Changes to Company Size Thresholds

Lee Eagling and Danny Noon discuss the recently published legislation which will change company size thresholds in April 2025 and the factors both entities and practitioners should be considering.

For more information on this topic and more, please visit www.mercia-group.com for further details.

Transcript

Lee Eagling: Hi everybody, welcome to this edition of the Mercia podcast with myself, Lee Eaglin. I am delighted to be joined by one of our newest recruits, Danny Noon. Danny, do you want to say hello to everyone? 

Danny Noon: Yep. Hi everyone. I am, I'm Danny and I joined Mercia in October of this year and I'm a technical consultant.

Lee Eagling: Thanks for having me. I know my pleasure, Danny. Thank you for being with me today. So what are we here to talk about? Well, the government gave us an early Christmas present as myself and Danny are sat here recording this, we are a few days before Christmas. And a week or so ago, the UK government confirmed their plans to revise the company size thresholds, which have been, I think, eagerly anticipated since the then conservative government made their announcement back In March, the Labour government then issued a ministerial statement in October to confirm they broadly plan to take those plans forward.

And as promised, they maybe left it a little bit fine, but they have issued legislation sort of this side of Christmas, this side of the new year. Um, to set out their plans. So Danny, I'll maybe hand over to you. Do you want to give us a quick overview of what the changes are? 

Danny Noon: Yep, 

Lee Eagling: I'll just 

Danny Noon: quickly run through sort of the new size thresholds.

So, I think for the purpose of this call, I'll start by saying there's actually been no changes confirmed to average number of employees. Um, so this is something that's maybe, uh, going to change in the future. Goodbye. As of today, I'm just going to be talking about turnover and balance sheet and thresholds.

So, I'll start with the micro entities. So, the old thresholds for micro entities were for 632, 000 of turnover and a 316, 000 balance sheet total. That's 1, 000, 000 of turnover. And 500, 000 balance sheet total. The small threshold has been changed from 10. 2 million turnover. And 5. 1 million pounds balance sheet total to 15 million pounds turnover and 7.

5 million pounds balance sheet And the medium size threshold has been changed from 36 million pounds of turnover and balance sheet total of 18 million pounds to Turnover of 54 million pounds and a balance sheet total of 27 million pounds So there's been some quite significant increases there which have probably been that A long time coming, since the last time these were changed was maybe 2013, and that's probably, yeah, reflective of how long it's taken to get some new size thresholds out.

Lee Eagling: Yeah, perfect. Thanks for that, Dan. I mean, you've touched on that. I mean, for those of you that follow similar changes in the EU, you've probably seen that our counterparts in Europe have had a 25 percent uplift to their size threshold. For those of you quickly doing the maths in your head or you may have followed from our courses earlier in the year, The UK government have given us a 50 percent uplift.

Now, they're maybe banging the drum of that being to sort of take away the red tape, sort of make business easier to do for UK businesses. There's an element of truth in that, dare I say, it's partially inflation adjusting for what's happened in Europe. And then, dare I say, an element of future proofing to acknowledge we're still above a target rate of inflation and maybe buying themselves some wiggle room before.

further revision. I just did. I think that it just did to clarify for folks as well. Hopefully people are well drilled on this now. But when we're referring to those thresholds, you've just mentioned really important for people to remember balance sheet total, we're talking about gross assets. So current assets, And then just remember on the turnover total, I'm going to maybe ignore charities and things like that.

It gets a bit complicated depending on what jurisdiction you're in for charities. But let's assume just a vanilla corporate entity. Your turnover threshold will be prorated based upon length of accounting period as well. So I think just a few things to remind people of there. I don't know though, before we dig into some more nitty gritty things, is it worth just clarifying and mentioning the goal?

group threshold changes as well. Do you want to take us through that? 

Danny Noon: Yeah, I won't list out the group size thresholds line by line, but um, as you can expect, they're roughly 20 percent higher, um, comparing net to gross limits, which is similar to how they were done before. So your new gross limits for small groups is 18 million of turnover and 9 million balance sheet.

And your medium threshold is 64 million of turnover and 32 million of balance sheet. So those are gross, which would mean no intercompany adjustments on there. So your net figures are after consolidation 

Lee Eagling: adjustments. Perfect. Now, thank you for that. I mean, again, just something we often get queries on just to clarify as well is that you it's probably one of the more lenient applications that you can pick and choose.

So you can look at some measures gross, you can look at all the measures net. And as long as you comply with one or the other, and you then meet two out of your three size criteria, that can then be used. So you do have a bit of freedom when you're looking at, say, a parent company and then a group.

There's a point I just mentioned that's popped into my head again, something that we maybe have to remind people of is when you're looking at a parent company, you have to look at the size of the group it heads. You are not looking at the parent based upon its standalone financial statements. Again, just something there that we sometimes get questions on.

We sometimes see people still falling into a trap of. Hang on, I just wanted to, to remind people. Now, certainly something, uh, clearly we've been lecturing for the past few months in terms of, with a good idea of what the revisions are likely to be, but still with a bit of uncertainty around timing and effective dates and maybe transitional provisions.

Again, now we've got the legislation, Dan, I don't know, do you want to talk us through when we're expecting these changes, well, when these changes are taking effect, and then maybe just the provisional, uh, sorry, the transitional arrangements that are in play as well. 

Danny Noon: Yeah, no, this is probably the most interesting point on here.

So these changes come into effect from accounting periods beginning on or after the 6th of April, 2025. So if we're thinking about March year ends, which is quite a common year end. The first period you're sort of looking at would be March 2027 year ends. That's because your first commencement date would be the 1st of April 2026, which is the first day after the 6th So, we've got actually before these changes come in, come into play for March year end.

So if we look at March, 2027, you're looking, if you have an audit or anything like that, it's more likely going to be summer of 2027. So we've got nearly three years before we can feel the benefit of these changes. But we do have the benefit of being able to apply what's known as the transitional provisions.

These uplifts in company size can be. retrospectively applied to the prior year end, so that means you'll be able to take advantage of the new thresholds almost straight away in that March 27 year end, because you'll be able to look back into March 26 and say, well, did these new size thresholds apply in my prior year as well?

Lee Eagling: Carified, I don't know what you said there, and certainly my interpretation of that is, that's really helpful when we're thinking about applying what we call the two year rule, when it comes to determining a company's size, is that these new thresholds that we have, we're going to use these new thresholds to look at, okay, our current year for the period, Commencing on or after the 6th of April, but then for where we're doing the prior year reference to determine size under the two year rule, we would use these revised thresholds when looking backwards, we wouldn't have to apply the outgoing size thresholds to historical years, but just to To be clear there, if you're thinking about when you can apply these provisions, we're looking at again, periods commencing on or after, and it's only then for that period you would, financial statements for those periods that you would then determine your size under these new thresholds.

But again, with then that backwards looking test. for the two year rule. Just on that, I know, Danny, before we recorded today and internally, we've had a bit of a debate. Is it worth it exploring thoughts that entities might have around changing their year end to potentially take advantage of these provisions a little bit sooner?

Danny Noon: Yeah, so probably what I'll do is do another circumstance. We've looked at March year ends for SUDs. try and put this into perspective. Let's take an April year end where your first accounting period after the 6th of April 2025 will begin on the 1st of May 2025. So that's applying to April 2026 year ends.

So effectively in April, year end will be able to take advantage of these new thresholds almost a year earlier than your March year ends. And March is obviously a very popular year end. So companies may be tempted to change their accounting reference date to be able to take advantage of the, yeah, the thresholds earlier.

So if we were thinking about maybe extending to, extending a March 2025 year end to the 5th of April 2025, their next accounting period will begin bang on that 6th of April 2025. So a March year end, if you're thinking of taking advantage of these thresholds sooner, it's maybe something worth considering.

Lee Eagling: Yeah, absolutely. I mean, interestingly, maybe something we've explicitly touched on, but I found it quite amusing that the government have gone with what feels to be a personal tax date rather than a traditional corporate date. So, I don't know, I don't know, too political, maybe a bit of naivety from our new government in that regard, but it is interesting with the day that they've picked.

Again, I know we've had a bit of debate internally. Some of you may be thinking, well, actually, could I use what we sometimes refer to as a seven day rule to keep the same accounting reference date, but actually draw up my financial statements at a different point in time? So again, let's use the example that Danny's given us of a 31st of March year end.

Technically, you could use a seven day rule to then prepare accounts, say, on the 5th of April. In our opinion, we don't think that would then allow you to take advantage of having then your next accounting period commence on the 6th of April, because your accounting reference date is still the 31st of March, and therefore your accounting reference date for the next period commencing is then the 1st of April.

So I think you would have to formally go through the motions of extending your accounting reference date. Now, again, Danny's used example there, and of extending it to, say, the 5th of April. It might be a pragmatic point to discuss with your clients who actually did extend by a month, so they still have a nice, clean month end sort of accounting reference date, but maybe sort of March year end may be looking to move at the end of April.

Likewise, if you've maybe got a year end that is, say, later on in the year, you may have clients that potentially want to bring forward a year end. A year end just to take advantage of the provision sooner. Not something I'm going to run into in tons of detail today, but I think just a reminder that there are requirements and provisions around how often a client or an entity may be able to move and tinker with their year end.

So particularly if you've got entities looking to shorten an accounting period, they may be restricted if they've already done that within the last five years. I want to say, but again, don't maybe don't fact check me on that, Danny. I have five years number I've got in my head. Yeah, I think just a few things.

To be careful of there. But again, a bit of food for thought that for those of you out there that you may be working through with clients, I know certainly conversations I've had with firms, both I've been file reviewing and lecturing is clearly clients are keen to take advantage of this. And we'll maybe touch on some of the advantages in a second, but it can have some quite interesting timing implications that may just need a bit of plotting through.

Wonderful. 

Danny Noon: I think one point just to add on there as well is just being careful when you're extending year ends so that you're thinking about how that's adjusted your turnover. You don't want to adjust a year end and end up being above the threshold if you, if your intention was to fall below it. So, yeah, just being careful on that point.

Yeah, especially if you've got a seasonal business. 

Lee Eagling: Yeah, absolutely. Again, as we mentioned earlier, we're very hopeful that you do. Obviously pro rata the turnover threshold, but it's nice into that. Let's say again. You got a march year end and let's say april is a really busy time for the particular client.

It might be that with a bit of pro rata in, you would then breach that fresh because of the level of activity that they perform in that month. So yeah, just basically. Be really careful. Now, probably one of the biggest advantages that some clients might be looking to take advantage of is audit exemption.

So I'd want to maybe stress to people one around just maybe a few reminders. On audit exemption and eligibility criteria for audit exemptions, again, Danny, I'll maybe cut to you if you want to throw a few thoughts in there and I can chip in where needed. 

Danny Noon: Again, so we're thinking of audit, there's small companies are exempt from audit, but you've got to be careful that you're not captured by any of the other rules.

So. We're thinking of public companies and insurance companies, banking companies, e money issuers, and method investment firms and plenty of others. They all do require audits because they're excluded from being treated as small companies. So just being careful there. 

Lee Eagling: In there, Danny as well. Sorry to interrupt you.

Just be mindful. If you've got barring a public company, and what I mean by public company is a PLC, not necessarily a listed PLC, but a PLC. If I take out that public company criteria, you've got. If you've got any of those other criteria that Danny's just mentioned in your group, that would likely make the group ineligible and therefore any entity in that group couldn't qualify as a small company.

So just to be careful around ineligibility of not just the entity, but maybe part of a group that makes the whole group ineligible. as well. Sorry, Danny, I'll let you crack on. 

Danny Noon: Yeah, I know. It's a good chance to lead us on to groups as well. So groups is probably the most common area where small companies won't be able to take advantage of audit exemption.

So If you're a part of a group, whether that being a UK based group or overseas, you're likely to be caught by rules, which mean you're not exempt from audit, especially if you're looking at UK groups, you've got to think about parent guarantees and things like overseas groups as well, the likely, the subsidiaries will likely need audits anyway.

So yeah, just remember, just remembering those rules. Yeah, and I think also probably worth mentioning sort of auditing standards as well, where we've got an ISO 600, which can often mean a substitute will require an audit just to be able to put an opinion on the group position as a whole as well. So yeah, just not being, just remembering to not be caught up by auditing standards as well.

Lee Eagling: Yeah, absolutely. I mean, again, maybe crossing the streams a little bit today. I mean, dare I say it's on my to do list for the new year with a revision to ISO 600, maybe just a podcast just to help people in terms of that revised standard. Again, just a reminder that will be effectively live for any December 24 year ends.

that you have, but again, maybe just to prelude that, I think really careful that you're comfortable you're planning the group audit accordingly, but you're then appropriately planning all the individual entity audits within that group accordingly. And then don't forget the parent as a standalone company.

Is a standalone opinion that you're issuing as well. So again, maybe a podcast for it for another day, but you're absolutely right. Danny, that the people do need to think about the group implications again, if you're a subsidiary company, I think still be cautious around the size of your group. But if you say a standalone, maybe you're working with an owner managed business that will now fall below these thresholds, we've going to maybe see some clients having the debate of, well, do they still want an order?

Maybe they don't necessarily want an audit, but they still want some form of assurance. So I don't know, again, Danny, is it worth running through thoughts that clients might have in this regard and then potentially impact on audit firms as well? A lot of companies can obviously 

Danny Noon: choose to have audits because one thing that an audit provides is just that little bit of assurance.

for stakeholders, especially when you're thinking about fraud within companies. So audits don't necessarily find all the fraud in a company. It's just probably worth caveat in that, but it is a fact that audited companies are less likely to have fraud in them because there's almost that scare factor sometimes where if a company has been audited, you know, the auditors are coming in and they can find fraud through a lot of the procedures that the auditors perform is a def there's a definite deterrent.

Lee Eagling: I think as you've said that it's maybe that fraud deterrent. I mean, certainly something that we find chatting to a number of firms is clients maybe find it easier to raise financing because an audit gravitas for a bank. It can sometimes be useful in terms of supplier. Uh, and customer negotiations. It just adds a bit more weight and gravitas to to the financial statement.

So it can be helpful in broader commercial negotiations that your clients are entering into. Maybe a debate that I think firms ought to be having and thinking about the implications are clearly, you will have some clients that can now take advantage of audit exemption and will take advantage of that.

I think for practitioners out there that are auditors. I think definitely worth thinking about the impact that will have on your fees. And are you comfortable that, I mean dare I say most firms I speak to will actually welcome the, maybe the pressure valve being released a little bit here and actually having less audit work to do.

But nonetheless it could be some out there that this maybe takes away quite a sizable rump of work for them. So maybe just worth touching on a few alternatives. So maybe thinking about. Alternative assurance frameworks, not necessarily an audit, but maybe think about a limited scope assurance engagement, and that could be a nice halfway house between don't necessarily want the cost and burden of an audit, but we can still provide some form of assurance.

I mean, the other thing that we've talked about. Internally and again I'm mindful not to cross the streams too much here but is maybe thinking about as the world is emerging around sort of ESG and climate reporting as a firm is that something that you ought to be thinking about with your clients and maybe the resource you get back with potentially losing the audit client.

Can be diverted there Appreciate that, maybe stall your thunder a little bit there But I don't know if there's anything you want to add to either of those. I appreciate the answer might be no, but feel free to if If you 

Danny Noon: No, I think it's a good point. It's probably just firms thinking about the future, isn't it?

Yeah, definitely assessing their portfolios of clients and seeing how many are going to drop out of audit. What that means for staffing requirements as well. Do we need to recruit more into the statutory accounts team where he might just be in that department as well? 

Lee Eagling: Yeah, no, you're absolutely right.

It's that proactive, forward looking aspect, but I think Just because it's not just helping your clients think about the impact on them. It may be actually do you need to sell yourself a little bit more as what's the value of the audit you give to to maybe protect your fee base and services you currently provide to it's a bit of maybe self preservation as well as being helpful and assisting our clients as best we can.

Just one little segue that it might be worth is going on is Clearly, these revisions to the company size threshold are amending the Companies Act and the size threshold in the Companies Act. That then, in some areas, might have an interesting knock on effect for how it impacts clients in other areas in terms of other size threshold debates, but in other areas where clients will still need to potentially track the old size threshold requirements.

So, again, I don't know, Danny, do you want to maybe touch on maybe IR35 and then stream energy carbon reporting? I'm not, I'm no tax expert, but You and me, we're generally, we're basically For everybody out there, mine and Danny's answer to the tax will be divided by four, and it'll be roughly okay. But maybe on a podcast either by Mark, Pat, or Norman, or Helen, they'll get into more specifics.

But yeah, just from a knowledge of how certain tax rules are drawn out by accounting size thresholds, yeah. Sorry, Danny, I'll let you take over again. 

Danny Noon: No, that's fine. So, yeah, IR35, the main thing to think about there is where the responsibility of IR35 lies. So, for medium sized companies, IR, the responsibility of IR35 is, The individual, so that being like the subcontractor or the person that's self employed, but when you enter, when you're into the large company threshold, then the responsibility actually lies with the company, and they are the ones to make sure that their subcontractors are applying IR35 rules.

Yeah, as we touched on as well, Lee, just the streamlined energy carbon reporting. Our understanding is that these won't apply because there are different rules. You may think you'd be able to take advantage of, uh, yeah, less reporting the director's report if you drop from a large or medium company, but that's unlikely going to be the case.

Lee Eagling: Yeah. No, I think you're absolutely right there, Dan. I mean, it's, again, it's often an area that we We get a lot of queries on currently. Again, I'm not going to go into the nitty gritty today, but it's worth remembering that the size thresholds for streamlined energy carbon reporting whilst is what was currently very heavily aligned to company size thresholds in the Companies Act, it was separate legislation that defined those.

And it does have a couple of slightly different parameters, maybe based upon sort of kilowatt hour consumption. But just to be clear, that piece of legislation, as far as we can see, isn't yet being updated. So it's almost the size thresholds that we're at play will still be what determines whether a company will need to include that stream energy carbon reporting.

So just be mindful, if you've got a client that thinks, Oh, I'm not large anymore, they might not necessarily be large for other directors report requirements, but they will still have to think about their stream energy carbon reporting. And so just. to be really careful, I think, for, um, for entities there.

Wonderful. Now, again, Danny, you, um, mentioned this a little bit earlier. So if we cast our minds all the way back to sort of March last year, the Conservative government did toy with the idea of consulting around changing, um, employee thresholds for medium companies, maybe tinkering more broadly with narrative reporting specifically for medium companies.

I'd say largely some of that has been put into place. Thank you. On ice, the now Labour government again have announced I'm going to for the listeners here. I'm going to air quote an ambitious consultation in inverted brackets in the new year. So we might have something to look forward to in terms of some softening around other requirements.

Let's wait and see there. As part of this legislation, the government have just dropped in a few other changes, amendments to soften some aspects of narrative reporting. I mean, maybe, Dana, we don't need to go through them in tons of detail, but is it worth just listing out the areas that are maybe being softened from a narrative reporting perspective?

Danny Noon: There were changes to director's report that we've got. We're basically to remove any sort of low value. obsolete or overlapping requirements. So these include financial instruments disclosures, which are already covered in accounting standards. So no need to report those on the director's report and disclosure of events after the year end, because they are also covered by accounting standards.

So again, that's another overlapping disclosure, which has been removed. And the other ones being removed are information about likely future developments. information about research and development, information of branches outside of the UK, information relating to the employment of disabled persons, information about how the company engages with employees, and information about how the company engages with their customers and suppliers as well.

Lee Eagling: Perfect, no thanks. I mean clearly something that it may be worth just running through in a bit more detail sort of when you actually come to preparing. I mean dare I say it's maybe those elements of narrative reporting that I tend to see entities and firms are maybe weak on anyway. So it's actually maybe going to help address weaknesses rather than actually take out what people currently put in their annual report, dare I say.

Perfect. So, but just for those, yeah, clearly it will have, I say, impact for you guys at firms, think about what it might mean for your fee base and client base, but clearly this will have implications for your clients. Maybe again, whether you actually hear this podcast before Christmas, maybe something to be mulling over sort of as your Christmas dinner settles, is to think about.

What the impact is for your clients, clearly, we're going to be including the detail on this in our spring and a courses. So certainly over the past week, we've been thinking about material that's going to go into those courses. So for those of you attending sort of our spring accounting sessions, either online or face to face, we'll be talking through this in a little bit more detail as part of those.

Clearly, as always, we've got our technical consultancy service if people want to talk through the implications for clients. RTQ service is available to help people out, maybe have more specific queries. And dare I say, as we're out doing file reviews, we'll be sort of willing to talk to you as part of a file reviews debrief as well, just to maybe work through.

the implications there. Danny, thank you so much for joining me today. It's been a pleasure to, to talk through those changes with you and I'm sure your, as you know, podcast debut is now out of the way. We'll be, we're hearing from you at many more future dates ahead. So thank you for joining me today. No, thanks Lee.

It's been a pleasure. Say thank you everybody for For downloading and listening to this podcast, we, uh, we hope you found it useful. As I said, I'll certainly look forward to seeing a few of you either at a course in the new year or on file reviews in the new year. Danny, we'll be probably seeing you on a file review as well for a few of that there.

So, yeah, do take care, everyone, and we look forward to seeing you again soon. 

Danny Noon: for listening to the Mercia podcast. For more information on this topic, please visit mercia group. com.