UK company size thresholds have increased

The turnover thresholds are adjusted pro-rata where the accounting period is not 12 months. The rules include a ‘year of grace’, and so a company will generally be deemed to meet the size threshold for a financial year unless failing the 2 out of 3 tests above for two consecutive years. The new legislation includes a transitional provision for the application of the ‘two-year consecutive rule’, which enables companies to benefit from the threshold uplift as soon as possible. When determining company size for a financial year beginning on or after 6 April 2025, this provision allows a company to assume that the new thresholds were applicable in the previous financial year.

In the case of a group, the figures to use for the ‘gross’ thresholds are simply the aggregate of the balances within all the individual company accounts before removing any intra-group transactions and balances. The ‘net’ thresholds are based upon the consolidated accounts after removing all intra-group transactions and balances. A group can choose to use a combination of net and gross figures for the test.

Additional points to consider

• Most companies (and groups) qualifying as ‘small’ will not require an audit, but there are some exemptions. For example, a company that is part of a medium or large-sized group would, irrespective of its size, always require an audit, as the group test for audit exemption applies to the largest group that the company belongs to, and there would be no ‘year of grace’.
• There may be situations where a company chooses not to opt for the audit exemption, for example, if this would only remove one year from the audit or if there were plans to sell. 
• If looking to dispense with an audit, companies need to review the terms of any lending and also their articles of association. In addition, shareholders with 10% or more of shares can require an audit.
• While the increase in monetary thresholds will be welcomed by many, in some cases the benefits will be short-lived. The new FRS 102, due to apply for accounting periods commencing on or after 1 January 2026, will mean an increase in the total assets measure for companies with significant operating leases, as both the value of the assets and corresponding liabilities will need to be reflected in the balance sheet. Further details of these changes can be found here.

In addition to introducing changes in company size thresholds, the legislation also introduces simplification of the directors’ report, removing the need to provide information on financial instruments, overseas branches, employment of disabled people, employee engagement, engagement with suppliers and customers, research and development, post-year-end important events and future developments.

Action to take

There may be proactive action that can be taken to benefit from the increase in thresholds. This could include changing your company’s year-end or actively reducing assets before a year-end, but seeking advice is essential to discuss the best approach for your organisation. Please speak to your usual Crowe contact for guidance or submit an enquiry, and a member of the Crowe team will be in touch.