When does a company need an audit?
The short answer to this question is that all UK registered companies are required to have an audit unless they can claim an exemption. There are a handful of exemptions available under the UK Companies Act 2006.
Dormant company exemption
A dormant company, being a company that has undertaken no significant accounting transactions in the reporting period, is exempt from audit. Significant accounting transactions are those related to share issues and payments to the registrar.
There are certain types of ‘dormant’ companies that are not entitled to take this exemption, and this includes traded companies, authorised insurance companies and banking companies etc.
Small company exemption
A company that qualifies as small in the reporting period, and is not a member of a group, can also claim exemption from audit. A company is small if it satisfies at least two of the following criteria:
- Turnover of less than £10.2million
- Gross assets of less than £5.1million
- Employees of less than 50
It is important to note that a ‘two-year rule’ applies when determining a company’s size. This means that the company will only cease to be small once it has breached at least two of the above limits for two consecutive reporting periods. Where the limits are breached in a first period after incorporation then the two year rule does not apply. As with the dormant company exemption, there are certain types of companies that are not entitled to take this exemption.
Small company that is part of a small group
A small company that is part of a group is only exempt from audit if the whole group that it is part of is a small group. If the small company is part of a non-small sized group or an ineligible group, it is not entitled to exemption from audit even though it itself is small. Note that this is not restricted to UK groups, it is any group globally, so a micro or small UK company will need auditing if it is part of a non-small international group.
A non-small sized group is one that exceeds the above limits when the results of the group are aggregated, and intercompany transactions are eliminated. Alternatively ‘gross’ limits can be applied when intercompany transactions are not eliminated to determine group size. The gross limits are:
· Turnover less than £12.2million
· Gross assets of less than £6.1million
· Employees of less than 50
It is also possible to use a mixture of the gross and net limits and this isn’t always a straightforward assessment.
Parent company guarantee
A company of any size that is a subsidiary of a UK parent company is entitled to claim exemption if the parent company formally guarantees all oustanding liabilities of the subsidiary until those liabilities are satisfied in full. In addition to this, the results of the subsidiary must be included in parent’s consolidated accounts for the exemption to apply.
All members of the subsidiary must consent to the exemption being taken and there are specific filings that must be made at Companies House where this exemption is taken. The guarantee is legally enforceable so careful considerable should be given when assessing whether the exemption is utilized. Please also note that since Brexit, this guarantee is only available for UK parent companies.
With all of the exemptions discussed above, there are specific disclosures that are required in the financial statements of the company, and of the parent company where applicable.
Want to know more?
At Carpenter Box we can provide support in determining the audit status of a company or group. So if you have any questions, please get in touch with a member of the audit team by calling 01903 234094.