Legislation is expected to be set out this summer which will increase the size thresholds that determine the size of a company. A 50% increase is expected in a bid to cut complexity and burden from reporting requirements.

Proposed size thresholds

Micro

Small

Medium

The changes are expected to result in:

• 5,000 large companies being reclassified as medium-sized to access more proportionate reporting;
  
• 13,000 medium-sized companies falling into the small companies’ regime enabling them to benefit from potential audit exemption and filing filleted accounts (until this provision is removed); and
  
• 113,000 small companies falling into the micro-entities’ regime to allow them to prepare FRS 105 micro accounts.
  

Assumptions

It is currently assumed that the existing rule will be retained under which two out of three of these limits must be exceeded for two consecutive years (in order for that company size to apply). It is also assumed but not confirmed that the alignment of the audit exemption thresholds with small company financial reporting thresholds for standalone companies, will be retained.

Other proposals

The Government also plans to remove several minor disclosure requirements from the Director’s Report and there are currently also plans to consult later in 2024 on amending the definition of a medium-sized company for company financial reporting. This aims to increase the threshold on the maximum number of employees to be classed as a medium-sized company from 250 to 500.

The Government will also consult on providing an exemption from medium-sized companies having to include a Strategic Report in the Annual Report.

Effective date

If legislation is passed, it is expected that the changes will come into effect for accounting periods commencing on or after 1 October 2024, thus impacting on 30 September 2025 year ends onwards.

The timing of this in a period on the run-in to a general election is unclear and any delay in setting out and passing the legislation may lead to this
effective date being pushed back, or the legislation not being passed at all and therefore any planning around these changes must be considered in this context and may be subject to potential changes as a result.

What does this mean for me?

Aside from the potential reduction in reporting referenced above, the main consideration is if these changes might impact whether your business(es) needs an audit or not moving forward.

For those businesses who are already exceeding the proposed new limits, there is little or no direct opportunity for planning around this, and wider planning should not be driven by the objective to fall out of the audit regime alone.

Where planning may be possible is for those businesses that are exceeding the existing limits but would fall below the proposed limits and might expect to do so moving forward, at least over the next two to three years.

In that scenario the business will fall out of the audit regime for the first time in their first accounting period commencing on or after 1 October 2024. So for a business with a March 2024 year-end, they would still require an audit for the periods ending 31 March 2024 and 31 March 2025.

However, assuming the business has not extended its accounting period in the last five years, it would be able to extend the period ending 31 March 2024 through to 30 September 2024 and have one further audit on that long period of account. The period commencing 1 October 2024 would then fall under the new limits and, in assessing size criteria would look back on its previous accounting period based on the new limits (bearing in mind the turnover will be prorated due to the extended period) when applying the “two consecutive years” rule, meaning that period of account should become audit exempt. 

It should be noted that a company cannot extend its accounting period date beyond an 18-month period and therefore this will only be potentially useful for those businesses with a March through to August year end.

Businesses should also be mindful of “flip-flopping” in and out of the audit regime and the potential impact this has on the audit work required and/or opinion reached. It is always important to ensure that there is a full understanding of what is required in order to ensure that subsequent periods are not adversely affected, and the unintended consequences that can result, including, by way of example, a decline in credit rating amongst other things.

How can Rickard Luckin help?

The team at Rickard Luckin will be keeping up to date with the position over the course of the coming months as it develops and as legislation is tabled. If you think your business may be affected by the changes and would like to talk to somebody about what practical impact this may have on you, or any planning that might be possible, please get in touch .