Audit exemptions and requirements in the UK
Audit exemptions can be confusing, with several rules that can cause complications. In this quick guide, we’ll outline everything you need to know so you can operate with confidence.
Unless you have an exemption, all companies must comply with the UK’s audit requirements. That includes subsidiaries of overseas groups that are based here in the UK. Many company directors miss deadlines and fail to meet their filing obligations simply because they are unsure exactly what the requirements are and whether an audit exemption applies. That can lead to everything from late filing penalties to prosecution.
The UK’s audit requirements and the rules around audit exemptions can be complex, and with a business to run, it’s probably not at the forefront of your mind. To provide clarity, we look at what the UK audit process involves, the exemptions that apply and discuss the key legislation to be aware of to give you peace of mind.
What is an audit?
A company audit is an inspection of your annual accounts carried out by an independent organisation with no connection to your business. The audit provides an objective view of whether you are operating legitimately and if the information in your accounts accurately reflects your financial performance.
During the audit, the auditors have a right to access all the company’s books, accounts and records in whatever form you hold them. They may also ask for help from an employee or officer of the company if they require more information or an explanation of your records.
Once the audit is complete, the auditor will produce a standard audit report to communicate their findings. It will address any areas of concern and be included in the company’s financial statements.
As well as identifying irregularities and providing transparency for investors and shareholders, audits also benefit the company directors. As companies grow, it becomes more difficult to identify mistakes you may be making. The audit can reveal opportunities and the warning signs of financial vulnerabilities you may have missed. You can then implement stronger processes accordingly.
Who needs to comply with audit requirements in the UK?
Your company must complete an external audit if any of the two following criteria apply:
- Your turnover is more than £10.2 million
- Your assets are worth more than £5.1 million
- You have more than 50 employees
It’s not just the size of the business that determines your audit requirements. All companies operating in more strictly regulated industries, such as finance and insurance, must complete external audits. The full list of companies that must complete an audit regardless of their size includes:
- Subsidiary companies (unless they qualify for an exemption)
- Public companies (unless they’re dormant)
- Authorised insurance companies
- Companies carrying out any insurance market activity
- Companies involved in banking
- Issuers of electronic money
- MiFID investment firms
- UCITS management companies
- Special registered bodies
- Funders of master trust pension schemes
- A pensions or labour relations body
Even if you don’t meet the UK’s audit requirements, you still have to complete one if shareholders owning at least 10% of the company’s shares (in number or value) request that you do so in writing. They must send their request to your company’s registered address at least one month before the end of the financial period they want to audit.
Some directors also choose to conduct an audit voluntarily. It can provide reassurance that they are meeting their statutory financial reporting obligations and give them the confidence that their financial statements are accurate. An audit can also positively impact the company’s credit rating and be beneficial if you want to sell your business.
What companies are exempt from an audit? The criteria for exemption
There are four scenarios when a company can qualify for an audit exemption:
- The company is dormant
- The company is an individual ‘small’ company
- The company is a small member of a small group of companies
- The company is a subsidiary of a UK parent company and has a parent guarantee
Let’s look at each of those in a little more detail.
1. Audit exemption for dormant companies
A dormant company is one that hasn’t performed any significant accounting transactions during the reporting period, so no audit is required.
2. Audit exemption for individual ‘small’ companies
Most small standalone companies in the UK qualify for audit exemption under s477 of the Companies Act 2006. Your company is considered ‘small’ for exemption purposes if it does not meet the criteria for annual turnover, value of assets and number of employees shown above.
3. Audit exemption for small members of a small group of companies
If your company is part of a wider group, you must first determine whether it qualifies for an exemption under the individual small company thresholds. You should then consider whether the wider group of companies, including any overseas companies, qualifies as a ‘small group’.
According to s479 of the Companies Act 2006, small groups are eligible for an audit exemption if their annual turnover is less than £10.2 million (net) or £12.2 million (gross). If the group’s fixed and current assets are worth less than £5.1 million (net) and £6.1 million (gross) or the group has fewer than 50 employees, you are also exempt.
To be exempt, the group must not exceed these thresholds for two consecutive years (unless it is your first year of operation). That prevents a company from qualifying for an exemption when it simply has a bad year.
4. Audit exemption for subsidiary companies
Any UK company that is a subsidiary of a UK parent company can qualify for exemption from audit under s479a of the Companies Act 2006 as long as it meets the following conditions:
- The UK parent company provides a parent company guarantee under s479c of the Companies Act 2006; and
- The UK parent company prepares and includes the relevant subsidiary in its consolidated statements for that period (or an earlier period); and
- The parent undertaking discloses in the notes of the consolidated accounts that the company is exempt from the requirements of auditing the individual accounts;
- The directors of the company deliver to the registrar on or before the date that they file the accounts for that year:
- a written notice of the agreement that no members have required an audit
- the statement referred to in s479c(1)
- a copy of the consolidated accounts including the audit report.
Total exemption full accounts: what does it mean?
Every year, companies have to prepare statutory accounts and file a version with Companies House. The type of accounts you must file depends on the size and type of the company.
A company that is listed as ‘Total Exemption Full Accounts’ is exempt from an audit but has to file full accounts, including the director’s report. Some companies may not have to submit a full set of accounts depending on their size. They would be listed on Companies House as ‘Total Exemption Small Accounts’.
Key legislation: s478a and s479a of the Companies Act 2006
Section 478a of the Companies Act 2006 excludes various categories of companies, such as public and financial services firms, from exemption regardless of whether they meet the small company exemption criteria.
s479a of the Companies Act sets out the conditions subsidiaries must meet to qualify for an audit exemption. This legislation was amended following Brexit to differentiate between subsidiaries with a UK or an EEA parent company.
How can Moore Kingston Smith help?
If you’re unsure of your UK audit requirements or would like help determining your exemption status, please get in touch with our team. No matter how complex your situation might be, we provide comprehensive audit services to help you meet your financial reporting obligations and make the right commercial decisions for your business.