The government has announced its intention to increase the thresholds that define small and medium companies with the aim of simplify reporting requirements for certain businesses and reducing regulatory burdens for companies required to prepare non-financial information.

The increase was announced as part of feedback on amendments to The Companies (Non-Financial Reporting) Regulations on which the Department for Business and Trade (DBT) consulted in 2023 and is expected to apply from October 2024. Additionally, the Prime Minister has announced that the government will consult on further increasing the employee thresholds for medium companies.

Why is the government making changes?

In May 2023 the DBT launched a consultation on non-financial reporting requirements within annual reports in order to address several issues. Annual reports are seen to have become increasingly long and complex with duplication between sections, in part due to a fragmented framework as legislation and regulatory requirements have added to existing requirements over time. In addition, the company size thresholds which determine the relevant requirements have not been updated since 2015 and therefore as a result of inflation are capturing more companies than was intended.

How will Annual Reports be simplified?

The government intends to simplify reporting by removing content from the Directors’ Report, in most cases because it is duplicated with requirements in the Strategic Report. All small, medium and large companies are required to prepare a Directors’ Report but there are different requirements based on company size. Information that is proposed to be removed relates to:

• Employment of disabled people,
• Financial instruments,
• Existence of branches,
• Employee engagement,
• Engagement with suppliers, customers and others, and
• Important events, future developments and research and development.

How will company size thresholds change?

The classification of a company as micro, small, medium or large is determined by the company and corporate group thresholds set out in Part 15 of the Companies Act 2006 (CA 2006). This then determines the reporting and audit requirements for a company. The government is proposing to

increase these thresholds by 50% not only to reflect historic inflation but to future proof the thresholds for some time. This is higher than recent amendments for EU companies where thresholds were increased by 25% only.

Thresholds will be increased as follows:

What is the impact of the increase in size thresholds?

Small companies are able to take advantage of various reporting, filing and audit exemptions and therefore moving down the bands should save time, effort and money. For example, small companies preparing financial statements under UK GAAP are able to take advantage of section 1A of FRS 102 The financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) which contains reduced disclosures compared to full FRS 102.

In terms of narrative reporting, all medium-sized and large companies are required to include a Strategic Report within their financial statements. This report contains information relating the entity’s business model, strategy and objectives, risks, performance and financial position to allow shareholders to understand the business and how the directors have performed their statutory duties. Medium-sized companies that are re-defined as small under these proposals would be able to take exemption from preparing this report.

Exemption from the requirement to have annual accounts audited is also available to small companies. However, the requirement for an audit can be driven by more factors than simply size. Certain factors can render companies ineligible for audit exemption such as being part of a non-small group, carrying out particular business activities such as banking or insurance or being itself a public company (ie a plc, whether or not its shares are traded). In other cases, an audit may still be required for reasons such as compliance with a loan covenant or other agreement.

Small companies are also currently permitted to take advantage of reduced filing options which allow the removal of the profit and loss account and directors’ report in the accounts filed at Companies House, otherwise known as filleted accounts. In addition, small companies are able to prepare and file abridged accounts which have a simplified profit and loss account and balance sheet. However, the government is separately removing these options as part of the Economic Crime and Corporate Transparency Act and therefore these advantages will not be realised under these proposals.

The changes proposed by the government will be welcome news for many companies particularly those who will be able to take advantage of the many small company exemptions and simplifications. It is possible that increasing thresholds may have knock on impacts further down the line for other reporting requirements which are loosely but not directly linked to Companies Act size

thresholds such as Modern Slavery Act reporting and Gender Pay Gap reporting. For now, however, businesses must wait for secondary legislation and the important transitional provisions to understand the specific timing and application of these proposals.

If you’d like to discuss any of the points raised above, please get in touch with Casidhe Baleri E: [email protected]

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Name: Oliver Danvers

Role: Senior accountant

Time at Saffery: Started September 2023

What’s the best bit about your job?

Other than the various social events at Saffery, being able to help and develop junior members of the team is something that I take great satisfaction from and is one of the best parts of the job. I also enjoy being able to deal with a variety of clients in various industries as each client brings their own challenges.

The culture of Saffery is really important to the business and the people within it – what do you think you bring to the team and what do you contribute?

I think I am team player that is willing to help the team complete work and train junior members of staff.

If you weren’t doing this role, what might you be doing?

As a teenager, I had aspired to become a sports physiotherapist until I realised A-level biology wasn’t my thing. So, I would probably say I may be doing something like this.

What do you enjoy doing outside of work?

I am a big fan of sport, so I would most likely be watching or playing sport of some capacity. Mainly football and cricket!

Tell us something about yourself that we don’t know.

Over the past couple of years, I have become a bit of a vinyl record collector, mainly Indie bands such as Oasis and Arctic Monkeys.

Who or what inspires you?

It’s not something I have ever told them personally, but my parents inspire me, they are some of the most hardworking people I know and their work ethic is something I have tried to take into my own career.

What’s your favourite place in Dorset?

Although I do not visit the scenic areas of Dorset as often as I should, Durdle Door is one of my favourite places to visit.

Give three words to describe yourself.

Quiet, laid-back, hardworking.