Certain small or medium-sized companies may prepare accounts for their members under the special provisions of sections 246 and 246A of the Companies Act 1985. In addition, they may prepare and deliver abbreviated accounts to the Registrar.

This chapter explains the exemptions available to small and medium-sized companies. Certain small companies with a turnover of less than £5.6 million (£250,000 for companies that are charities) and assets of less than £2.8 million can claim exemption from audit.

1. What is a small or medium-sized company?

Public companies and certain companies in the regulated sectors cannot qualify as small or medium-sized companies. Similarly, companies which are part of a group which has members who are public companies or companies in the regulated sector cannot qualify as small or medium-sized (except in certain circumstances). For other companies, the size of the company (and in the case of a parent company the size of the group headed by it) in terms of its turnover, balance sheet total (meaning the total of the fixed and current assets) and average number of employees determines whether it is classed as small or medium-sized.

The exact conditions for qualifying as a small or medium-sized company are given below.

To be a small company, at least two of the following conditions must be met:

1. annual turnover must be £5.6 million or less;
2. the balance sheet total must be £2.8 million or less;
3. the average number of employees must be 50 or fewer.

Please note: The above accounting exemption thresholds apply to financial years ending on or after 30 January 2004. For earlier financial years, to be a small company, at least 2 of the following conditions must be met:

1. annual turnover must be £2.8 million or less;
2. the balance sheet total must be £1.4 million or less;
3. the average number of employees must be 50 or fewer.

To be a medium-sized company, at least two of the following conditions must be met:

1. annual turnover must be £22.8 million or less;
2. the balance sheet total must be £11.4 or less;
3. the average number of employees must be 250 or fewer.

Please note: The above accounting exemption thresholds apply to financial years ending on or after 30 January 2004. For earlier financial years, to be a medium-sized company, at least 2 of the following conditions must be met:

1. annual turnover must be £11.2 million or less;
2. the balance sheet total must be £5.6 million or less;
3. the average number of employees must be 250 or fewer.

If the company is a parent company, it cannot qualify as a small or medium-sized company unless the group headed by it is also small or medium-sized.

The exact conditions for qualifying as a small or medium-sized group are given at question 4.

Generally, a company qualifies as ’small’ or ‘medium-sized’ in its first financial year, or in any subsequent financial year if it fulfils the conditions in that year and the year before. If the company ceases to be small or medium-sized, the exemption continues for the first year that the company does not fulfil the conditions. And the exemption continues uninterrupted if the company reverts to being small or medium-sized the following year - see the table below.

If you think the company might qualify as small or medium-sized, you should consult a professional accountant before you prepare ’special-provision’ accounts. If you abbreviate the accounts, you will also need a special auditor’s report for filing with the Registrar, confirming that the company qualifies to produce such accounts. This report is not needed if the company is exempt from audit.

The following table may help you decide whether you qualify to prepare ’small’ or ‘medium’ accounts. The table applies to small companies. For medium-sized companies simply substitute ‘medium-sized’ for ’small’.

2. What does a small or medium-sized company have to deliver to the Registrar?

The company can deliver the accounts which were prepared for its members under the special provisions of part VII of the Companies Act 1985, or it can deliver an abbreviated version of these accounts.

Abbreviated accounts of a small company must include:

1. the abbreviated balance sheet and notes; and
2. a special auditor’s report (unless the company is also claiming audit exemption).

Abbreviated accounts of a medium-sized company must include:

1. the abbreviated profit and loss account;
2. the full balance sheet;
3. a special auditor’s report;
4. the directors’ report; and
5. notes to the accounts.

The special auditor’s report should state that in the auditor’s opinion the company is entitled to deliver abbreviated accounts and that they have been properly prepared in accordance with section 246(5) or (6) or 246A(3) of the Companies Act 1985; as the case may be.

The balance sheet (and if appropriate, the directors’ report) must contain a statement that the accounts are prepared in accordance with the special provisions in Part VII of the Companies Act 1985 relating to small or medium-sized companies, as the case may be.

Community Interest Companies (CICs): Please remember: CICs which are taking advantage of these exemptions must still prepare and deliver to Companies House a ‘community interest company report’ and a fee of £15.

3. What if the company would qualify as small or medium-sized, except that it is part of a group which has members who are public companies or companies in the regulated sectors?

For financial years beginning on or after 1 April 2005*, certain exemptions are available for small and medium-sized companies which fall into this category.

1. Small Companies may omit certain information from the directors’ report prepared for its shareholders (that is, amount to be paid as dividend, business review, statement of market valise of fixed assets where substantially different from the balance sheet amount, miscellaneous disclosures and employee involvement) and the company need not deliver the directors’ report to Companies House.
2. Medium-sized companies may omit certain information from the business review in its directors’ report (that is, analysis using key performance indicators so far as they relate to non-financial information).

(*After implementation, these provisions were subsequently back-dated to also apply to accounts covering a period beginning between 1 January 2005 and 1 April 2005 and ending on or after 1 October 2005).

4. Are there special rules for small and medium-sized groups?

Yes, a parent company need not prepare group accounts or send them to the Registrar if the group is small or medium-sized and none of its member companies is: a public company, a person who has permission under Part 4 of the Financial Services and Markets Act 2000 to carry on a regulated activity, or a person who carries on insurance market activity.

To qualify as small, a group of companies must meet at least two of the following conditions:

1. aggregate turnover must be £5.6 million net (£6.72 million gross) or less;
2. the aggregate balance sheet total must be £2.8 million net (£3.36 million gross) or less;
3. the aggregate average number of employees must be 50 or fewer.

Please note: The above accounting exemption thresholds apply to financial years ending on or after 30 January 2004.For earlier financial years, to qualify as small, a group must meet at least two of the following conditions:

1. aggregate turnover must be £2.8 million net (£3.36 million gross) or less;
2. the aggregate balance sheet total must be £1.4 million net (or £1.68 million gross);
3. the aggregate average number of employees must be 50 or fewer.

To qualify as medium-sized, a group must satisfy at least two of the following conditions:

1. its aggregate turnover must be £22.8 million net (£27.36 million gross) or less;
2. the aggregate balance sheet total must be £11.4 million net (£13.68 million gross) or less;
3. the aggregate average number of employees must be 250 or fewer.

Please note: The above accounting exemption thresholds apply to financial years ending on or after 30 January 2004. For earlier financial years, to qualify as medium-sized, a group must meet at least two of the following conditions:

1. aggregate turnover must be £11.2 million net (or £13.44 million gross);
2. the aggregate balance sheet total must be £5.6 million net (or £6.72 million gross);
3. the aggregate average number of employees must be 250 or fewer.

5. What if a small or medium-sized company is required to prepare group accounts?

A small parent company which has prepared individual accounts for its members using the special provisions of section 246(2) or (3) of the Companies Act 1985, may choose to prepare group accounts under the special provisions of section 248A. However, a small group cannot file abbreviated accounts at Companies House. Group accounts prepared under section 248A must contain a statement above the signature on the balance sheet, confirming that they are prepared in accordance with the special provisions of Part VII of the Companies Act 1985 relating to small companies.

If a medium-sized company decides to prepare group accounts, they must be full group accounts.

Format of accounts:

1. The format of the accounts must follow the relevant Schedules to the Companies Act 1985. The provisions relating to small and medium-sized companies are in Schedules 4, 5, 6, 8 and 8A.
2. For financial years beginning on or after 1 January 2005, the company may opt to prepare group accounts in accordance with international accounting standards. The parent company’s account and each of its subsidiary undertakings must be prepared using the same financial reporting framework, except to the extent that there are good reasons for not doing so.

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