Understanding ESOS Phase 2 qualification thresholds and improving energy compliance
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An organisation is considered a large undertaking in the UK if on the qualification date of 31 December 2018, it has;
• at least 250 employees; or
• less than 250 employees but an annual turnover more than €50 million (£44,845,000) AND an annual balance sheet total €43m (£38,566,700); or
• Is part of a corporate group which includes a UK undertaking which meets the above criteria.
The above Bank of England exchange rate from Euros to Sterling for ESOS Phase 2 qualification was confirmed on the qualification date of 31 December 2018.
To find out if you qualify you will need to use your total employee numbers and your turnover and balance sheet totals from your accounts for the financial year ending either:
• on the qualification date of 31 December 2018
• in the 12 months immediately preceding the qualification date of 31 December 2018.
Below we explore the qualification criteria of total number of employees as well as turnover & balance sheet totals for ESOS Phase 2.
Total number of employees
A person is employed by an undertaking if they are:
• an employee
• an owner / manager
• a partner.
An employee is a person employed under contracts of service. Their contracted hours and status (full time / part time) are irrelevant to their classification as an employee.
The number of employees means the average number of people employed by the undertaking in the year.
To determine whether you meet the employee criteria you need to work out your average number of employees in the relevant accounting period:
• note the number of people employed by the company for each month of the financial year (whether for the whole month or part of it)
• add together the monthly totals
• divide by the number of months in the financial year
If you are a UK undertaking which directly (i.e. not via a foreign subsidiary) employs people who are based overseas, you must still include them in your employee count.
You usually do not have to count agency workers as employees, but you should check their contracts with a legal advisor to confirm this.
If you sub-contract work, then you should talk to HMRC to find out if the sub-contractors are considered your employees.
Example of calculating employees
The financial year for Company A runs from 1 April to 31 March the following year.
At the qualification date (31 December 2018) for the ESOS Phase 2 compliance period, the most recent set of financial statements for Company A are those for the year to 31 March 2018.
This means Company A must calculate the number of employees during that period.
On 1 April 2017, Company A had five directors and 235 employees. On 10 July 2017 Company A hired 20 more employees. There were no further changes in employee or director numbers before the end of the year.
For 3 months in its financial year (April, May and June) Company A had a total of 240 staff (5 directors plus 235 employees).
For 9 months of the year (July 2017 to March 2018) the company had a total 260 staff (5 directors and 255 employees).
For ESOS purposes, the number of employees for the year for Company A is : [(240 x 3) + (260 x 9)] / 12 = 255
Company A exceeds the employee threshold of 250 at the qualification date.
This however does not qualify Company A for ESOS Phase 2, as they would need to look back over previous years employee numbers to determine whether they have maintained their size for at least two consecutive accounting periods.
If during the period 1 April 2014 to 31 March 2018 (ESOS Phase 2 Compliance period) the total number of employees was above 250 employees for 2 x consecutive accounting periods, then Company A would qualify for ESOS Phase 2 based on the number of employees.
Conversely, if the number of employees for Company A only exceeded the employee threshold of 250 for the year ending March 2018 during the compliance period, then Company A does not qualify for ESOS Phase 2, as it did not maintain this status for 2 consecutive accounting periods!
Meeting the financial conditions
“turnover”, in relation to an undertaking, means the amounts derived from the provision of goods and services falling within the company's ordinary activities, after deduction of—
(a) trade discounts,
(b) value added tax, and
(c) any other taxes based on the amounts so derived
“balance sheet total”
means the aggregate of the amounts shown as assets in the company’s balance sheet (that is before deducting both current and long-term liabilities). Therefore, it is the gross figure not the net figure.
If your undertaking is registered in the UK but directly owns or runs overseas activities (which aren't subsidiaries), then you should include the turnover and balance sheet total contributions of these activities as you assess whether that undertaking qualifies in its own right.
If a UK company owns overseas subsidiaries then the turnover and balance sheet totals of those companies aren’t included in the assessment of qualification for the UK undertaking.
Example of checking financial qualification
Company A above has not satisfied the qualification thresholds since the start of the ESOS Phase 2 Compliance period, but in its accounts ending 31 March 2018 it now meets the qualification thresholds of Turnover and Balance Sheet totals, then it would not qualify for ESOS Phase 2.
This is because it has not maintained the large undertaking size for two consecutive accounting periods, so it is still counted as a small or medium undertaking.
Conversely, if Company A satisfied the qualification thresholds of Turnover and Balance Sheet totals for any 2 consecutive accounting periods during the ESOS Phase 2 Compliance period but does not satisfy the qualification thresholds on 31 March 2018, then it would qualify for ESOS Phase 2.
If your organisation is very close to the threshold for qualification or has recently grown or shrunk, then you may need to look back over several accounting periods to establish if you qualify. This is because the status of an organisation is determined by whether they have maintained their size for at least two consecutive accounting periods.
The exact wording from the ESOS Regulations is as follows: “Where, in any accounting period, an undertaking is a large undertaking (or a small or medium undertaking, as the case may be), it retains that status until it falls within the definition of a small or medium undertaking (or a large undertaking, as the case may be) for two consecutive accounting periods.”
To learn more or to arrange a no obligation discussion of your specific situation, please feel free to contact us on 03300 881451 to talk with one of our ESOS Lead Assessors or CIBSE accredited Low Carbon Consultants for ISO 50001 Energy Managent Systems.