BusinessThresholds
BUSINESS THRESHOLDS
Sizing things up
As the government adjusts size thresholds for businesses, we analyse what the changes mean for hundreds of thousands of companies across the UK
Words: Katie Harvard-Taylor, audit director, Hillier Hopkins Illustration: Jackie Parsons
The UK government has announced that it will implement increases to the company size thresholds following a consultation in 2024. The announcement is part of a package of measures to ease the regulatory burden for businesses on reporting. The changes are expected to come into force on 6 April 2025, meaning they are likely to affect companies with a financial year starting on or after that date.
The changes are expected to see 5,000 large companies reclassified as medium-sized businesses with more proportionate reporting. Around 13,000 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. Meanwhile, more than 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 that are part of a medium or large-sized group.
Additionally, the government proposals will include changes to the directors’ report and the directors’ remuneration report, removing obsolete or overlapping requirements.
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.
The changes in detail
To qualify as a micro, small or medium company, 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 it affect my business?
These changes may sound some way off, but preparation is critical. Businesses that fall into smaller categories may no longer need to collect certain bits of information and many companies may not require an audit in future.
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. The same holds true 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.
