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Audit exemption – key facts

Audit exemption for companies can be claimed under Companies Act 2006 under one of the following scenarios:

  • Small company
  • Small member of a small group
  • Any sized subsidiary of a UK or EEA parent with a parent guarantee
  • Dormant company

Certain types of companies cannot claim audit exemption even if categorised as small. These include public companies, banking companies, insurance companies, members of ineligible groups and others. The complete list is set out in CA 2006, s 478.

Small company

Companies that qualify as small companies under Companies Act 2006 are usually exempt from audit, unless they are members of an ineligible group or are charities. A company is small if for both current and last year it was not ineligible, and it met two out of three of the following criteria:

  • an annual turnover of no more than £10.2 million
  • assets worth no more than £5.1 million
  • 50 or fewer employees on average

Small member of a small group

 If a company is a member of a group, it can claim audit exemption if it is a small member (apply the limits given above) of a small group. To qualify as a small group, the group must meet two out of the three requirements below:

  • the aggregate turnover must be not more than £12.2 million (gross) or £10.2 million (net)
  • the aggregate balance sheet total must be not more than £6.1 million (gross) or £5.1 million (net)
  • the aggregate average number of employees must be not more than 50

Net: Per consolidated financial statements

Gross: Adding the individual accounts before deducting intragroup eliminations.

Group and company (outlined above) qualifies as small in its first financial year if it meets the conditions in that year. In any subsequent years, a group or company must meet the conditions in that year and the year before.

Ineligible groups

If the company meets the requirements to be small itself, and the group it is part of is small and not ineligible, the company can take the audit exemption. A group is ineligible if any of its members is:

  • a traded company,
  • a body corporate whose shares are admitted to trading on a regulated market,
  • an e-money issuer,
  • a small company that is an authorised insurance company, a banking company, a MiFID investment firm or a UCITS management company,
  • a person who carries on insurance market activity, or
  • a scheme funder of a Master Trust Scheme within the meanings given by Pension Schemes Act 2017.

Any size subsidiary of an EEA parent with a parent guarantee

Where a company is itself a subsidiary company and its parent is established under UK law or EEA state, then a company can claim audit exemption by parent guarantee.

The parent guarantee does need to be from the immediate parent within the group. The parent company indefinitely guarantees the subsidiaries liabilities that exist at the year-end by disclosure in the notes of its consolidated financial statements that the company (i.e., the subsidiary) is exempt from the audit of individual financial statements. The guarantee notice needs to be filed to the Companies house under s479C of the Companies Act 2006.

Dormant Company

Dormant companies are entitled to claim audit exemption. A company is only dormant during a financial period in which it has no significant transactions. Significant transaction refers to any transaction that requires accounting records, in particular, entries from day to day of all sums of money received and expended by the company, as well as records of the assets and liabilities of the company.

Contact details

The information outlined above covers key aspects in relation to audit exemptions, however they may be additional circumstances to consider depending on your group/company structure. If you have any questions about whether your business needs an audit or to understand the exemptions and thresholds, please contact Mohsin Hussain who leads our Financial Accounting and Reporting (FAR) team.

Mohsin Hussain

mohsin.hussain@assuracc.co.uk

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