The turnover threshold which currently exempts most companies and limited liability partnerships (LLPs) from a statutory audit is £6.5 million.
In the past, audits were seen as the 'cost' companies had to pay for the privilege of limited liability. Audits provide reassurance to shareholders, lenders and creditors that the annual accounts are reliable. Companies House confirms that 93% of the complaints it receives are about the credibility of filed accounts from audit-exempt companies.
However, small companies still have to produce full statutory accounts, so there remains scope for cutting more 'red tape'.
Not all companies with turnover under £6.5 million come within the audit exemption provisions, because there are criteria other than turnover; since 1 October 2012 small firms have been able to obtain an audit exemption if they meet two of three criteria relating to balance sheet total, turnover and number of employees. Public companies and those carrying on particular types of business, such as insurance broking and financial services are also subject to an audit.
Shareholders can require that an audit is carried out, for example if they are not involved in the day-to-day running of the business and require reassurance that their investment is being properly looked after.
Audit exemption thresholds
The definition of a small company eligible for exemption will normally be one that meets two or more of the following criteria for the current and previous year:
- Turnover not more than £6.5 million
- Balance sheet total not more than £3.26 million
- Not more than 50 employees (on average)
The way forward
The existence of audit exemption makes it more attractive for sole traders and partnerships to consider setting up a company to gain the protection of limited liability. However, there are tax consequences of such a change and it is important to seek our advice on these matters.
Audit exemptions for subsidiaries
Subsidiaries are exempt from audit provided they fulfil all the following conditions:
- Its parent undertaking is established under the law of an EEA state
- The company's shareholders must unanimously agree to dispense with an audit in the financial year in question
- The parent must give a statutory guarantee of all the outstanding liabilities to which the subsidiary is subject at the end of the financial year
- The company must be included in the consolidated accounts drawn up by the parent undertaking, which must be prepared in accordance with Directive 83/349/EEC (the Seventh Company Law Directive)
- The use of the exemption by the subsidiary must be disclosed in the notes on the consolidated accounts drawn up by the parent
- The following documents must be filed by the directors of the subsidiary at Companies House on or before the date that they file the subsidiary's accounts:
i. written notice of the agreement in (2)
ii. a statement by the parent that it guarantees the subsidiary company under the particular section of the Act
iii. a copy of the consolidated report and accounts referred to in (4) and the auditor's report on those accounts
- The company is not quoted within s385(2) of the Companies Act
- It is not an authorised insurance company, a banking company, an e-Money issuer, a MiFID investment firm or a UCITS management company, or carries on insurance market activity
- It is not a trade union or an employer's association