Audit thresholds and lease accounting – The hidden impact on tax

The increase in company size thresholds for audit requirements may initially seem like a relief for many businesses, allowing them to avoid the administrative and financial burden of statutory audits. However, the changes in lease accounting rules — requiring many leases to be brought onto the balance sheet — could significantly inflate a company’s asset base. This means that businesses that previously believed they would fall outside audit requirements could suddenly find themselves back within scope due to the recognition of lease liabilities.

Beyond audit considerations, the lease accounting changes will have major tax implications. Four key areas stand out where these changes could have unintended and potentially damaging effects:

1) Venture Capital Relief at risk – action required

If your business is planning to raise investment under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), these changes could put that funding at serious risk. Under EIS, companies must have gross assets below £15 million immediately before issuing shares. With the new lease accounting rules potentially inflating your balance sheet, you could be disqualified from receiving vital investment.

For startups seeking SEIS, the danger is even more pronounced, as the asset limit is a mere £350,000. A minor adjustment to lease accounting could suddenly push you over the threshold and out of eligibility. The consequence? Lost investment, lost opportunities, and a major setback in growth.

Time is of the essence—businesses looking to raise funds should accelerate their EIS or SEIS claims before these changes impact their eligibility.

2) Enterprise Management Incentives (EMI) under immediate threat

One of the most powerful employee incentive tools, Enterprise Management Incentives (EMI), could be taken off the table for many companies due to these accounting changes. Currently, businesses with gross assets below £30 million can offer tax-advantaged share options to their key employees. However, once leases are recognised on the balance sheet, many businesses will breach this limit—rendering them ineligible for EMI schemes.

Without EMI, businesses may struggle to attract and retain top talent, as alternative incentive schemes are often more expensive and less tax-efficient.

If you are considering implementing an EMI scheme, you should act now before it’s too late. .

3) Off-payroll worker rules (IR35) and Business size classification

The exemption from IR35 rules for small private sector businesses is based on the Companies Act 2006 definition of business size. With new thresholds taking effect in April 2025, some businesses may initially qualify as ‘small’ and be exempt from IR35 obligations. However, once leases are recognised on the balance sheet, they could breach the size criteria, forcing them into compliance with the stricter IR35 regime. This could lead to significant additional compliance costs and risks for businesses engaging contractors.

4) Transfer pricing and SME exemptions

Transfer pricing rules offer exemptions for Small or Medium-Sized Enterprises (SMEs), one of which is based on the balance sheet total being below €43 million. The new lease accounting rules could inflate balance sheets, making some businesses ineligible for these SME exemptions and subjecting them to more complex and costly transfer pricing regulations. Companies engaged in cross-border transactions should review their status now.

There are other areas of the tax code where these changes may also have an impact. For example, the interest restriction rules for qualifying infrastructure companies could be affected, as could the thresholds determining whether a company or group falls into the Senior Accounting Officer (SAO) requirements. Additionally, the qualifying criteria for recognition as a Real Estate Investment Trust (REIT) may also be impacted. However, at present, our expectation is that the four areas highlighted above will have the most significant impact on the tax affairs of owner-managed businesses—at least in an indirect and, in our view, unintended way.

While it remains unclear whether HMRC will introduce carve-outs to mitigate the impact of these changes on tax thresholds, we strongly recommend that businesses take proactive steps now. Key actions include:

• Reviewing eligibility for EIS and SEIS funding and fast-tracking investment rounds before the rules impact asset calculations.
• Accelerating EMI scheme introductions before lease recognition potentially disqualifies businesses.
• Assessing IR35 exposure and preparing for possible classification changes.
• Reevaluating transfer pricing policies to avoid compliance pitfalls.

The impact of these changes is not just about compliance—it directly affects funding opportunities, employee incentives, and tax efficiency. Businesses that take action now will be better positioned to navigate these complex changes and minimize disruption.

If you need expert guidance on how these changes will affect your company, contact our team today.