Expected changes to company size thresholds from 1 October 2024

The UK government has recently announced a substantial change to company size thresholds, the first revision to the thresholds since 2016, as they attempt to simplify the regulatory landscape for UK businesses.

The changes are intended to reduce the complexity and administrative burden for companies and will directly impact the type of accounts a company is required to prepare and whether the company is required to have a UK statutory audit.

The size of a company, as well as its ability to claim exemption from an audit, is assessed based on three criteria; its level of turnover, its total assets and the average number of employees during the accounting period.

The size of a company is impacted when a company breaches at least two of these three criteria in two consecutive accounting periods. There are different rules for newly incorporated companies who breach the limits in their first accounting period.

• 113,000 small companies that will be reclassified as micro-entities
• 13,000 medium-sized companies that will be reclassified as small companies
• 5,000 large companies that will be reclassified as medium-sized entities

The increase in thresholds will come as a relief to numerous small businesses that were at risk of being pulled into the audit threshold due to the recent amendments made to FRS 102. These amendments first proposed under FRED 82 and set to take effect for accounting periods starting on 1 January 2026, will require UK businesses to recognise operating leases on their balance sheets. For many small companies with substantial leased assets, this would have been sufficient to breach the total assets threshold increasing the likelihood of needing an audit.

Small businesses that are reclassified as micro entities will need to consider whether they continue preparing accounts under FRS 102 1a or switch to FRS 105 accounts. Although FRS 105 accounts provide limited financial information and are far simpler to prepare, they have not been widely accepted by lenders and other parties that need to assess a business’s creditworthiness.

While some may argue that the increase in limits does not sufficiently account for recent inflation, for many, it represents a positive step forward for many businesses.