When audit thresholds can be confusing

The statutory instrument implementing the 2013 EU Accounting Directive effective in the UK from 1 January 2016 has changed the audit thresholds for limited companies.

Companies

Companies are exempt from audit as per Companies Act 2006 section 477 if they qualify as small companies under section 382-384, unless they are members of a group or are charities and hence are required to follow the different charity audit thresholds.

A company is small if it meets two out of three of the following criteria for two consecutive years:

Once a company size is established, it has to meet or cease to meet only when the limits are exceeded for two consecutive years. The audit exemption does not apply if the company is ineligible. A company must have an audit if at any time in the financial year it has been: 

• a public company (unless it’s dormant)
• a subsidiary company within a group which is not small
• an authorised insurance company or carrying out insurance market activity
• involved in banking or issuing e-money
• a Markets in Financial Instruments Directive (MiFID) investment firm or an Undertakings for Collective Investment in Transferable Securities (UCITS) management company
• a corporate body and its shares have been traded on a regulated market in a European state.

Please bear in mind that the ineligible rules only refer to the financial year for which the accounts relate.

As these revised limits apply to accounting periods starting on or after 1 January 2016, to be exempt from a statutory audit the company must meet the new limits for this year and the previous year.

Groups

A group has to meet the above limits as a whole to be able to exempt from an audit. If the group does not qualify as a small group then an audit will be required for each group member. However, there is an exemption for subsidiaries under section 479A to 479C if they meet certain criteria and if the parent company provides a guarantee in respect of all actual outstanding liabilities and all contingent liabilities at the end of the financial year.

Does ‘plc’ in a group make it ineligible?

Not really, but it depends. Under the old rules a PLC in the group would make the entire group ineligible but under the new rules a PLC will only make that company and group ineligible if the PLC is also a traded company (eg listed on LSE).

Another benefit is that a group with an AIM listed PLC company will not make the group ineligible, and this was not available under the old rules. So having a ‘vanity PLC’ in the group will no longer, on its own, prevent other group companies preparing accounts under the small regime and claiming small audit exemptions.

Although small companies are exempt from an audit under the criteria but they may still undertake an audit for various other reasons eg: 

• the company’s lender requires an audit
• a grant provider requires an audit
• directors or shareholders may request an audit assurance
• the company constitution may require it
• to support future sale or public offering of the business.

Charity thresholds

The audit threshold for all charities is different from non-charitable entities. There are different thresholds for Scottish charities and other UK charities for periods ending on or after 31 March 2015 as detailed below:

Any charity that fulfils the above criteria can choose to opt out of a full audit. However, most are required to obtain an alternative assurance service as per their governing documents. Broadly speaking, an independent examination is needed if gross income is between £25,000 and £1m (£500,000 in Scotland). Where the charity is not required to have an audit but gross income exceeds £250,000, an independent examiner must qualify by being a member of an approved professional organisation specified under the Charities Act.

The Charity Commission has issued guidance in relation to charity reporting and accounting. 

Co-operatives and community benefit societies

The Statutory Instrument containing the new audit limit thresholds is expected to come into force from 1 April 2018. This would see an increase in the audit thresholds for Co-operatives and Community Benefit Societies to the same thresholds that exist for companies. The change in the draft SI is that section 84(1) of the Co-operative and Community Benefit Societies Act 2014 would be amended as follows: in paragraph (a), for ‘£2,800,000’ substitute ‘£5,100,000’; in paragraph (b), for ‘£5,600,000’ substitute ‘£10,200,000’.