Company size threshold changes – what does it mean for your business?

The primary reason given for this change is the goal of reducing the burden, complexity and administration for business, to save costs, and therefore making UK companies more competitive. In this article, we explore the implications of the changes and where they may make a real difference for your business. Will corporate UK see the savings that the government expect?

For an in-depth analysis of the details of the changes, there are several sources you can refer to. This article is focussed on the overall implications to your business and the factors that you will need to consider for your financial reporting. Will the change result in any savings in time or cost? This is likely to depend upon several factors that we will cover.

To begin with, the headline rate changes to the thresholds are as follows:

The rules regarding shorter/longer periods and any two of the three of the above criteria are unchanged. Similarly, the consideration for groups remains the same, so in this article, whilst we refer to a company, it will apply in the same way to a group as before the changes.

Smaller Owner-Managed Businesses (FRS 102 to FRS102 1A)

These businesses are likely to be the main beneficiaries of the changes. A business that moves from medium into the small size category will probably be aware that this is likely to mean that an audit will no longer be a requirement. There are exceptions that usually relate to funding or shareholder requirements, but for most, this will be a direct cost saving, as well as the administrative time spent working with an audit team.

There are limited savings in time for some of the disclosure requirements, with a reduction in the requirements for front-end reports and a reduction in some of the disclosure requirements in the notes to the accounts. Most businesses of this scale and ownership do little more than the standard compliance requirements for their front-end reporting, perhaps with a short statement from the Chairman explaining progress.

Where a group moves from a medium-sized group to a small one, there will no longer be a requirement for consolidated accounts to be prepared, which, added to the audit saving, will make a meaningful total saving for the business.

For those using outsourced accountants to complete the accounts using specific financial statement software, we estimate that total audit and accounting costs would reduce somewhere in the region of 60-70%. For those that prepare financial statements in-house, it will depend upon the skill and experience of the Accounts team, and a reduction in requirements could well mean time saving for the team, but this is from a fixed cost already incurred.

Micro-entities (FRS1021a to FRS105)

For those companies that fall from small into the micro-entity size threshold, there are significant savings, potentially 25-30%, largely from the significantly reduced disclosure, which requires the company to only consider the mandated disclosures under FRS105 and no more. Therefore, the relevance of the micro-entity regime will only really apply to very small businesses and any business with ambitions to grow and build future value are recommended to continue with the small company regime.

Large corporate structures (FRS 102)

Where a large group reduces in size to become a medium-sized group, there will be reductions in the disclosures required, in the strategic report, Directors report and notes, but in general terms, this is not expected to bring about significant savings in time or cost.

There are likely to be similar savings of 10-15% for those groups, which include subsidiaries moving from medium to small. There may also be potentially a greater willingness to rely upon a “parental company guarantee” for an audit exemption with a small company than a medium-sized company, which could result in audit cost savings, not forgetting that those entities will be subject to audit at the group level.

For those companies that are medium and small but are part of a larger group, the savings become minimal as there will still be a requirement for the collation of the information required for reporting as part of the group and it is simply the reporting in that entity's accounts that is eliminated.

All companies under UK GAAP

Finally, and critically for many companies, this change comes at a time when we are approaching the updates to FRS102 (as from year ends commencing after 1 January 2026), which will bring significant changes to some accounting treatments of leases and revenue recognition for many companies. It is our view that compliance with these changes will be far more time-consuming and costly than the dropping of a few aspects of a strategic report or notes to the financial statements.

Other key factors

The requirements of a business’s key stakeholders should be considered. What are the expectations of shareholders or perhaps funders? With an increasing requirement for transparency in the corporate world, sometimes, greater disclosure should be considered.

An increase in transparency is what has driven a further change in requirements for filings at Companies House, which will soon require every company to disclose its profit and loss account, and therefore, perhaps more explanations will need to be considered by some businesses.

Finally, if a business is dropping down a size category, how long will it take for the business to grow sufficiently back into the size category it was before? The savings for one year may well be swallowed up by having to catch up in the following year.

In conclusion, there are clearly some meaningful changes for that select group of companies that will drop out of audit; for others, the changes will not save costs or time significantly, especially when the new FRS102 regime comes into force and the changes that most UK companies will have to make as a result.

Get in touch

If you would like to know more about how these changes impact your business, please do not hesitate to get in touch.

Get in touch