There is total exemption from audit for certain small companies (including very small charitable companies) if they are eligible and wish to take advantage of it. Some charitable companies are exempt from audit but must provide an accountant’s report on the accounts (partial exemption). Further details about how to claim exemption are in this chapter.

1. Which small companies qualify for audit exemption?

To qualify for total audit exemption, a company must:

1. qualify as small;
2. have a turnover of not more than £5.6 million; and
3. have a balance sheet total of not more than £2.8 million.

Please note: The above audit exemption thresholds apply to financial years ending after 30 March 2004. For earlier financial years, to qualify for total audit exemption, a company must:

1. qualify as small;
2. have a turnover of not more than £1 million; and
3. have a balance sheet total of not more than £1.4 million.

For a charitable company to qualify for total audit exemption it must qualify as small, its gross income must not be more than £90,000 and its balance sheet total must not be more than £2.8 million (£1.4 million for financial years ended on or before 30 March 2004).

Charitable companies which qualify as small (see chapter 3) and have a gross income between £90,000 and £250,000 and a balance sheet total of no more than £1.4 million qualify for partial exemption.

2. Are all types of small companies eligible for the exemption?

No. Audited accounts must be delivered to Companies House if the company falls into any of the following categories:

(a) A parent company or subsidiary undertaking (unless dormant for the period during which it was a subsidiary) except where:

1. the group qualifies as a small group or would qualify if all the bodies corporate in the group were companies; and
2. the turnover for the whole group is not more than £5.6 million net or £6.72 million gross; and
3. the group’s combined balance sheet total is not more than £2.8 million net (£3.36 million gross).

Please note: The above audit exemption thresholds apply to financial years ending after 30 March 2004. For earlier financial years, a parent company or subsidiary undertaking (unless dormant for the period during which it was a subsidiary) cannot qualify except where the group:

1. qualifies as a small group or would qualify if all the bodies corporate in the group were companies; and
2. the turnover for the whole group is not more than £1 million net (or £1.2 million gross); and
3. the group’s combined balance sheet total is not more than £1.4 million net (or £1.68 million gross).

(b) A member of a group of companies in which any member is:

1. a public company or body corporate which (not being a company) has power under its constitution to offer shares or debentures to the public;
2. a person who has permission under Part 4 of the Financial Services and Markets Act 2000 to carry on a regulated activity;
3. a person who carries on insurance market activity.

(c) A person who has permission under Part 4 of the Financial Services and Markets Act 2000 to carry on a regulated activity (other than an appointed representative whose scope of appointment is limited to activities that are not regulated activities).

“Regulated activity” does not include:

1. arranging regulated mortgage contracts;
2. assisting administration and performance of a contract of insurance;
3. advising on regulated mortgage contracts; or
4. dealing as agent, arranging deals in investments or advising on investments- where the activity concerns relevant investments that are not contractually based investment.

(d) A person who carries on insurance market activity.

(e) An appointed representative within the meaning of s.39 of the Financial Services and Markets Act 2000.

(f) A public limited company unless the company is dormant.

(g) A special register body or employers association under the Trade Union and Labour Relations (Consolidation) Act 1992.

(h) A company where an audit is required by a member or members holding at least 10% of the nominal value of issued share capital or holding 10% of any class of shares; or - in the case of a company limited by guarantee - 10% of its members in number. The demand for the accounts to be audited should be in the form of written notice to the company, deposited at the registered office at least one month before the end of the financial year in question.

Some flat management companies may have to prepare audited accounts to comply with the terms of their lease. If in doubt, you should seek professional advice.

3. What does an audit-exempt company need to send to Companies House?

If the company qualifies, unaudited accounts may be delivered to the Registrar in the form of an abbreviated balance sheet and notes. The balance sheet must contain the following statements above the director’s signature:

(a) For the year ended . . . (date) the company was entitled to exemption under section 249A(1) of the Companies Act 1985. (In the case of charitable companies which are claiming partial exemption, the reference will be to section 249A(2)).

(b) Members have not required the company to obtain an audit in accordance with section 249B(2) of the Companies Act 1985;

(c) The directors acknowledge their responsibility for:

1. ensuring the company keeps accounting records which comply with section 221; and
2. preparing accounts which give a true and fair view of the state of affairs of the company as at the end of the financial year, and of its profit or loss for the financial year, in accordance with the requirements of section 226, and which otherwise comply with the requirements of the Companies Act relating to accounts, so far as applicable to the company.

(d) The accounts have been prepared in accordance with the special provisions in Part VII of the Companies Act 1985 relating to small companies.

If the company chooses, it may deliver the unabbreviated accounts prepared for its members. The same statements must appear on the unabbreviated balance sheet.

Community Interest Companies (CICs) Please remember: CICs which are taking advantage of these exemptions must still prepare and deliver to Companies House a ‘community interest company report’ and a fee of £15.

4. My company is a charity claiming partial exemption, what must the accountant’s report say?

The accountant’s report must state that:

1. the accounts of the company for the financial year in question are in agreement with the accounting records kept by the company under section 221 of the Companies Act 1985; and
2. having regard only to, and on the basis of, the information in those accounting records, those accounts have been drawn up in a manner consistent with the provisions of the Act as specified in subsection (6) of section 249C, so far as applicable to the company;
3. having regard only to, and on the basis of, the information in the accounting records, the company satisfied the requirements of section 249A(4), for the financial year in question, and did not fall within section 249B(1)(a) to (f) at any time within that financial year.

The report must show the name and signature of the reporting accountant.

5. Who can be a reporting accountant?

A reporting accountant is either:

1. any member of a body listed below who, under the rules of that body, is entitled to engage in public practice, and who is eligible for appointment as a reporting accountant; or
2. any person, (whether or not a member of any such body), who is eligible for appointment as a company auditor under the rules of that body.

The bodies referred to above are the:

1. Institute of Chartered Accountants in England and Wales;
2. Institute of Chartered Accountants of Scotland;
3. Institute of Chartered Accountants in Ireland;
4. Association of Chartered Certified Accountants;
5. Association of Authorised Public Accountants;
6. Association of Accounting Technicians;
7. Association of International Accountants;
8. Chartered Institute of Management Accountants;
9. Institute of Chartered Secretaries and Administrators. (This new addition applies to financial years ending on or after 30 January 2004.)

An individual, body corporate or firm may be appointed as a reporting accountant. A partnership that is not a legal person may be appointed under section 26 of the Companies Act 1989.

The reporting accountant must be independent and meet the conditions set out in section 27 of the Companies Act 1989. This means, for example, that he or she cannot be an officer or employee of the company.

6. How long do I have to deliver accounts to Companies House?

The same time applies as for all other accounts. The same penalties are imposed for late filing.

7. Does an audit exempt company still have to send accounts to its members?

Yes. In accordance with the Companies Act 1985, members have a right to receive or demand copies of accounts and the related reports.

Possible drawbacks of unaudited accounts: Banks and credit managers rely on information available from Companies House to assess a company’s creditworthiness and currently look for the reassurance of an independent audit. If it qualifies for audit exemption, a company will need to decide whether unaudited accounts are appropriate to its own circumstances.

8. Are annual accounts required if a company is not trading?

All limited companies, whether they trade or not, must deliver accounts to Companies House. However, a limited company may claim exemption from audit as a ‘dormant company’ if it has not traded during a financial year, and provided it meets certain other criteria.

Dormant companies do not need to appoint auditors and can deliver even simpler annual accounts to Companies House.

9. My company’s articles of association state that the company must have an auditor but otherwise we would be exempt. What can we do?

Companies may decide to revise their articles of association to ensure that these do not stop them taking advantage of the audit exemptions. Companies with articles based on the model articles at Table A of the Companies Act 1985 are unlikely to have such problems. However, the 1948 version of Table A (and other similar earlier provisions) imposes an obligation to appoint auditors. Companies with such articles may wish to take legal advice about possible changes.

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