Accountants: How new company size thresholds could impact you

The planned reduction in company size thresholds may be a welcome cut in red tape for small businesses, but for accountants it brings challenges as well as opportunities.

In March 2024, the previous UK government announced a plan to increase the turnover and balance sheet thresholds that determine a company’s size by 50%.

These thresholds determine how much information your clients must disclose in their annual financial statements, and whether they need a statutory audit.

This change should shrink corporate reporting burdens for 132,000 Small and Medium-sized Enterprises (SMEs), and mean thousands no longer need a statutory audit.

For accountants, the changes could reduce workloads but could put pressure on fee income as a result of stripped-back services. However, experts say it also presents opportunities to offer other value-added services.

Let’s delve into the changes and how your accounting firm might respond if the proposed changes come to fruition.

The planned changes for company size thresholds

The Conservative government presented the planned changes as a Brexit win and a simplification for business. Many of the thresholds and requirements came from EU legislation, so are no longer necessary in the UK, it said.

Although, its worth noting that the EU have also implemented a similar measure to help combat the impact of creeping inflation on the thresholds.

However, while the Conservative government were firm in their commitment to the changes, legislation was never laid prior to the general election.

The proposed date for the changes was for accounting periods starting on or after 1st October 2024 (meaning much of the impact wouldn’t have been felt until October 2025 when accountants began preparation of the corresponding statutory accounts), but this now looks unlikely as the new Labour government has yet to comment on their intention regarding the planned changes.

However, industry bodies expect Labour will keep the plans in some form to help ease inflationary impacts on businesses, and offer them some much-needed simplification.

If implemented in their current format, this ACCA table shows the full impact of each change on company sizes, with:

• 5,000 large companies reclassifying as medium
  
• 13,000 medium-sized firms falling into the small companies reporting regime
  
• 113,000 small companies dropping into the micro-entities regime.
  

Impact on accountants

If the changes are implemented, your first task would be to segment your client base to understand who will be impacted, how and when, based on their accounting date.

Once this is understood then you can then start the task of having the appropriate conversations which each impacted client to give them guidance and advice based on their circumstances.

Nigel Sleigh-Johnson, director, audit and corporate reporting at ICAEW, says:

“We anticipate newly appointed ministers will still look at the plans, and may bring a fresh perspective to the issues, including the potential increase in audit exemptions. Firms should advise clients of the expected changes and their options when more clarity is available.

For example, some may advise clients against taking advantage of the micro-reporting regime due to questions about the value of micro accounts. Or they may discuss the pros and cons of retaining a statutory audit where a company becomes exempt.”

Many companies do not take advantage of the exemption because shareholders still require them to audit, for example, or because of the assurance audits offer.

Jo Gibson, a partner at Hurst Accounting, says many of her firm’s clients already fall above the potential new exemption thresholds or volunteer to have an audit—for example, because of private equity owner requirements, owner preference for robust governance, or proving security of supply chains.

However, several clients would fall out of audit scope and discontinue this service under the proposed regime, she says. “For these, we will likely continue to provide non-audit services, such as accounts and tax. So, while overall fees might reduce, the base fee will be retained.”

However, the changes would create an opportunity to replace statutory audits with alternative assurance engagements tailored to the client’s needs, adds Jo. The value small businesses perceive in an audit varies widely.

“Tailoring a business review could allow assurance to focus more on risk areas, and less on low-value or low-risk areas, which isn’t possible in statutory audits,” she says.

“For example, Hurst’s digital transformation team has been prohibited from providing services to audit clients but, under the new thresholds, it could do this for clients opting out of an audit.

“An example is a business set to fall out of scope that has good governance protocols and internal controls. It intends to replace the statutory audit with an alternative in-depth review of efficiencies in IT, systems, processes, and reporting.”

How to respond

Yogesh Dhanak, senior technical advisory manager at ACCA, says offering more advisory services can balance the pressure on fees, and enable you to showcase the value you can add beyond the finance function.

This may include consultancy and broader skills such as non-financial reporting, including around sustainability, he says.

Yogesh recommends reviewing your marketing strategies to identify opportunities to attract new clients. “For example, if an SME no longer requires an audit or falls into the micro reporting regime, it may move to a smaller accountant firm to save costs,” he says. “Look at your business matrix carefully to see which client sizes fit you best.”

Jo recommends segmenting your clients to see which are impacted by new thresholds and which need action. Then target each group with a specific strategy. If your audits and fees are set to fall, you may need to upskill or recruit people with different skills, such in advisory.

Consider reviewing how your alternative assurance services could benefit clients, and how to price them. For example, could you create an “assurance lite” service for clients falling out of audit scope to keep stakeholders happy with some assurance and protect some of your fees?

Use the changes as an opportunity to speak to your clients about what they value in an audit and advise on whether to continue with a voluntary audit or a tailored service.

You could also review businesses where other advisory work has previously been prohibited, as the removal of audit could create an opportunity there.

Final thoughts—planning is critical

Some accounting firms have clearly thought carefully about how they will position themselves for the potential new regime in whatever form it arrives. If you’ve not yet done this, it should be worth looking now at how your firm can respond to the challenges and opportunities.

A cut in red tape is great for your clients, but it may not necessarily mean falling fees for you. There are copious ways to maintain and enhance your relationships with impacted clients. But careful planning is key.