Why Changes to Micro, Small, Medium, Large Company Size Thresholds Are Important

You may or may not be aware that the government has 4 thresholds that classify limited companies as Micro, Small, Medium or Large.  The reason this is important is because ‘micro’ companies can use ‘Historical Cost Basis’ for accounting when Small, Medium, and Large companies cannot.

Why is Micro Company Historical Cost Basis Accounting Important?

If the company qualifies as a micro-entity, it means all company investments such as investment property, cash, investment bonds and OEICs (open ended investment companies (similar to unit trusts will be included in historic cost accounting meaning that the original purchase price of the investment is only used in the accounts i.e., the investment shows no profit/growth meaning no additional corporation tax as tax is only payable where a withdrawal is taken/asset is sold, realizing a gain in the accounting period.

This offers ‘micro’ companies the opportunity to defer/postpone taxes whereas small, medium, and large companies must use ‘fair value’ or ‘alternative’ accounting rules where tax may be paid on gains even if they have not been taken yet.

From 6^th April 2025, the thresholds increase as follows:

• To be considered a ‘micro’ company, two of the above three ‘micro’ thresholds must be met.
• To be considered a ‘small’ company, two of the above three ‘small’ thresholds must be met but small company rules apply based upon your previous year’s position and not the current year.

6^th April 2026 - ‘Medium’ Companies now Falling into ‘Small’ Companies – the Impact on ‘off payroll’ working (IR35)

We have all seen certain TV personalities getting caught with huge tax bills if they have been exclusively working for a broadcasting company i.e., they are technically employees but have managed/deferred taxes by offering services through their own ‘personal service’ type company.

Medium and Large sized companies are responsible for deciding on the employment status of any ‘worker’ supplying their services through organisations like personal service companies – i.e., they may technically be paid under IR35 as an employee and ‘on payroll’ if they work exclusively for the company but if they genuinely offer services/have clients elsewhere and their hours are not contractual and the company does not control when they work, they are truly just contracted and therefore ‘off payroll’.

With some medium sized firms now falling into the ‘small’ company thresholds, they may wish to consider stopping their responsibility to check the status of a ‘worker’ via a personal service company and move them ‘off payroll’.   Those companies involved should note that:

• ‘Off payroll’ working assessment rules for ‘medium’ companies that move to ‘small’ companies on 6^th April 2025 do not start until 6th April 2026 given that company status is based upon the previous year’s company status position.