Audit Exemption
The turnover threshold which exempts most companies from a statutory audit is £5.6 million (previously £1 million) for accounting periods ending after 30 March 2004.
The legal definition of small and medium-sized companies was also changed so that more companies are able to prepare accounts with fewer disclosures than for 'larger' companies.
In the past, audits were seen as the 'cost' companies had to pay for the privilege of limited liability. Audits provide reassurance to shareholders, lenders and creditors that the annual accounts are reliable. Companies House has confirmed that 93% of the complaints it receives are about the credibility of filed accounts from audit-exempt companies.
However, small companies still have to produce full statutory accounts, so there remains scope for cutting more 'red tape'. The accounting requirements for smaller companies remain under review.
Not all companies with turnover under £5.6 million come within the new audit exemption provisions, because there are criteria other than turnover. In particular, companies not classed as small or whose total assets exceed £2.8 million must still have an audit. Public companies and those carrying on particular types of business, such as insurance broking and financial services, will remain subject to an audit.
Shareholders can require that an audit is carried out, for example if they are not involved in the day-to-day running of the business and require reassurance that their investment is being properly looked after.
Small and medium-sized company thresholds
For accounting periods ending on or after 30 January 2004 a small company is normally one that meets two or more of the following criteria for the current and previous year:
- Turnover not more than £5.6 million
- Balance sheet total not more than £2.8 million
- Not more than 50 employees
A medium-sized company will be one that meets two or more of the following criteria:
- Turnover not more than £22.8 million
- Balance sheet total not more than £11.4 million
- Not more than 250 employees
The way forward
The existence of audit exemption makes it more attractive for sole traders and partnerships to consider setting up a company to gain the protection of limited liability. However, there are tax consequences of such a change and it is important to seek our advice on these matters.
Do call us if you would like further help or advice on this subject.
