The requirement to have an audit is driven by The Companies Act 2006, which states that a company must be audited unless it obtains an exemption.
There are four potential ways to obtain an exemption:
1. Be a small, standalone company
2. Be a small company within a small group of companies
3. Be a company of any size, within a group, and obtain a parent guarantee
4. Be a dormant company
Each of these potential ways to obtain an exemption has its own requirements and conditions that need to be met each year.
What is a small company?
A company’s size is determined by financial thresholds set out in The Companies Act 2006. To qualify as ‘small’ a company must have at least 2 of the following:
- Turnover of no more than £10.2 million;
- Net Assets worth no more than £5.1 million; and
- 50 or fewer employees, on average
Some companies are not entitled to this exemption, such as public companies (PLC’s). The full list of companies that are not entitled to this exemption is set out in section 384 of the Companies Act 2006.
My business has exceeded these limits for the first time, do I need an audit?
Under the Companies Act, a company is only required to have an audit if it exceeds the small company limits in two consecutive accounting periods. Breaching the limits in one year only does not mean that your business requires an audit.
What about Groups of companies?
A Group of companies is subject to the same thresholds outlined above.
If the Group as a whole exceeds these small company limits, then every company in the group requires an audit, even if each company is individually small.
When assessing whether a Group has breached the thresholds it is also important to remember to include any overseas companies in the size calculations. This may result in the UK companies requiring an audit, though not every overseas company will require an audit.
We must also be mindful of the rules around “ineligible” groups, which are groups that include companies that are traded on UK regulated markets, that carry on regulated activities or are caught by the list set out in section 384 of the Companies Act 2006.
What is a parent guarantee?
Where a company is a subsidiary within a group of companies, and the parent of the group is established under UK law, then audit exemption may be available through a parent guarantee.
This involves the parent company ‘guaranteeing’ all actual outstanding liabilities and all contingent liabilities at the end of the financial year. The existence of the guarantee is then disclosed in the accounts of the subsidiary.
There are several requirements to meet to be eligible for this guarantee, and these are set out in section 479A of the Companies Act 2006.
Identifying whether your business requires an audit can be a challenging exercise. If you’re unsure whether your business requires an audit, or if you’d like to find out more about our audit services, then please do get in touch with our Head of Audit and Assurance, Grahame Maughan, who would be delighted to help.