Is a company or group small?

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help members make their assessment as to whether a company or group qualifies as small under the Companies Act 2006.

Members may also wish to refer to the following related helpsheets and guidance:

• Small and micro company size calculator
• Ineligible companies and groups
• Is an audit required for a company?
• Calculating employee numbers
• Company size and audit exemption – complex examples

When a company is assessing whether it is subject to the small companies regime, it must have regard to sections 381-384 of the Companies Act 2006.

The small companies regime applies to a company for a financial year in relation to which -

• the company qualifies as small and
  (see section 382 and section 383 and the remainder of this helpsheet – for this purpose, the company and the group it heads (if applicable) must be considered)
• is not excluded from the small companies regime
  (see section 384 and the helpsheet Ineligible companies and groups - for this purpose, the entire group of which the company is a member must be considered).

To qualify as a small company in size, companies which are not parent companies must be assessed against the net thresholds in the Size thresholds table below.

Company size thresholds

First year of the company

If it is the first year of the company, it will qualify as small under section 382 of the Companies Act 2006 if satisfies two or more of the net thresholds in the Size thresholds table below.

Subsequent year of the company

If it is not the first year of the company, a ‘two year rule’ applies by virtue of section 382(2) which states that, in relation to a subsequent financial year, where on its balance sheet date a company meets or ceases to meet the qualifying conditions, that affects its qualification as a small company only if it occurs in two consecutive financial years. As such a company may have to track back over several years of history to determine its size (the Small and micro company size calculator may be of assistance).

To qualify as a small company, the size of both the parent as a single entity and the group headed by it must be considered.

Firstly, the parent company’s size is assessed as described above for an individual company based on its individual turnover, balance sheet total and employees.

Secondly, the size of its group must be considered because a parent company can only qualify as a small company if the group headed by it also qualifies as a small group. In assessing the size of the group against the thresholds in the Size thresholds table below, the group may use either the net or gross thresholds where applicable.

The aggregate figures are ascertained by aggregating the relevant figures (calculated in accordance with section 382 of the Companies Act 2006) for each member of the group. If any subsidiaries within the group have a different year end from the parent company, the figures for the financial year ending last before the financial year end of the parent should be used (Companies Act 2006 section 383(7)).  

Even if the group as a whole does not qualify as small, subsidiaries of the parent company may still qualify as such for the purposes of their own accounts.

Group size thresholds

First year of the parent company

If it is the first year of the parent company, the group will qualify as small under section 383 of the Companies Act 2006 if satisfies two or more of the thresholds in the Size thresholds table below (the parent company may pick either gross or net for each of the thresholds).

Subsequent year of the parent company

If it is not the first year of the parent company, a two year rule applies by virtue of section 383(3) which states that in relation to a subsequent financial year of the parent company, where on the parent company’s balance sheet date the group meets or ceases to meet the qualifying conditions, that affects the group’s qualification as a small group only if it occurs in two consecutive financial years. As such a group may have to track back over several years of history to determine its size.

Net and gross criteria

It is acceptable to use a combination of ‘net’ or ‘gross’ thresholds to qualify. For example, the net threshold could be used for turnover and the gross threshold used for the balance sheet total. There is no distinction between net and gross for the employee numbers threshold.

Net turnover or net balance sheet total is defined as being ‘after any set-offs and other adjustments made to eliminate group transactions’ (Companies Act 2006 section 383(6)).

Gross turnover or gross balance sheet total means ‘without those set-offs and other adjustments’. This simply means adding together the figures straight from the individual financial statements of each group entity.

Further guidance is available for more complex situations to help consider the size of a company and group, see Company size and audit exemption – complex examples.

When assessing whether a parent entity qualifies for the small companies regime, as outlined in the preceding sections, the size of the company itself and the group it heads is considered.

When assessing the size of the group to determine whether a company is excluded by section 479 of the Companies Act 2006 from taking the section 477 small companies audit exemption, it is the size of the entire group that is considered. As such an entity will need to consider the largest group of which it is a part, including its parents and fellow subsidiaries in addition to the group it heads.

It is therefore not uncommon for an intermediate parent company to qualify for the small companies regime but still require an audit because it is part of a larger group, which is not small. Further details on audit requirements can be found in the helpsheet Is an audit required for a company?.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.