Government to streamline non-financial reporting and increase company size threshold

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. 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. Feedback to the consultation supported reform and the government will now move to prepare secondary legislation to implement the changes.

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.

The proposals will also make changes to directors’ remuneration reporting to remove certain EU-driven requirements which had been introduced as part of the implementation of the EU Shareholder Rights Directive, but in practice these changes will only affect quoted companies (and unquoted traded companies).

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. Micro-entities can adopt a separate standard (FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime) which is simplified even further in terms of recognition and measurement as well as disclosure.

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.

Outside the annual report large companies are required to report half-yearly on supplier payment practices, payment policies and payment performance. The increase in thresholds will therefore allow certain companies to dispense with this reporting.

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 Anna Hicks.