Companies Act 2006 size limits set to increase

In response to its call for evidence on ‘smarter regulation non-financial reporting’, the Government has announced plans to revise the turnover and balance sheet size thresholds used to define micro, small, medium and large entities in the Companies Act 2006. Employee size limits will remain unchanged for now.

With the forthcoming legislation set to be introduced in summer 2024, these adjustments aim to create a more proportionate regulatory environment for small and medium-sized companies, enabling them to focus on running their business. 

The 50% increase will bring size limits to ‘not more than’:

These limits will apply to individual companies and for ‘small’ and ‘medium’, the ‘net’ test for groups headed by a parent company. While the official Government announcement does not explicitly address it, we anticipate that similar increases will apply to ‘gross’ tests for groups and that the new size criteria will also extend to Limited Liability Partnerships (LLPs).

The requirement for entities to meet two out of three of these size tests is expected to remain unchanged, along with the condition for size tests to be met, or not met, in two consecutive years before an entity can move between size categories. Additionally, the ‘ineligible’ criteria are also expected to remain, scoping certain entities out of being micro, small or medium even if they fall within the size limits. 

Entities falling within each size category will have the current simplifications and exemptions available to them, broadly:

• micro-entities – accounts comprise of a profit and loss account, balance sheet and limited notes, with recognition and measurement simplifications available in FRS 105.
• small companies – accounts can include only FRS 102 Section 1A disclosures, alternative presentation formats, and a simplified directors report. Exemptions can be taken from preparing group accounts, presenting a strategic report, and statutory audit (subject to additional conditions being met).
• medium-sized companies – while disclosure exemptions are limited, several non-financial reporting exemptions are available such as section 172, stakeholder engagement, and carbon reporting, some of which only consider the size of the company and/or ignore the ineligibility criteria.

Some entities that are entitled to these simplifications and exemptions may continue with their current accounting practices, e.g. choose not to adopt FRS 102 Section 1A for consistency with the rest of their group. Businesses falling into the small category may choose or be required to continue to have their accounts audited at the request of shareholders, or for non-statutory reasons, such as lending conditions.

With legislation expected to be laid in the summer of 2024, entities may be able to benefit from the changes from as early as financial years starting on or after 1 October 2024, meaning those with a 30 September period end would be the first to take advantage of the new thresholds. 

This is not the end of the road for regulatory reform - more change is to come. The Government’s broader objectives to enhance non-financial reporting include: 

• Removing requirements from the Directors’ Report, and the Directors’ Remuneration Report and Policy.
• Raising the medium-sized employee size limit from 250 to 500. 
• Extending the strategic report exemption to medium-sized companies. 

In light of these upcoming changes, it is advisable for all businesses to conduct an early review of their corporate structures to identify entities affected by the proposed changes. This proactive approach will allow sufficient time for management to identify the potential benefits and cost savings arising from the proposed changes which can be applied to their statutory reporting in the future.

Contact us 

We will provide further information once the legislation is put forward, however, if you would like to discuss the impact of these potential changes further, please get in touch with Lee Marshall or your usual RSM contact.