On 14 October 2024, the Secretary of State for Business and Trade announced an update to the reforms to company law as part of the objective of its plans to cut unnecessary burdens and ‘red tape’ for businesses.
The proposed reforms include:
- streamlining reporting requirements and providing greater clarity within UK legislation, removing requirements for information that is considered to be low value
- uplifting the company size thresholds set out in Companies Act 2006 to reflect historical and future inflation to reduce regulatory burdens on business
- making technical corrections to the audit regulatory framework.
Highlighted issues
Over time, governments and regulators have increased non-financial reporting requirements for companies, primarily in response to stakeholder and investor demand, public policy considerations and EU regulations and directives. The objective of this increased reporting regime has always been to improve transparency and accountability of companies to their members (shareholders) as well as to wider society.
But in some cases, this has led to complexity and an increase in the size of the annual report and duplication across different sections (for example, with information contained in the directors’ report and strategic report). This does not help comparability and there is not enough ‘linkage’ between what is being measured and reported and the actual business strategy and how it is informing that strategy.
In addition, The Statutory Auditors and Third Country Auditors Regulations (SATCAR) 2013 and SATCAR 2016 were both retained in UK law following Brexit.
A number of problems have emerged including:
- References to ‘audit committees’ in the Audit Regulation and SATCAR 2016 are unclear because they are not defined. In addition, other references in the Audit Regulation are outdated following Brexit.
- The Financial Reporting Council’s (FRC) powers to deregister auditors in SATCAR 2013 require clarification because they do not explicitly provide for deregistration in certain circumstances.
- Article 5 of the UK Audit Regulation can result in Public Interest Entities (PIEs) running a less competitive tender process or contribute to the failure of this process to identify a first and second choice for auditor appointment. Article 5 also prohibits certain services that a PIE can obtain from its auditor, and auditors often find they cannot tender for an audit because of minor amounts of non-audit work they have previously provided. SATCAR 2016 does provide an exemption from the application of this prohibition, but it is too limited and inflexible to be of any value.
- The FRC does not have the power to inspect audits by UK auditors of UK traded overseas entities incorporated in third countries with any form of equivalence status.
- The threshold for defining those ‘large debt securities issuers’ that are exempt from the regulatory framework for UK traded overseas companies are outdated and are expressed in € rather than £.
Directors' report
As part of its regulatory reforms, the government plans to remove several requirements from the directors’ report and remuneration report. Existing requirements are as follows:
Existing requirements
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Small companies
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- Names of directors
- If more than 250 employees, company policy on employment, training, career development and promotion of disabled persons
- Directors’ qualifying indemnity provisions
- Political donations
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Medium-sized companies
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- Names of directors
- If more than 250 employees, company policy on employment, training, career development and promotion of disabled persons
- Recommended dividends
- Directors’ qualifying indemnity provisions
- Political donations
- Engagement with employees
- Information on financial instruments
- Information on important events affecting the company
- Information on likely future developments and research and development
- Information on non-UK branches
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Large companies
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- Names of directors
- If more than 250 employees, company policy on employment, training, career development and promotion of disabled persons
- Recommended dividends
- Directors’ qualifying indemnity provisions
- Political donations
- Engagement with employees
- Engagement with suppliers, customers and others
- Information on financial instruments
- Information on events affecting the company
- Information on likely future developments and research and development
- Information on non-UK branches
- Streamlined Energy and Carbon Reporting information
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The following information requirements are planned to be removed from the directors’ report:
- information related to the employment of disabled people
- information on financial instruments
- information on branches
- information on employee engagement
- information on engagement with suppliers, customers and others
- information on important events, future developments and research and development.
Company size thresholds
This is one of the areas that seems to be of most interest to ACCA members in the UK and one which was not covered in the King’s Speech in July 2024, indicating it had been delayed from its initial implementation date of accounting periods commencing on or after 1 October 2024. However, it now appears to be back on the government’s agenda.
The current company size thresholds are:
Company and group size thresholds (net)
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2 out of 3 of:
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Micro
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Small
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Medium
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Large
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Annual turnover (£)
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<632k
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<10.2m
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<36m
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>36m
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Balance sheet total (£)
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<316k
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<5.1m
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<18m
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>18m
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Average number of employees
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<10
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<50
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<250
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>250
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Group size thresholds (gross)
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2 out of 3 of:
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Not
applicable
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Small
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Medium
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Large
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Annual turnover (£)
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<12.2m
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<43.2m
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>43.2m
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Balance sheet total (£)
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<6.1m
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<21.6m
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>21.6m
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Average number of employees
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<50
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<250
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>250
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The government plans to uplift these thresholds by 50% on current levels resulting in the following revised thresholds:
Company and group size thresholds (net)
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2 out of 3 of:
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Micro
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Small
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Medium
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Large
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Annual turnover (£)
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<1m
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<15m
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<54m
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>54m
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Balance sheet total (£)
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<500k
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<7.5m
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<27m
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>27m
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Average number of employees
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<10
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<50
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<250
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>250
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Group size thresholds (gross)
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2 out of 3 of:
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Not
applicable
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Small
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Medium
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Large
|
Annual turnover (£)
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<18m
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<64m
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>64m
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Balance sheet total (£)
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<9m
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<32m
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>32m
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Average number of employees
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<50
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<250
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>250
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Medium-sized companies that are re-classified as small would become eligible to take up audit exemption and would be eligible to prepare financial statements in accordance with FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, including the presentation and disclosure requirements of section 1A Small Entities (if they wish), subject to that regime being appropriate in the company’s specific circumstances.
Audit exemption thresholds
Audit exemption thresholds (which are the same as the small company thresholds) are linked directly to the small company thresholds, so any increase in the small company thresholds will mean the audit exemption thresholds change automatically.
Planned effective date
The Secretary of State for Business and Trade has stated in his announcement on 14 October 2024 that the regulations are planned to come into force on 6 April 2025.
Conclusion
Consideration must also be given to the perception by the entity’s stakeholders of a reduced reporting regime. In particular, companies that automatically contract in size due to the increased size thresholds should consider whether there may be any issues caused with third parties, such as banks and investors, when a medium company becomes reclassified as small and hence can apply a ‘lighter’ disclosure regime when preparing its financial statements. In most cases, this is unlikely to be an issue; but in some, it could well be.
Further guidance on transitional arrangements will follow as the legislative changes are made.