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The audit threshold is a critical element of UK company law. It is laid out in the Companies Act 2006. It determines if a company must undergo a statutory audit or can claim an exemption from audit. However, not every business must have an audit. For instance, there are many small companies and certain types of subsidiary companies which are exempt. But they must meet the specific financial and structural criteria.
Even if audit exemption applies, a company must still prepare proper financial statements and file them with Companies House. In this regard, transparency and accountability are important because they reduce the compliance burden on smaller enterprises. Thus, one must ally with an audit expert, such as MMBA Accountants experts, to stay transparent.
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What Is the Audit Threshold?
The audit threshold is assessed annually and is based on three main factors:
- Turnover (not more than £10.2 million)
- Balance sheet total (not more than £5.1 million in fixed and current assets)
- Number of employees (50 or fewer)
If a company satisfies at least two of these conditions during a financial year, it may qualify for audit exemption.
However, the threshold is not the only consideration. Some companies, regardless of size, must have an audit due to the nature of their business or their classification under other legislation. You can also check our full guide on small business audit exemptions to see if your company qualifies.
Qualification Criteria for Audit Exemption
To qualify for audit exemption, the business must be a private limited company and meet the thresholds mentioned above. But there are exceptions.
The company must not be a public company, banking company, or authorised insurance company carrying out regulated activities. Nor should it fall under the Financial Instruments Directive or the Markets in Financial Instruments Directive. However, the rules that apply to entities like a MiFID investment firm, UCITS management company, or investment firm involved in collective investment in transferable securities.
A subsidiary company can still qualify for subsidiary audit exemption if its parent company guarantees its liabilities and the group meets the small group thresholds under the Companies Act 2006 that relates to group audits. However, groups classified as an ineligible group. It may include a traded company, e money issuer, or company listed on a regulated market.
In all cases, directors acknowledge their responsibilities for maintaining proper accounting records and making sure that the company’s accounts have been prepared using provisions that are applicable to companies under the small companies regime. Even if you fall below the threshold, you might still benefit, here’s why an external audit can still be important.
Insurance Companies and Audit Requirements
Companies involved in insurance market activity face stricter regulations. An authorised insurance company is generally not entitled to audit exemption. Regardless of size, these firms must undergo a statutory audit, performed by an independent auditor, and submit audited accounts to Companies House and the appropriate regulators.
These companies must comply with regulations governing the insurance market activity involved, and are often subject to both the Markets in Financial Instruments Directive and the Financial Instruments Directive. These rules ensure that an authorised insurance company maintains accurate and transparent reporting of its operations, especially when dealing with transferable securities or offering collective investment services.
Other Exceptions and Special Cases
Some entities, even if small, do not qualify for exemption:
- A dormant company linked to a public company
- A body corporate operating as a management company for investments
- A corporate body linked to a master trust pensions scheme
- A labour relations body or special register body operating under regulated status
- Businesses with significant accounting transactions that trigger audit requirements
Changes in the company’s year end date, or an increase in turnover or employees in the previous financial year, can also affect audit status.
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Conclusion
It is important to understand if a business qualifies for audit exemption under the Companies Act 2006 or not. However, it requires careful annual assessment. The financial limits are just the starting point. Other factors, like industry, group structure, and regulation, also play a key role.
For any business owner, particularly those who manage subsidiary companies, seeking a professional advice is essential. With complex rules governing exemptions and mandatory audits, compliance depends on accurate interpretation and timely filing of individual accounts and financial documents.
If in doubt, consult a professional advisor to make sure that your business remains fully compliant and avoids unnecessary penalties.
FAQs
Which companies are subject to audit requirements under the Companies Act 2006?
Companies subject to audit include public companies, certain private companies, and those outside the audit exemption limits. The Companies Act 2006 relating to audit outlines who must undergo a statutory audit each year.
What are the provisions applicable to companies seeking audit exemption?
The provisions applicable to companies seeking exemption depend on size, structure, and activity. These rules are applicable to companies subject to the small companies regime under the Companies Act 2006.
Does a parent undertaking affect a subsidiary’s audit exemption?
Yes, a parent undertaking can impact the audit status of a subsidiary. However, group audit exemptions may apply if certain conditions are met under the Companies Act 2006 relating to group thresholds.
Why is professional advice recommended when preparing financial statements?
Seeking professional advice ensures your business’s financial statements meet legal standards, especially regarding respect to accounting records and compliance with audit requirements. Need help with both audits and tax filings? Our corporate taxation specialists have you covered.
Are electronic money institutions and investment firms always audited?
Yes, firms dealing with electronic money or undertakings for collective investment are typically outside the scope of audit exemption limits, and must follow strict regulatory audit rules.
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