Regulations were laid before Parliament on 10 December 2024 which initiate the Government’s plans to improve the UK’s non-financial reporting framework. The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 (the “Regulations”), which will come into force on 6 April 2025, follow responses to the Call for Evidence on the perceived costs and benefits of the existing framework as part of the Non-Financial Reporting Review launched in May 2023 (Smarter regulation non-financial reporting review: call for evidence - GOV.UK).

Whilst 80% of respondents said that existing non-financial reporting was useful to an extent, the feedback was clear that it is complex and would benefit from simplification. The comments also focused on the shortcomings of Directors’ Reports (principally the inclusion of irrelevant or repetitive information), with some respondents even suggesting that it should be abolished in its entirely.

The Regulations therefore look to address these points and will reduce the non-financial reporting burden on companies by:

1. amending the thresholds in the turnover and balance sheet tests which help to decide on the size of a company so that fewer companies are classified as “medium-sized” or “large” and have the reporting obligations associated with those classifications; and
2. decreasing the number of disclosures required in the Directors’ Report to eliminate duplication with other reporting requirements and remove information of limited value to investors.

Increasing financial thresholds in the definition of a company’s size

The three criteria for determining the size of a company in this context are (1) annual turnover, (2) balance sheet total and (3) number of employees. A company or group must not exceed two of the three thresholds for each size classification.

The new limits are summarised in the table below and reflect an approximately 50% increase to the existing thresholds. Prior to this legislation, these thresholds had not been reviewed since 2013 and so the adjustments aim to take account of inflation during that period and ensure the thresholds are fit for purpose for the foreseeable future.

To allow companies and LLPs to benefit from these adjustments as soon as possible after 6 April 2025, there is a transitional provision which allows them to treat these amendments as applying to previous financial years when they look back to consider the qualification of their size.

Note: the Regulations don’t change the thresholds under the streamlined energy and carbon reporting (“SECR”) regime. Accordingly, qualifying as an unquoted company or LLP required to comply with SECR requirements will no longer be aligned with qualifying as an unquoted large company or LLP under the Companies Act 2006 or the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008.

Changes to the Directors’ Report requirements

Under s. 415 of the Companies Act 2006, it is generally medium-sized and large companies who are required to prepare a Directors’ Report each year. Following the feedback in 2023, the Regulations aim to ensure that the Directors’ Report includes relevant, useful information, which is not repeated elsewhere. Accordingly, the Regulations remove the requirements to make disclosures about the following information:

1. financial instruments;
2. important events which have occurred since the end of the financial year;
3. likely future developments;
4. research and development;
5. branches;
6. the employment of disabled people;
7. engagement with employees; and
8. engagement with customers and suppliers.

The Government anticipates that these changes will mean that approximately 113,00 companies and LLPs will move from the small to micro-entity category, 14,000 will move from the medium-sized to the small category and 6,000 will move from the large to the medium-sized category. The Government also estimates that the net benefit to business of the reduction of this regulatory burden will be £240.2m. (2019 prices) per year. (The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024). 

If the Regulations are as far-reaching as anticipated, they will be a very welcome start to the Government’s reform of the non-financial reporting regime and we will eagerly anticipate the consultation on updating shareholder communication and the law in relation to virtual AGMs next year.

Further information

If you would like to discuss this update and what it means for your business, please contact Nick Graves.