Open consultation

Non-financial reporting review: simpler corporate reporting

Published 16 May 2024

Foreword

Kevin Hollinrake MP – Minister of State

Small and medium-sized businesses (SMEs) are the lifeblood of our local communities and drive the UK’s economy. That is why this government made 2024 the year of the SME, and why the government is prioritising SMEs in its review of non-financial reporting.

On 18 March 2024, the Prime Minister announced the first set of changes we intend to make as part of our commitment to make the non-financial reporting framework smarter, simpler and better for business. Those changes focus on reducing regulation on small and medium-sized companies, ensuring that reporting requirements are proportionate so that those companies can focus on their growth and delivering for their customers.

We received a significant amount of stakeholder feedback during our call for evidence on reducing reporting burdens on medium-sized companies. I am pleased that we are now launching this consultation on 2 additional proposals that could reduce the burden of reporting on medium-sized companies even further.

The first proposal is to exempt medium-sized companies from producing a Strategic Report. The second proposal is to further amend the definition of a medium-sized company for corporate reporting so that the threshold for the maximum number of employees is increased from 250 to 500, aligning the employee threshold to a level that reflects what the government considers to be a medium-sized business.

These are proposals that the government intends to take forward in this Parliament, subject to the views of stakeholders in response to this consultation. I welcome views and evidence from stakeholders to inform the government’s final decision on whether to proceed.

We know that there is a lot that can be done to simplify the reporting landscape for the largest companies too, and the government will bring forward ambitious proposals to do so in due course.

Kevin Hollinrake MP

Minister of State, Department for Business and Trade

General information

Why we are consulting

This document sets out measures aimed at improving corporate reporting by reducing burdens on medium-sized companies. The government is seeking views on whether it should proceed with the proposals set out in this document. This includes looking for evidence on their likely impact. Your contribution would be much appreciated.

Consultation details

Issued:

16 May 2024

Respond by:  

27 June 2024

Enquiries to:

nfr.review@businessandtrade.gov.uk  

Consultation reference:

Simpler corporate reporting: a consultation on raising the employee threshold for medium-sized companies to 500 employees and exempting medium-sized companies from producing a Strategic Report.

Audiences:

The consultation is open to everyone with an interest in this area. In particular, we are keen to hear from:

• companies and other preparers of accounts
• investors
• asset owners
• other users of financial and non-financial reporting by businesses
• business stakeholders
• audit firms and auditors
• professional associations and representative bodies

Territorial extent:

UK government is responsible for the operation and regulation of business entities across Great Britain. Previously, the Northern Ireland administration has agreed that, while the operation and regulation of business entities remains a transferred matter within the legislative competence of the Northern Ireland Assembly, amendments to the Companies Act 2006 and legislation regulating business entities should be made in the same terms for the whole of the United Kingdom. As such, proposals set out in the consultation may apply across the whole of the UK.

How to respond

Respond online at: https://ditresearch.eu.qualtrics.com/jfe/form/SV_2ocaRod5X8Wdl6C

or

Email to: nfr.review@businessandtrade.gov.uk

When responding, please state whether you are responding as an individual or representing the views of an organisation.

Your response will be most useful if it is framed in direct response to the questions posed, though further comments and evidence are also welcome.

We prefer electronic submission of your response. To help us analyse your response, we would be grateful if you could provide it in a format that can be read and searched by common word-processing software and that allows copying and pasting into another document. Please avoid sending images or Portable Document Format (.pdf) files.

Confidentiality and data protection

Information you provide in response to this consultation, including personal information, may be disclosed in accordance with UK legislation (the Freedom of Information Act 2000, the Data Protection Act 2018, and the Environmental Information Regulations 2004).

We will process your personal data in accordance with all applicable data protection laws. See our privacy policy.

The Department for Business and Trade (DBT) has been supported by the Financial Reporting Council (FRC), the UK regulator for corporate governance, reporting and audit, during the non-financial reporting (NFR) review. The FRC were provided access to responses to the non-financial reporting review’s call for evidence that was held between 24 May and 16 August 2023. Responses to this consultation will also be shared with the FRC. If you do not want some or all of your response to be shared with the FRC, please tell us and, if you would prefer to do so, provide a clearly labelled redacted version of your response to be shared with the FRC.

The FRC will process the responses shared with it in order to offer feedback to the government but will keep those responses confidential (disclosing them only as required by UK legislation and processing personal data in accordance with all applicable data protection laws).

If you want the information that you provide to be treated as confidential, please tell us, but be aware that we cannot guarantee confidentiality in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not be regarded by us as a confidentiality request.

The government may choose to publish the content of responses in full on GOV.UK, other than those where confidentiality has been requested. Otherwise, we will summarise all responses and publish this summary on GOV.UK. The summary would include a list of names of organisations that responded, but not people’s personal names, addresses or other contact details.

Quality assurance

This consultation has been carried out in accordance with the government’s consultation principles.

If you have any complaints about the way this consultation has been conducted, please email: BRF@businessandtrade.gov.uk.

Introduction

On 18 March 2024, the Prime Minister announced a package of deregulatory measures to simplify financial and non-financial reporting requirements for UK companies. This package will save businesses across the UK around £150 million per year. The government also committed to consulting later in the year on further proposals to reduce the reporting burden on medium-sized companies.

This consultation covers proposals to:

• uplift the medium-sized company employee threshold from up to 250 employees to up to 500
• exempt medium-sized companies from the requirement to produce a Strategic Report

This aligns with the commitment government made in October 2022, as part of the Better Regulation framework, to consider companies with up to 500 employees as SMEs when introducing new regulations.

Small and medium-sized companies are the bedrock of our economy. Government is committed to supporting businesspeople across the country by ensuring that reporting requirements are proportionate and appropriate to company size.

Context – uplifting the monetary threshold and removing some reporting requirements

The UK’s system of corporate reporting is based on 4 size-based ‘tiers’:

• micro-entities
• small companies
• medium-sized companies
• large companies

This document refers to these as “micro”, “small”, “medium” and “large” tiers for brevity. These are defined in Part 15 of the Companies Act 2006; large companies are those entities which are not a micro-entity or a small or medium-sized company.

In March 2024, government announced plans to uplift the monetary company size thresholds in legislation in Summer 2024. Brexit has restored the government’s ability to review and uplift these thresholds to a level that accounts for inflation and goes further to reduce the reporting burden on companies.

Recent inflation has resulted in many companies no longer meeting the thresholds for micro-entities, small and medium-sized companies, resulting in them moving into a more burdensome reporting regime. This problem of ‘drift’, where some companies report more because of inflation rather than because of any significant change in their business, takes time and resource away from productive work that is not justified by the objectives of the reporting. The government will correct this in regulations this Summer.

The new tiered monetary thresholds (with the employee size thresholds as they stand before the changes proposed in this consultation) will be as follows:

Table 1: individual companies and groups calculating on a net basis

2 of 3 out of:	Micro	Small	Medium	Large
Annual turnover (£)	not more than 1 million	not more than 15 million	not more than 54 million	54 million+
Balance sheet total (£)	not more than 500,000	not more than 7.5 million	not more than 27 million	27 million+
Average number of employees	not more than 10	not more than 50	not more than 250	250+

Table 2: groups calculating on a gross basis

2 of 3 out of:	Small	Medium	Large
Aggregate annual turnover (£)	not more than 18 million	not more than 64 million	64 million+
Aggregate balance sheet total (£)	not more than 9 million	not more than 32 million	32 million+
Aggregate average number of employees	not more than 50	not more than 250	250+

This will result in the following changes to the numbers of UK companies sitting within the new company size thresholds:

Table 3: estimated number of companies following the 50% uplift of the monetary company size thresholds with adjustments for reporting regime eligibility ^{[footnote 1]} (to the nearest 1,000)

Effective company size [footnote 2]	By current size criteria	With 50% uplift in monetary criteria	Net change in size-band [footnote 3]
Micro	3,168,000	3,281,000	+ 113,000
Small	381,000	281,000	- 100,000
Medium	49,000	40,000	- 9,000
Large [footnote 4]	104,000	99,000	- 5,000

The Non-financial reporting review: impact assessment published on 18 March 2024 estimated that the monetary uplift would save business around £150 million per year (2019 prices). It estimated that 132,000 businesses would benefit from the changes.

5,000 large companies will be reclassified as medium-sized companies and access more proportionate reporting, 14,000 medium-sized companies would be reclassified as small companies, and 113,000 small companies would be reclassified as micro-sized companies which will allow them to file simpler accounts.

Approximately £145 million of the £150 million deregulatory saving is expected to accrue to SMEs. A typical small company that takes advantages of the benefits of these changes could be expected to save around 10 hours of reporting and accountancy time a year.

The March 2024 announcement also included changes the government intends to make to the information required in the Directors’ Report, which will be delivered as part of the package of regulations this summer.

The annex sets out the expected base reporting requirements for medium-sized and large companies following these changes. The requirements listed as applicable to large companies are additional to those applicable to medium-sized companies.

Some companies may also have to comply with other reporting requirements where they meet separate thresholds dependent on their status as well as their size, such as requirements for quoted companies or requirements for public interest entities with more than 500 employees.

The government does not propose to change the threshold for Streamlined Energy and Carbon reporting before it has undertaken a full analysis of how this would impact carbon budgets, therefore that threshold is listed separately.

The following reporting requirements are expected to be removed from the Directors’ Report, for all companies, via legislation to be brought forward in Summer 2024:

• the use of financial instruments
• important events affecting the company since the end of the financial year
• likely future developments in the business of the company
• the research and development (R&D) activities of the company
• branches of the company outside the UK
• employment of disabled persons
• engagement with employees and engagement with suppliers and customers

The medium-sized company employee threshold

Issue

Currently, almost half of UK businesses consider regulation to be an obstacle to their success^{[footnote 5]}. The government is committed to ensuring that reporting is proportionate and appropriate to the size of the company. One way to reduce the regulatory burden on companies is to amend the scope of the company size definitions that determine the volume and type of reporting requirements a company must abide by. The benefit of Brexit means that the UK is now able to set our own definitions when it comes to the size thresholds for companies.

Having announced the uplift of the monetary elements of the company size thresholds in March 2024, the government is now considering whether it should also amend the final element of the size threshold criteria – the aggregate average number of employees.

The government has made clear that when a company becomes an employer of a significant number of people, it should be considered large. For the purposes of the Better Regulation framework, which outlines the government’s approach to proportionate, smart and evidenced regulation-making, a business with between 50 to 499 employees is considered a medium-sized business.

The guidance accompanying the Better Regulation framework^{[footnote 6]} sets out that medium companies should be exempted from new regulation, unless there is a specific reason for them to be included.

Some businesses in sectors that tend to have high numbers of casual or part-time employees, such as in the hospitality sector, have expressed to the government that the current employee threshold is an issue for them when it comes to corporate reporting.

A 500-employee threshold would also align to the employee threshold at which companies can claim Enhanced Relief for R&D Intensive SMEs.

We have an opportunity to align the Companies Act employee threshold to the one established through the Better Regulation framework, so that the criteria that companies use to determine their size reflects the government’s wider position. The government is therefore seeking views on raising the medium-sized company employee threshold to up to 500.

The government is considering the employee threshold separately from the monetary thresholds, given that inflation has not affected the employee threshold in the same way.

The government already received clear feedback from stakeholders in response to the call for evidence that the monetary thresholds should be raised, but further views from stakeholders would be useful in determining whether to proceed with this specific proposal to increase the employee threshold as well.

Policy intention

Subject to evidence and responses provided in response to this consultation, the government intends to raise the medium-sized company employee threshold from the current 250 employee limit to up to 500 employees.

The combined expected changes to the monetary elements of the company size thresholds and the proposed uplift to the number of employees for medium-sized companies would result in the following thresholds:

Table 4: individual companies and groups calculating on a net basis

2 of 3 out of:	Micro	Small	Medium	Large
Annual turnover (£)	not more than 1 million	not more than 15 million	not more than 54 million	54 million+
Balance sheet total (£)	not more than 500,000	not more than 7.5 million	not more than 27 million	27 million+
Average number of employees	not more than 10	not more than 50	not more than 500 (increased from ‘not more than’ 250)	500+ (increased from 250+)

Table 5: groups calculating on a gross basis

2 of 3 out of:	Small	Medium	Large
Aggregate annual turnover (£)	not more than 18 million	not more than 64 million	64 million+
Aggregate balance sheet total (£)	not more than 9 million	not more than 32 million	32 million+
Aggregate average number of employees	not more than 50	not more than 500 (increased from ‘not more than 250’)	500+ (increased from 250+)

Uplifting the medium-sized company employee threshold from up to 250 to up to 500 employees will mean around 2,000^{[footnote 7]} more large companies are categorised as medium-sized on top of the number re-classified with the 50% uplift in monetary criteria only.

By broadening the population of medium-sized companies, the intention is to allow more companies to refocus their resources away from regulatory compliance and on to growth and economic output.

The changes announced and the proposed change to the employee threshold will not directly affect thresholds which are set in legislation other than the Companies Act. The government will consider whether any amendment to other thresholds is appropriate in due course where appropriate.

Exempting medium-sized private companies from producing a Strategic Report

Issue

All medium-sized companies are currently required to provide some basic disclosures in a Strategic Report. These are:

• a fair review of the company’s business
• a balanced and comprehensive analysis of the company’s development, performance in the year, and its position at the end of the year
• a description of the principal risks and uncertainties facing the company.
• an analysis using financial key performance indicators

Responses to the Call for Evidence (May to August 2023) suggested that there were too many disclosures and reporting requirements on medium companies and that these were too burdensome.

The government has listened to the concerns that the requirements on medium-sized companies are too burdensome and recognises that a significant part of the current reporting burden is in the production of a Strategic Report. It therefore proposes exempting medium-sized companies from being required to produce a Strategic Report, reducing the overall reporting burden, and allowing these companies to better focus their time and resources on delivering for their customers.

Policy intention

The government proposes exempting medium-sized companies from having to prepare and publish a Strategic Report.

There are existing ineligibility criteria in the Act which mean that in practice, this exemption would only apply to medium-sized private companies, public companies and public interest entities would not be able to take advantage of such an exemption.

Companies that would be classed as medium-sized companies except for the fact that they are part of an ineligible group would be able to benefit from the exemption. Directors of the parent company of an ineligible group would be responsible for preparing a consolidated Strategic Report for the group.

The government plans to consider the ineligibility criteria more widely, and whether they should be amended, in the future.

This could benefit between 41,000 and 43,000 companies, depending on whether the government chooses to proceed with its proposed uplift to the medium-sized company employee threshold to 500 employees. The government’s previous analysis suggests that this could save medium companies around £150 million if all medium companies took advantage of the exemptions.^{[footnote 8]}

The Strategic Report provides potentially important context for the financial statements, and a review of the company’s risks and uncertainties. However, investors have reported that they do not make significant use of this information for medium-sized private companies in order to justify the costs of its production.

Feedback the government has received so far indicates that the shareholders of private medium-sized companies are often close to the business (such as family, friends, or sophisticated outside investors who enjoy a direct relationship with company management) and may therefore get limited benefit from the Strategic Report.

The government proposes exempting medium-sized private companies from having to prepare a Strategic Report but would welcome evidence as to any unidentified costs and benefits of doing so before it makes a final decision.

Consultation questions

1. Do you agree or disagree with the uplift of the employee threshold from 250 to 500 employees for ‘medium-sized’ companies? Please explain your answer.

2. Do you agree or disagree with exempting medium-sized private companies from having to prepare a Strategic Report?  Please explain your answer.

3. Please provide any evidence you have regarding the usefulness of the information medium-sized private companies provide to their shareholders or other stakeholders in their Strategic Reports.

Annex

Summary of current financial and corporate reporting requirements for medium-sized and large companies

Medium companies

Full accounts:

Medium-sized companies can prepare their accounts under UK GAAP (generally accepted accounting principles) using the reporting requirements of Financial Reporting Standard (FRS) 102, FRS 101 or, where applicable, FRS 103. Use of international financial reporting standards (IFRS) is also permitted. Medium-sized companies are exempt from disclosing some detailed information relating to fees for non-audit services.

Directors’ Report:

In addition to the requirements for micro-entities and small-sized companies, medium-sized companies are required to disclose the following information in their Directors’ Report:

• directors’ names, approval and signing
• qualifying indemnity provisions
• statement on disclosures provided to auditors
• political donations and expenditure, if in excess of £2,000 (on aggregate) in the UK and the total amount of all non-UK political donations
• recommended dividends

Streamlined energy and carbon reporting (SECR):

Companies are required to disclose their greenhouse gas emissions in accordance with the SECR reporting requirements if they meet 2 or more of the following criteria:

• turnover (or gross income) of £36 million or more
• balance sheet total of £18 million or more
• 250 employees or more
• energy use in the UK is more than 40,000 kWh

Strategic Report:

Medium-sized companies are required to disclose the following information in their Strategic Report:

• fair review of the company’s business, principal risks and uncertainties facing the business
• analysis of development performance of business and position at end of financial year
• analysis using financial key performance indicators (KPIs)
• approval and signing
• explanation of amounts in the annual accounts

Other requirements:

If a medium-sized company is the parent company of a group, a Group Strategic Report is required.

Some Directors’ Remuneration Disclosures, including disclosure of the pay of the highest paid Director (if the combined pay of all the directors is over £200,000) is also required of medium-sized companies.

For medium-sized companies, an audit is generally required (some subsidiaries may qualify for the subsidiary audit exemption).

Large companies

Large companies are those which either exceed the thresholds to be a medium-sized company or are ineligible to use the regimes for smaller companies.

Full accounts:

Large companies can prepare their accounts under UK GAAP (generally accepted accounting principles) using the reporting requirements of Financial Reporting Standard (FRS) 102, FRS 101 or, where applicable, FRS 103. Use of international financial reporting standards (IFRS) is also permitted.

Prompt payment:

Large companies are required to report on their payment practices and performance.

Strategic Report:

In addition to the requirements on medium-sized companies, large companies must also disclose:

• non-financial KPIs (including information on environmental and employee matters) (Strategic Report)
• section 172 (1) statement describing how the directors have had regard to the matters in section 172(1) when fulfilling their section 172 duty

Section 172 is the duty of a director to promote the success of the company for the benefit of its members as a whole and in doing so have regard (amongst other matters) to:

• the likely consequences of any decision in the long term
• the interests of the company’s employees
• the need to foster the company’s business relationships with suppliers, customers and others
• the impact of the company’s operations on the community and the environment
• the desirability of the company maintaining a reputation for high standards of business conduct
• the need to act fairly as between members of the company

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1. Micro, small and medium-sized companies that are ineligible for reporting under the size- appropriate regimes on the basis of criteria set out in s384,384B and s467 of CA 2006 are added to the count of large companies as they would be required to file full accounts, subject to a full audit.        ↩

2. Effective size is based on reporting eligibility. Company types covered are private, public, limited by guarantee and unlimited. Limited Liability Partnerships (LLPs) are also included. ↩

3. Net change after accounting for companies entering the size band from the size above. For example, 5,000 large companies would be re-classified as medium and 14,000 medium companies would be re-classified as small. The net change in the number of companies in the medium size band is 9,000. ↩

4. Based on the current sizing criteria only, there are around 26,000 large companies. This falls to around 20,000 companies with a 50% uplift in the monetary size criteria. The figures shown in the table are larger due to the addition of micro, small and medium-sized companies that are ineligible for reporting under their respective size-appropriate regimes when adjusting for effective size. ↩

5. BEIS Research Paper Number 2022/016 ↩

6. Better Regulation Framework: Guide for government officials covering all aspects of the Better Regulation Framework ↩

7. After adjusting for companies that are ineligible to report as medium-sized, and which therefore continue to be counted as large for reporting purposes. ↩

8. Page 40, footnote 110 of the Impact Assessment ↩