Rishi Sunak recently announced an increase in the UK small company (and consequently audit requirement) thresholds for Turnover and Gross Assets of 50%.
These changes are intended to modernise the UK's corporate reporting system, reduce administrative burdens, and support businesses, particularly small and medium-sized enterprises (SMEs), in their reporting obligations, and for some will represent welcome news.
We outline the changes and potential benefits (and consequences) below:
Planned threshold changes
Predicted impact and benefits for SMEs
It is estimated that, following the changes, around 132,000 SMEs will no longer be required to have an audit. These changes will also result in simplified financial reporting requirements for these businesses. The benefits of these changes are expected to include; saving time, saving resource and freeing up funds usually allocated to an audit process, which can then be redirected to developing other areas of the business, and supporting growth.
Around 5,000 large companies will be reclassified as medium-sized, enabling more balanced and appropriate reporting. 13,000 medium-sized businesses could drop into the small-sized business classification. The benefits to these businesses could include audit exemption and simplified reporting. Another 113,000 small-sized businesses will fall into the micro entity classification, where even further simplified reporting options exist.
Reduced transparency
The changes could however also present different challenges for businesses. The removal of an audit and reduced transparency through financial reporting could well harm confidence among stakeholders including investors and lenders. SMEs can still opt for voluntary audits to counteract this, though the maintenance of audit costs should be weighed carefully against the less tangible benefits of having increased surety over financial health and stakeholder confidence.
Further proposals
There are further consultations planned by the government later in the year, regarding potential changes including:
- removal of low-value, obsolete, or overlapping requirements from the Directors' Report and Directors' Remuneration Report
- making it easier for companies to issue digital annual reports
- addressing technical issues in the audit regulatory framework
- amendment of the definition of a medium-sized company for company reporting
- increasing the threshold on the maximum number of employees from 250 to 500
- providing exemptions for medium-sized companies from including a strategic report in the annual report
- exempting smaller public interest entities from audit tendering and rotation requirements.
Next steps for SMEs
These changes are intended to take effect for periods commencing on or after 1 October 2024. If you have any further questions regarding the impact of the changes on your business or whether you require an audit for this financial year or the next, you can contact UHY East’s Audit Partner; James Price, by email j.price@uhy-uk.com or by calling 01462 687333. Alternatively, you can get in touch with your usual UHY advisor and one of our audit team will be able to advise you.
