17 January 2017

Audit thresholds: what’s changed?

The audit thresholds for limited companies changed from 1 January 2016 - what does this mean and does it affect you?

The statutory instrument implementing the 2013 EU Accounting Directive came into force in the UK on 1 January 2016. One of the changes brought into law by this new legislation was a change in the audit thresholds for limited companies.

Companies

Companies that qualify as small companies under the Companies Act 2006 are usually exempt from audit, unless they are members of a group or are charities and thus are required to follow the charity audit thresholds (see below).

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

 
'Old' limits (for periods beginning before 1 January 2016)
'New' limits (for periods beginning on or after 1 January 2016)
Turnover <£6.5m <£10.2m
Total assets <£3.26m <£5.1m
Number of employees <50 <50

Once a company size is established, it is only lost when the limits are exceeded for two consecutive years.

There are corresponding changes to the gross criteria that apply in a group situation. As before, these are plus 20% on the thresholds for turnover and total assets.

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; or
  • a corporate body and its shares have been traded on a regulated market in a European state.

The ineligible rules only refer to the financial year for which the accounts relate. The key is to qualify as small and then not be excluded for the relevant year.

These revised limits apply to accounting periods starting on or after 1 January 2016 (e.g. if the year end is 31 December 2016 or 31 March 2017). To be exempt from a statutory audit the company must meet the new limits for this year and the previous year (e.g. 31 December 2016 and 31 December 2015).

However, there may be reasons why a company would still undertake an audit even if it met the new small company criteria, such as:

  • the constitution of the company may require it;
  • directors or shareholders may want the assurance that an audit provides;
  • the company’s lender requires an audit;
  • a grant provider requires an audit; or
  • to provide a history of audited financial statements in the event of a future sale or public offering of the business.

Groups

Entities within a group are exempt from an audit if the above limits are met across the group as a whole. There are two sets of limits for companies (net and gross), as noted above, to ease the assessment for the group. If the group does not qualify as a small group then an audit will be required for each group member, although there is an exemption for subsidiaries 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. However, given the guarantee that the parent company must provide, we have seen very few groups take up this exemption.

There is also a further complication in respect of group eligibility. Under the old rules a plc in the group would make the entire group ineligible. Under the new rules a plc will only make that company ineligible, unless the plc is also a traded company (e.g. listed on LSE) in which case the entire group is ineligible. One of the benefits of this is that a group with an AIM listed plc company will not make the group ineligible, whereas under the old rules it would. The actual number of companies benefitting from this may be limited.

Charity thresholds

The audit threshold for all charitable entities, including charitable companies, is different from non-charitable companies and these have not been impacted by the statutory instrument noted above. However, the audit thresholds for Scottish charities and other UK charities differ, as detailed below.

Charities registered in Scotland with the Office of the Scottish Charity Regulator (OSCR)

Any charity registered in Scotland that falls below a gross income of £500,000 (unless both their gross assets exceed £3.26m and their gross income exceeds £250,000) can choose to opt out of a full audit. Most are required to obtain an alternative assurance service, which is an independent examination.

Charities registered in England and Wales with The Charity Commission

Any charity registered in England and Wales that falls below a gross income of £1m (unless both their gross assets exceed £3.26m and their gross income exceeds £250,000) can choose to opt out of a full audit. As above, most are required to obtain an alternative assurance service.

Charities registered in Northern Ireland with The Charity Commission for Northern Ireland

Any charity registered in Northern Ireland that falls below a gross income of £500,000 can choose to opt out of a full audit. Again, most are required to obtain an alternative assurance.

Medium-sized companies

Medium-sized companies are subject to audit, however, as a consequence of the change in the small company limits, there has also been a change to the financial reporting thresholds for qualification as ‘medium’, with the new thresholds being:

  • turnover: from £10.2m to £36m;
  • total assets: from £5.1m to £18m;
  • number of employees: 50 to 250.

An entity or group must meet two out of three of these criteria to qualify as a medium reporting entity. As with small companies, there are corresponding changes to the gross criteria that apply in a group situation. As before, these are plus 20% on the thresholds for turnover and total assets.

If you would like to discuss these changes in more detail, please do not hesitate to get in touch with James McBride or your usual contact at Scott-Moncrieff.

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