There are many small are growing UK businesses for whom the word ‘audit’ seems expensive and intimidating. But the best part is that not every company needs one. In reality, there are many thousands of private limited companies across the UK who qualify for audit exemption. This allows them to skip the formal audit process. However, for that, they have to meet certain audit criteria.
But how do you know if your company qualifies for a financial services audit or not? Let’s explore what audit exemption means. Moreover, let’s have a look at which companies are eligible, and when an audit may still be required.
What Does Audit Exemption Mean?
In simple terms, audit exemption means that your company doesn’t need to have its financial statements independently reviewed by an external auditor.
Instead, your accountant can prepare and file your accounts. That too without the extra step of statutory audit services.
However, this isn’t a free pass for all small businesses. The Companies Act 2006 sets out clear rules that determine which companies are exempt from audit.
The Small Company Audit Exemption Criteria
Most UK companies that qualify for exemption fall under the “small company” category. To qualify, your business must meet at least two of these three thresholds:
ü Annual turnover: £10.2 million or less
ü Balance sheet total: £5.1 million or less
ü Average employees: 50 or fewer
It is important to meet these conditions for two consecutive years, if you want your company to be officially classed as small and if you want to claim audit exemption.
If you meet these conditions for two consecutive years, your company is officially classed as small and can claim audit exemption.
Also, your external auditor will usually confirm your eligibility and make the relevant declarations when he files your accounts with Companies House.
Group Companies and Parent-Subsidiary Rules
If your business is part of a group, things become more complex.
Moreover, one can only exempt a group if one qualifies the entire group as small. This means that the combined turnover, assets, and employee numbers of all companies in the group have to stay below the thresholds.
However, regardless of its size, if the group includes a public company, insurance firm, or bank, none of its subsidiaries can claim exemption. This is where expert advice from the statutory auditors becomes invaluable. Because they review your group structure and confirm which entities can legally skip the audit.
Exceptions: When an Audit Is Still Required?
You are required to have an audit even if your company qualifies as small. Common exceptions include:
Public Limited Companies (PLCs)
All PLCs must be audited, regardless of turnover or size.
Financial or Insurance Companies
For these sectors, regulations are a bit strict and one cannot claim exemption.
Charitable Companies
It depends on income and funding. As far as charities are concerned, they often need independent audits.
Shareholder Requests
For shareholders, who own at least 10% of shares demand an audit, then it becomes mandatory.
Ineligible Groups
If your company belongs to a non-small group, then exemption does not apply.
These conditions exist to maintain financial transparency and accountability in higher-risk or publicly accountable sectors.
Dormant Companies and Audit Exemption
Dormant companies are those companies that have no trading activity or transactions during the year. Thus, they are automatically exempt from audit.
This rule helps businesses that exist only to hold assets, protect names, or stay inactive for future projects.
However, there are dormant subsidiaries in a larger group as well. They may still need the parent company to issue a section 479C guarantee to claim exemption.
Why Some Businesses Still Choose an Audit
Some companies voluntarily opt for an audit even when they don’t require it. It is, although, for a good reason.
An independent audit can:
- Strengthen credibility with investors and lenders
- It provides peace of mind for directors and shareholders
- Can improve financial controls and accuracy
- It highlights inefficiencies or potential fraud risks
So, while exemption saves money, a voluntary audit can add long-term value and trust.
Conclusion
Audit exemption offers real relief for small and medium-sized UK companies. However, it’s not universal. For that, one needs to meet specific thresholds and conditions to qualify. Even then, there are exceptions.
If a person is not sure about the qualification of a company, he must consult an experienced financial auditor or an expert statutory auditor in the UK. They have years of experience, and they are experts, who can thoroughly guide through every step. They’ll review your financials and confirm your eligibility. Moreover, they make sure that your filings comply with UK law.
It is important to have the right assumption about the audit. Because any wrong assumption could cost you far more later, however, the right audit exemption saves time and money.
