Business owners, here’s a regulation change that could actually save you time and money!

While changes in company regulations often have little real impact on everyday operations, adjusting company size thresholds and additional changes will benefit many companies. Initially announced by the previous Conservative government, the legislation was never laid before Parliament, and the Labour government is in the process of finalising the legislative adjustments.

Whether seen as a benefit of Brexit or part of the current government’s drive for economic growth, there are potentially significant time and monetary cost savings for many businesses. The bulk of the changes come into law on 6th April 2025, with further adjustments to follow, impacting accounts and financial statements covering accounting periods after that date.

In this article, we will look at the background to the changes, what they mean in practice, and whether they are the start of significant adjustments to company regulations and laws in the UK. Is the government finally taking a proactive approach to helping businesses grow?

Understanding the current company size classifications and changes

Ironically, with personal financial allowances frozen until at least the 2028/29 tax year, not reflecting inflation, one of the principles behind adjusting company size thresholds is to consider inflation. It is important to recognise that while the changes will be very helpful to some companies, the previous thresholds were set in 2013. The circa 50% increase effectively accounts for “lost” inflation and a little extra as we will discuss later.

The company size threshold regulations consider micro, small and medium-sized companies. If a company meets two of the three criteria in two consecutive financial years, it would usually be reclassified.

This is a summary of the before and after scenarios:-

At first glance, it may not be easy to see tangible benefits for companies reclassified under the new legislation. However, this is a broad summary of the reporting requirements of the different classifications:-

• Micro-entities: Reduced financial disclosures and no mandatory audit requirements.
• Small companies: Exempt from statutory audit (unless required under specific conditions), limited financial disclosures compared to medium and large companies.
• Medium-sized companies: Requirement for full financial statements, subject to statutory audit requirements and disclosures, such as employee benefits and related party transactions

It’s important to recognise this is not a free-for-all, not a burning of red tape, simply an adjustment to the thresholds, directly impacting time and money spent on various reporting requirements.

Under current legislation, companies can only be reclassified if they fall under a new threshold for two consecutive financial years. Under the new legislation, if a company falls under a new threshold after the implementation date (6 April 2025), the directors can look back to the previous financial year, where it is likely to qualify – fulfilling the two-year consecutive obligation.

Interestingly, the new legislation will also align LLPs with company thresholds, a move on which the government has been particularly vocal.

Why is the government making these changes?

Even though these changes were in the pipeline before the last general election, although unfulfilled by the previous government, it’s important to recognise the reasons and the benefits for companies and LLPs.

Reduced administrative burdens

Even though we live in a world where digitised services are the norm and efficiency savings are achievable (at least before the last tax rises) for many businesses, any additional reduction in the administrative burden can only benefit long-term company growth. Consequently, more companies will fall under lower classifications, reducing the reporting burden and the need to file full financial reports. Audit exemptions will remain available to many smaller businesses to further reduce compliance costs.

Encouraging business growth

As an SME entrepreneur, it is essential to be able to focus on the business rather than spend excessive time on enhanced regulatory and reporting burdens. These changes will allow SMEs to scale without immediate exposure to costly compliance regulations and time away from the real focus of building a business. There is also the opportunity to focus on long-term investment in the business and hiring personnel without exceeding the various thresholds.

Aligning with international standards

While the UK may have left the European Union (at least for now), it’s important to recognise the role of international investors and markets. Similar adjustments announced by the EU have brought UK regulations closer to European and IFRS standards. So, this enhances competitiveness and makes UK businesses more attractive to international investors, now able to consider investments on a like-for-like regulatory basis.

Reflecting inflation and economic growth

While we touched on the subject of a “catch-up” with inflation since the threshold was introduced in 2013, the government has been a little more generous than you might expect. According to the Bank of England’s inflation calculator, between January 2013 and January 2025, goods and services increased by 37.44%. The additional “benefit”, over and above inflation, is likely to have come from an appreciation of economic growth over that time rather than simple inflationary distortions.

Implications for businesses

In summary, there are several benefits and challenges for different-sized businesses, such as:-

Micro-entities

Benefits: Increased turnover threshold means more businesses qualify as micro-entities, benefiting from simplified reporting. These changes will result in lower compliance costs and less regulatory oversight.

Challenges: Even though the thresholds are changing, growing businesses will still need to monitor the new limits and try to make plans for future regulatory and financial reporting obligations.

Smaller companies

Benefits: Higher turnover and asset limits mean more companies could remain in the small company category, avoiding audits and complex disclosures.

Challenges: A potential reclassification to a medium-sized operation as the company grows is positive from a business aspect but brings with it more financial and regulatory obligations.

Medium-sized companies

Benefits: Under the new legislation, fewer companies will be classified as medium-sized, reducing compliance burdens. There will also be less need for detailed public disclosures, enhancing financial privacy.

Challenges: Those companies just over the new threshold will need to make plans for audit obligations and increased reporting requirements.

To put this into perspective, under the new legislation, it is forecasted that:-

• 113,000 companies and LLPs will move from the small to micro-entity category
• 14,000 companies will move from medium-sized to small
• 6000 companies will move from large to medium-sized

As you would expect, as companies move lower down the threshold criteria, their obligations, both in terms of time and money, are reduced.

Action steps for compliance

While many companies will already have assessed the implications of the threshold changes, it’s crucial to have a plan of action in place. In simple terms, company directors will need to:-

Assess the company’s status

This will include a review of turnover, balance sheet totals and employment counts, comparing and contrasting against the new thresholds. Whether moving up or down the ladder, evaluating the financial impact and allocating the required resources is essential.

Update reporting processes

For those moving between thresholds, there is a need to adjust internal processes, such as accounting software, to align with new financial disclosure rules. Ensuring internal finance teams are trained on updated reporting requirements is also important.

Consult your financial adviser

On the surface, the structural changes are relatively simple, but in practice, many businesses will have pros and cons to consider. Consequently, engaging with your accountant, auditor, and legal advisers as soon as possible is vital to assess the new regulatory framework.

Communicate with stakeholders

Even though most employees may not see any significant changes in their day-to-day activities, it’s important to keep investors, lenders and employees in the loop about a potential reclassification. There may also be paperwork to update, such as contracts and agreements where financial/regulatory obligations may have changed.

UK Company Size Thresholds – Conclusion

The UK’s corporate reporting landscape is evolving, benefiting small and medium-sized businesses. Those who act early and adapt will be best positioned to capitalise on reduced administrative burdens, enabling them to focus on growth, investment, and expansion. The key is understanding where your company fits into the new structure and planning accordingly.

Therefore, engaging with your accountant and financial adviser as soon as possible is important to ensure you are aware and business-ready for the future. Our team of experienced advisers is ready to talk you through the changes, assess your situation and the potential impact. Please contact us at your convenience, and we can discuss your situation in more detail.