresholds represent a significant shift in the UK’s financial reporting and audit landscape. Business owners should assess how these adjustments impact their reporting obligations and take proactive steps to ensure compliance. Consulting with a professional advisor can provide tailored guidance to navigate these changes effectively.
At Nordens, we offer expert advice and assistance with all of your business needs: from your everyday accounting to Advisory, Tax, Audit and more. If you need support with any of the above or just want to speak to a member of the team, get in touch today.
