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How to qualify for audit exemption in the UK

How to qualify for audit exemption in the UK

Darren Jordan

Many UK businesses face serious consequences for not adhering to auditing requirements. If you’re a business owner or a decision-maker, it’s crucial to be in the know. While a key area for many businesses in the UK, auditing can be stressful for owners and managerial staff who are unsure of what their legal and regulatory obligations are. At Moore Kingston Smith, we recognise that diving into the intricacies of UK audit rules can be daunting, especially when you’re juggling the many tasks of running a business.

We can help you understand what the UK auditing requirements are, help you understand what the qualifying criteria are, as well as whether your business may be exempt from the process. This isn’t always a clean-cut decision, so seeking expert guidance and advice is always a smart decision.

In this post, we’ll look at the audit requirements for UK businesses, paying close attention to the audit exemption and qualification criteria, giving you the knowledge you need to operate with complete confidence and peace of mind. There are several rules in place that can cause complications, such as your status as part of a larger, transnational organisation, but our goal is to help make this much easier to understand.

Understanding audit exemption in the UK

Auditing is a key area for many businesses in the UK, and it can be Audit exemption allows certain UK businesses to bypass the requirement of a statutory audit, but this can be a source of confusion due to the different rules in place concerning turnover, assets, workforce size, and composition, particularly about the business status as part of a larger, international group. As you can imagine, this requires careful consideration and a sound understanding of the audit planning process, and what your audit report obligations are.

What is an audit and what is its purpose?

If you are unsure and would like some clarification on what an audit report is, it is defined as an official inspection of your company’s accounts, often completed by an independent body that has no connection to your business. This is a common occurrence for many companies, so understanding the UK audit threshold and the small company audit exemption is essential, as there are some exemptions in place based on specific limits and thresholds, particularly for smaller businesses or those that are part of larger groups that operate in the UK and beyond.

The purpose of a statutory audit is to review the business’s financial statements, serving as an independent stakeholder who is operating from an unbias standpoint. This independent opinion will investigate whether the business’s financial statements are fair and true, as well as whether they have been prepared in line with the current accounting standards. The purpose, contrary to popular belief, is not to identify all mistakes, but instead to identify material misstatements.

Once this work has been completed and an opinion has been formed, it will be communicated in a standard audit report, which will then be included in the company’s financial statements. If there are any areas of concern, this will be addressed within the audit report, as well as being communicated to the management team.

Qualification criteria for audit exemption

There are limits in place that serve as a benchmark for the auditing exemption process, and this can seem quite confusing if you’re a business operating in multiple areas. If you are a UK company that is part of an audit threshold group, the audit procedures are slightly different when it comes to looking at exemptions – the audit exemption limits will need to apply to the entire group and not just the UK company.

If you are part of a larger group, there are two sets of audit limits that you will need to consider:

1. Limits that apply to individual companies;
2. Higher limits that allow for a simple aggregation of group numbers before removing intragroup trade.

Meeting either set of limits qualifies the group for UK audit exemption, but the group must satisfy the criteria for two consecutive years unless it is the first year of operation. You cannot, for example, have a particularly challenging year and therefore qualify for a UK audit exemption as a result. This helps ensure that businesses that would typically qualify for the UK audit requirements don’t slip under the radar for a single year.

Limits and thresholds for audit exemption

There are limits and audit thresholds in place that can help businesses gauge whether they are eligible for UK audit exemption, but seeking professional advice is always worthwhile in situations like this. Audit planning is a key role for many financial organisations, as well as your internal finance team, so having access to as much information as possible will help you operate with a greater sense of certainty, which is essential when dealing with such matters.

If you have a net annual turnover of less than £10.2 million and a gross annual turnover of less than £12.2 million, you should qualify for audit report exemption. Additionally, if you have assets worth less than £5.1 million net and £6.1 million gross, you should also qualify – this includes fixed and current assets. What’s more, you may have audit exemption status if you have 50 or fewer employees over the measurement period.

 

Audit exemption limits Net* Gross**
An annual turnover/revenues of no more than £10.2 million £12.2 million
Assets (fixed and current assets) worth no more than £5.1 million £6.1 million
50 or fewer employees on average    

 

*Based on consolidated figures after intragroup trade is removed
**Based on consolidated figures before intragroup trade is removed

Some groups may qualify for UK audit exemption regardless of their size, but this should not be taken as a given and should therefore be investigated by the relevant stakeholders. These include groups where any of its companies fall into the following categories:

  • Public company.
  • Corporate body with shares traded in a regulated market.
  • Authorised insurance company, bank, an issuer of electronic money (e-money), or a Markets in Financial Instruments Directive (MiFID) investment firm.

If a UK group, consisting of a UK parent and a UK subsidiary, is part of a larger multijurisdictional group, the UK parent can provide a guarantee for the UK subsidiary. In this scenario, an audit report is only required for the UK group’s results. This may seem complicated, but by segmenting the different business arms by area of operation, the UK audit requirements should be easier to understand.

Ineligibility factors for audit exemption

Despite there being a set criteria that can provide businesses with audit exemption status, you may still qualify for the audit procedures if you operate within certain industries, or have status as a registered body, for example.

To help clear up any confusion, you will not qualify for UK audit exemption status if, at any time in the financial year, your business has been one of the following:

  • a public company (unless it’s dormant)
  • a subsidiary company (unless it qualifies for an exemption)
  • 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
  • has exceeded the audit limit set by regulatory bodies
  • 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

If you are still unsure as to whether you qualify for UK audit exemption status, you should contact a financial professional. This can be confusing for many businesses, especially where the stipulations may appear to contradict one another, so seeking expert advice is always a good way to remove any confusion.

How to apply for audit exemption

If you believe that your business has audit exemption status, this should be communicated to your accountants and be included in your financial statements. You must include the following statement on the balance sheet of your accounts if you do not qualify for a statutory audit, as outlined by the government.

For the year ending [your company’s year-end date], the company was entitled to exemption from audit under section 477 of the Companies Act 2006 relating to small companies.

The members have not required the company to obtain an audit of its accounts for the year in question in accordance with section 476.

The directors acknowledge their responsibilities for complying with the requirements of the Act with respect to accounting records and the preparation of accounts.

These accounts have been prepared in accordance with the provisions applicable to companies subject to the small companies’ regime.

This only applies to private limited companies, but by including this, you are conveying to the relevant authorities that, to the best of your knowledge, you are exempt from the auditing process and that you will not require an independent audit report.

Impact of Brexit on audit and consolidation exemptions

Once Brexit became legally binding, UK company law changed to reflect our altered status within the European community. This impacted the ability to take advantage of audit and consolidation exemptions for UK subsidiaries of companies that operate and are registered in the European Economic Area (EEA). Post-Brexit, which became official on July 1st 2021, these subsidiaries were no longer able to take advantage of this.

However, subsidiary audit exemption status is still available when the sub-group is within the UK and a UK parent company guarantees liabilities for its UK subsidiaries. The company that provides the guarantee must prepare and file consolidated accounts at Companies House, which can cause an administrative headache, but this is often still preferable to the audit planning process.