TT179: Audit Threshold Changes

October 01, 2012

Audit threshold changes

There have been recent changes to audit exemption thresholds for limited companies and LLPs. The changes apply to financial years ending on or after 1 October 2012.

Previous rules

Prior to the rule changes small companies did not require an audit if they met both of the following criteria:

  • Turnover not more than £6.5 million and
  • Balance sheet total not more than £3.26 million

New rules

The changes mean that a company that qualifies as a small company in accordance with Companies Act 2006 sections 382(1) to (6) will qualify for audit exemption.

Qualifying as a small company

Once a company qualifies as small it will remain small unless it fails to meet the qualifying conditions in the current year and the preceding year. Whereas, if a company qualified as medium or large it will need to satisfy the qualifying conditions in the current and preceding year to qualify as small and be exempt from audit.

The qualifying conditions are met by a company in a year in which it satisfies two or more of the following three requirements:

  • Turnover not more than £6.5 million
  • Balance sheet total not more than £3.26 million
  • No more than 50 employees

The balance sheet total is the total of fixed and current assets.

Certain entities such as public limited companies cannot qualify as a small company nor can companies in a group containing one.

A parent company must be the parent of a small group to qualify as a small company. A subsidiary must be a small company and part of a small group to qualify as audit exempt unless it takes advantages of the new rules relating to subsidiary undertakings.

Changes relating to subsidiary undertakings

Under the new rules a subsidiary can be exempted from an audit even though it is part of a group which doesn’t qualify as small, as long as all of the following conditions are met and it files the necessary documents with Companies House before it files its accounts:

  • Its parent undertaking is established under the law of an EEA State
  • All the members of the company agree to the exemption for the financial year (a written notice must be filed)
  • The parent company guarantees the subsidiary’s commitments (a statement must be filed)
  • The company is included in the consolidated accounts for that financial year or an earlier date (these must be filed and an audit report must be filed)
  • The parent undertaking must disclose in the notes to the consolidated accounts that the company is exempt from the audit requirement

Certain companies such as quoted companies and banks cannot take advantage of this exemption.

We expect that many subsidiaries will continue to have an audit rather than taking the steps necessary for exemption. In any event the audit of a material subsidiary might still be required by the auditor of the parent undertaking.


The above changes have also been implemented for limited liability partnerships.

Planning point

If you would like your company to take advantage of the new rules consideration can be given to changing the year end to a post 1 October 2012 date.

If you require advice or assistance on this or any other matters in this Topical Tip please contact your Barnes Roffe LLP Partner.


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