The number of small companies in Northern Ireland is set to significantly increase in 2016 and to some extent that will be due to the establishment of new indigenous businesses. This will be viewed as a sign of improving economic conditions and the long-awaited rebalancing of the Northern Ireland economy.
However, much of the increase will not in fact be as a result of the creation of new companies, but rather will be due to changes to the criteria under which a company qualifies as small.
For accounting periods beginning on or after 1 January 2016, a company will qualify as small if it can satisfy at least two of the following three criteria for (usually) two consecutive financial years: Turnover - £10.2m; Balance sheet total (total assets) - £5.1m; Employees – 50 (previously £6.5m; £3.26m; and 50 respectively).
Government point of view
The Government has taken the opportunity to apply similar increases to the criteria for medium sized companies and for small and medium sized groups. The changes form part of the Government’s movement to reduce red tape - the so-called ‘Red Tape Challenge’.
The Department of Business Innovation and Skills (BIS) estimates that 11,000 more UK companies (formerly medium sized companies) will qualify as small. Upon reclassification they will enjoy the benefits of reduced accounting disclosure and the ability to file abbreviated financial statements (comprising an abbreviated balance sheet and limited notes) with Companies House.
Furthermore, a recent decision in the House of Lords to raise the audit threshold for qualifying companies to the new small company limits (the maximum level available), will mean that those ‘reclassified’ small companies may also avail of audit exemption. As before, some companies by their nature will not qualify.
BIS expects that only 3,000 reclassified companies will avail of the audit exemption, but intuitively that estimate is considered low by many commentators. Whilst it is reasonable to expect companies with strong governance to retain the audit function or alternative measures of assurance, it is argued that it is well governed companies which will potentially have a lesser need for audit and that financial reporting standards may decline in those companies that choose the exemption.
Northern Ireland context
In the Northern Ireland context, a company with a £10m turnover remains a significant enterprise and already concerns are being raised about the reduced level of information that will be publicly available to creditors and credit rating agencies.
In the Republic of Ireland, the Companies Act 2014 legislators chose to introduce the following lower thresholds for audit exemption: Turnover - €8.8m (£6.8m); Balance sheet total - €4.4m (£3.4m); and Employees - 50
For local businesses with companies in both jurisdictions, the differing criteria may give rise to auditing anomalies. For example, a Northern Ireland group with £9.5m consolidated income may not require an audit, but its Republic of Ireland subsidiary with total assets of €5m may well do.
One certainty is that fewer companies will undergo an annual audit from 2017. In recent years auditing has increasingly become a specialist service and the changes in the small company criteria and the audit threshold is likely to accelerate that process.