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New rules mean tens of thousands of UK businesses could be eligible for an audit exemption.
The government’s response to the consultation on audit exemptions and change of accounting framework confirms plans to allow more companies to make a commercial decision about whether or not to have a statutory audit.
To be eligible for an exemption in the UK, firms must currently be below limits set for balance sheet and turnover.
The new regulations will align mandatory audit thresholds with accounting thresholds, with the result that small and medium-sized enterprises will be able to obtain an exemption if they meet two out of three criteria:
- no more than 50 employees;
- no more than £3.26 million on their balance sheet; and
- less than £6.5 million in turnover
The change could affect around 36,000 extra businesses, and about 83,000 subsidiary companies will be exempted from mandatory audit as long as their parent companies guarantees their liabilities.
In addition, another 67,000 dormant subsidiaries will no longer need to prepare and file annual accounts, provided they receive a similar guarantee.
Following consultation by the Financial Reporting Council (FRC) on changes to UK generally accepted accounting principles (GAAP), companies that prepare accounts under International Financial Reporting Standards may move to UK GAAP and take advantage of reduced disclosures.
The regulations will have effect for accounting years ending on or after 1 October 2012.
When weighing up whether or not to take advantage of the exemptions, directors should remember that accounts must still comply with the requirements of tax legislation, warned Paul Martin of Baker Tilly.
He said CTA 2009, s 46 “states that the profits of a trade must be calculated in accordance with GAAP, subject to any adjustment required or authorised by law. Regardless of the relaxation in the statutory audit requirement, this has not changed.
“Failure to comply with GAAP when calculating profits for corporation tax purposes could mean the corporation tax return is wrong, and this may in turn mean penalties arise,” added Martin.
He concluded that while “the requirement for an independent opinion as to whether or not the financial statements of a company show a ‘true and fair view’ has been removed for many companies, the need for those accounts to be GAAP-compliant remains, in particular for the purposes of corporate tax”.
