When does a UK incorporated company need an audit?
The aim of this guide is to take you through the process of determining whether a company requires an audit.
The underlying rules, as set out by the Companies Act 2006, are complex. We have presented a straightforward and easy-to-follow guide, but this summary inevitably contains some simplifications. Therefore, we recommend discussing your accounting needs with one of our specialists before making any decisions.
The audit provisions are contained in Part 16 of Companies Act 2006.
The basic premise is that all UK companies must file audited accounts unless they meet at least one of the following exemptions:
1. The exemption for small companies
2. The exemption for dormant companies
3. The exemption for non-profit making companies subject to a public sector audit
The exemption for small companies (Companies Act 2006 s.477)
This exemption aims to relief small companies of the cost and administrative burden of an audit.
Standalone small companies are exempt from audit requirements. A small company is one which meets at least 2 of the following criteria for the financial year in question:
• Turnover less than £10.2m
• A Balance Sheet total of less than £5.1m
• An average of 50 or fewer employees
You must also consider the wider perspective of the company’s group. A small company is not entitled to the audit exemption if it was part of a group at any time during the financial year in question unless it was a dormant subsidiary or unless the group was a small group (i.e. the group in aggregate meets the definitions of a small company).
The exemption is not available to standalone companies which are, or groups which contain:
• A public company
• An authorised insurance company
• A banking company
• An e-money issuer
• A MiFiD investment firm
• A company which carries on insurance market activity
• A Trade Union special register body
• An employers’ association
The exemption for dormant companies (Companies Act 2006 s.480)
A company which has been dormant throughout the accounting period is exempt from the audit requirements provided it meets the definition of a small company and is not required to prepare group/consolidated accounts. To be dormant, there must have been no activity in the company during the year aside from filing fees to Companies House or money paid for shares upon incorporation. If other transactions occur, the company will not qualify as dormant.
The exemption is not available to:
• An authorised insurance company
• A banking company
• An e-money issuer
• A MiFiD investment firm
• A company which carries on insurance market activity
Right of members to require audit
The right of a company’s members (i.e. shareholders) to require an audit overrides any available exemption. Shareholders representing 10% of the company’s share capital may require the directors to appoint auditors by delivering a notice to that effect not later than one month before the end of the financial year to which it relates.
Balance sheet disclosures if taking the exemption
For the audit exemption to be effective the directors must make disclosures on the balance sheet stating:
• That the company is entitled to the exemption in question
• That the members of the company do not require the company to have an audit
• That the directors acknowledge their responsibility for complying with the requirements of the Companies Act 2006 with respect to accounting records and the preparation of accounts.
Companies that must have an audit
Your company must have an audit if at any time in the financial year it’s been one of the following:
• a public company (unless it’s dormant – read the dormant accounts section of the company accounts guidance)
• a subsidiary company (unless it qualifies for an exemption – read the subsidiary company section of the company accounts guidance)
• an authorised insurance company
• carrying out insurance market activity
• involved in banking
• an issuer of electronic money (e-money)
• a Markets in Financial Instruments Directive (MiFID) investment firm
• an Undertakings for Collective Investment in Transferable Securities (UCITS) management company
• a corporate body and its shares have been traded on a regulated market
• a funder of a master trust pensions scheme
• a special register body
• a pensions or labour relations body
To find out more and discuss how the rules apply to you please contact us. For further information on our accounting services, please visit here.
