In a move to reduce the UK’s regulatory burden the Government has announced new thresholds for company size classification which subsequently will allow an estimated 132,000 businesses to take audit exemption, if they so choose.

The intention is that these changes would be for years starting on or after 1 October 2024. The changes affect micro, small, medium and therefore large size classifications, however, given the small company threshold drives audit exemption and the removal of the requirement for detailed narrative reporting, this is what we consider below in more detail.

If the new measures are adopted the small company size criteria’s would change as set out in the table below:

To take small company exemptions you need to meet 2 out of the 3 criteria. If you breach in the current year, you can still qualify as small for one further year if you qualified as small in the previous year.

In simple terms, if you classify as a small company then you are likely to be able to take audit exemption. The company size classification rules are more complicated in practice and have some additional considerations as the concept of certain companies being ineligible for small company exemption and heading a non-small group, this is not considered further here.

Whilst the audit exemption and small company exemption are not the same, you do need to be a small company to claim audit exemption. One of the key additional considerations is being part of a group, for instance if you are a small company but owned by a group that is non-small you would need an audit. This is often missed by foreign companies that set up subsidiaries in the UK!

Summary

At the time of writing the rules are draft and will only come into force when the relevant statutory instruments have been made.

Generally any potential easing of regulation is welcome for businesses, however directors will need to decide whether the ability to take audit exemption is desirable commercially. Whilst it may reduce cost there are potential negative impacts such as a loss of scrutiny on the financial statements and the knock-on effect to quality perceived by other stakeholders such as investors, creditors and customers.

If you need any assistance in assessing what size your company will be under the new rules or whether your company will require an audit, please contact us.

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