If you’re running a company and wondering whether you qualify as “small” under the Companies Act 2006, you’re in the right place. Understanding whether your business qualifies for the small companies regime is crucial for determining the level of financial reporting and auditing requirements you must follow. This blog will walk you through the relevant sections of the Companies Act 2006, and help you determine if your company or group qualifies as small, and what that means for your accounting obligations.
What is the Small Companies Regime?
Under the Companies Act 2006, small companies benefit from certain exemptions, such as simplified reporting requirements and potential audit exemptions. To qualify, a company must meet certain size thresholds, as outlined in sections 381-384 of the Companies Act 2006.
This regime applies for a financial year if:
- The company qualifies as small based on the thresholds, and
- It is not excluded from the regime for reasons we’ll cover later in this blog.
Key Thresholds for Small Companies
Not Parent Companies
For a company that is not a parent company, the size is assessed against three key financial thresholds:
- Turnover
- Balance Sheet Total
- Number of Employees
The company must meet at least two of these thresholds to qualify as small.
Company size thresholds (for periods commencing on or before 5 April 2025)
| Criteria | Small |
| Turnover (adjust proportionately if not a year) | Not more than £10.2m |
| Balance sheet total (the aggregate of the amounts shown as assets in the company’s balance sheet) | Not more than £5.1m |
| Number of employees | Not more than 50 |
Company size thresholds (for periods commencing on or after 6 April 2025)
| Criteria | Small |
| Turnover (adjust proportionately if not a year) | Not more than £15m |
| Balance sheet total (the aggregate of the amounts shown as assets in the company’s balance sheet) | Not more than £7.5m |
| Number of employees | Not more than 50 |
If it’s the company’s first year, and it satisfies two or more of these thresholds, it will qualify as small under the Companies Act 2006.
For companies beyond the first year, the two-year rule applies. This means that if the company meets or ceases to meet the criteria for two consecutive years, its status as a small company will be determined.
Parent Companies
For parent companies, the assessment is slightly more complex because it involves both the parent company’s individual size and the size of the group as a whole. When assessing the parent company:
- The company must be assessed based on its own turnover, balance sheet total, and employees.
| Criteria | Small | |
| Turnover | Net | Not more than £10.2m |
| Gross | Not more than £12.2m | |
| Balance sheet total (the aggregate of the amounts shown as assets in the company’s balance sheets) | Net | Not more than £5.1m |
| Gross | Not more than £6.1m | |
| Number of employees | Not more than 50 | |
When assessing the size of the group, companies can either use net or gross thresholds where applicable. Here’s what that means:
- Net turnover or net balance sheet total refers to figures after set-offs and adjustments to eliminate inter-company transactions within the group.
- Gross turnover or gross balance sheet total refers to figures without any adjustments, using the numbers directly from the financial statements of each group entity.
Group Size Assessment
To calculate the size of the group, you aggregate the relevant figures from each group member. If subsidiaries have a different financial year-end from the parent company, you must use the financial figures from the subsidiaries’ last financial year before the parent company’s financial year-end.
Even if the group itself does not qualify as small, individual subsidiaries might still qualify for small company status in their own accounts.
Similar to the first year rule for standalone companies, if the parent company meets two or more of the group thresholds, it will qualify as small.
In subsequent years, the two-year rule applies, based on the parent company’s balance sheet date. The group’s qualification will depend on whether it meets or ceases to meet the criteria for two consecutive years.
Moreover, the parent company can use a combination of net or gross thresholds for different criteria. For example, net turnover could be used for turnover, and gross for balance sheet total. However, there is no differentiation between net and gross thresholds for the employee number.
New Thresholds
For financial years beginning on or after 6 April 2025, new thresholds will apply. Companies should use these updated thresholds going forward and also consider them when applying the two-year rule for entities changing size.
Audit Exemption for Small Companies
A significant benefit for small companies is the audit exemption, which can reduce your compliance costs. When considering whether a company is eligible for audit exemption, the entire group must be considered — including the parent company and its fellow subsidiaries.
Even if a company is an intermediate parent company and qualifies for the small companies regime, it might still require an audit if it is part of a larger group that does not meet the small company criteria.
Conclusion
To sum up, qualifying as a small company under the Companies Act 2006 depends on your company’s size relative to the thresholds. It is essential to regularly assess your company’s status, especially as new thresholds come into effect. The two-year rule provides a helpful guideline for companies transitioning between sizes, but if you’re part of a larger group, the group’s size can still affect your small company status.
If you’re unsure about your company’s qualifications or need more support navigating these complex regulations, feel free to reach out to me for further assistance. I’m here to help you make sense of it all.