Accountants: How new company size limits could affect you

The planned reduction in company size limits may be a welcome reduction in bureau­cracy for small businesses, but for accoun­tants it presents both challenges and oppor­tu­nities.

In March 2024, the previous British government announced a plan to do this Increase in sales and balance sheet thresholds that determine company size by 50%.

These thresholds determine how much infor­mation your clients must disclose in their financial state­ments and whether they require a legal audit.

This change should reduce the reporting burden for 132,000 small and medium-sized enter­prises (SMEs) and result in thousands no longer needing audits.

For accoun­tants, the changes could ease workloads but could put pressure on fee income due to reduced services. But experts say it also presents oppor­tu­nities to offer other value-added services.

Let’s take a closer look at the changes and how your accounting firm might respond if the proposed changes come into effect.

The planned changes to company size limits

The Conser­v­ative government presented the planned changes as a Brexit victory and simpli­fi­cation for the economy. Many of the thresholds and require­ments came from EU legis­lation and are therefore no longer required in the UK, it said.

However, it is worth noting that the EU has also intro­duced a similar measure to combat the impact of creeping inflation on thresholds.

But although the Conser­v­ative government remained firm in its commitment to the changes, no law was ever passed before the general election.

The proposed date for the changes applied to accounting periods beginning on or after October 1, 2024 (meaning that much of the impact would not have been felt until October 2025, when accoun­tants began preparing the relevant statutory accounts) , but this now seems unlikely as the new Labor government has not yet commented on its inten­tions regarding the proposed changes.

However, industry groups expect Labor will maintain the plans in some form to mitigate the infla­tionary impact on businesses and provide them with much-needed simpli­fi­cation.

When imple­mented in its current format, this is ACCA Table shows the full impact of each change on company size, with:

• 5,000 large companies classify themselves as medium
• 13,000 medium-sized companies are subject to the reporting requirement for small businesses
• 113,000 small businesses fall under the micro-enter­prise regime.

Impact on accountants

When the changes are imple­mented, your first task is to segment your customer base to under­stand who will be affected, how and when, based on invoice date.

Once this is under­stood, you can begin the task of having the appro­priate conver­sa­tions relevant to each individual customer to provide them with guidance and advice based on their circum­stances.

Nigel Sleigh-Johnson, Director of Audit and Corporate Reporting at ICAEW, says:

“We expect newly appointed ministers to continue to review the plans and poten­tially bring a new perspective to the issues, including the possible extension of exam exemp­tions. Companies should inform their customers about the expected changes and their options as soon as there is more clarity.

For example, some clients may advise against using the micro reporting system because they have questions about the value of micro accounts. Or they discuss the pros and cons of maintaining an audit if a company is exempt from it.”

Many companies do not make use of the exemption because, for example, the share­holders continue to demand an audit or because audits are offered.

Jo Gibson, partner at Hurst Accounting, says many of her firm’s clients are already exceeding the potential new exemption thresholds or volun­teering to be audited — for example, due to require­ments for private equity owners, owners’ preference for sound corporate gover­nance or proof of the security of supply chains.

However, several clients would fall out of the auditing scope and discon­tinue that service under the proposed rule, she said. “For these, we will likely continue to offer non-audit services such as accounting and tax. Even if the overall fees could go down, the basic fee will remain the same.”

However, the changes would provide the oppor­tunity to replace statutory audits with alter­native audit engage­ments tailored to the client’s needs, Jo adds. The value that small businesses place on an audit varies greatly.

“A tailored business audit could allow the audit to focus more on risk areas and less on low-value or low-risk areas, which is not possible with mandatory audits,” she says.

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

“An example is a company that will be out of scope and has good gover­nance protocols and internal controls in place. The aim is to replace the statutory audit with an alter­native in-depth audit of the efficiency of IT, systems, processes and reporting.”

This is how you react

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

This can include advice and broader skills such as non-financial reporting, including in the area of ​​sustain­ability, he says.

Yogesh recom­mends reviewing your marketing strategies to identify oppor­tu­nities to attract new customers. “For example, if an SME no longer needs an audit or falls into the micro-reporting system, it may switch to a smaller accounting firm to save costs,” he says. “Look carefully at your business matrix to determine which customer sizes suit you best.”

Jo recom­mends segmenting your customers to see which are affected by the new thresholds and which require action. Then approach each group with a specific strategy. If your exams and fees are expected to drop, you may need to train or hire people with other skills, such as consulting.

Consider how your alter­native insurance services could benefit your customers and how you can price them. For example, could you create an “Assurance Lite” service for customers who fall outside the audit scope to provide some peace of mind to stake­holders and protect some of your fees?

Use the changes as an oppor­tunity to talk to your customers about what they value in an audit and advise you on whether you should move forward with a voluntary audit or a tailored service.

They could also review companies where other consulting activ­ities were previ­ously banned, as elimi­nating the audit could create an oppor­tunity there.

Final Thoughts – Planning is key

Some accounting firms have clearly thought carefully about how they want to position themselves vis-à-vis the potential new regime, whatever form it takes. If you haven’t already, it’s worth consid­ering now how your business can respond to the challenges and oppor­tu­nities.

Reducing bureau­cracy is good for your customers, but it doesn’t neces­sarily mean lower fees for you. There are numerous ways to maintain and improve your relation­ships with affected customers. But careful planning is key.