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Audit exemption for companies and LLPs
When can a company or LLP opt for audit exemption?
The guidance applies to companies and LLPs that are not parents or subsidiaries of a group. Guidance for group entities is included in Audit exemption for group companies and LLPs.
There are a number of conditions that companies and LLPs need to meet in order to be able to claim exemption from audit in accordance with Companies Act 2006.
Articles of association
The articles of association of a company may prescribe that an audit of the accounts should be carried out regardless of the fact that audit exemption may be available in accordance with relevant legislation. The articles would therefore need to be carefully considered when determining whether exemption from audit could be claimed. The articles of association supplement but do not replace statutory audit requirements.
Small companies and LLPs
Companies and LLPs may claim exemption from audit in a financial year if they meet all of the following conditions outlined in section 477 of Companies Act:
- the company or LLP qualifies as small
- its turnover should not be more than £6.5m in that year, and
- its total balance sheet for the year is not more than £3.26m.
If the accounting period in question is actually more or less than a year, the turnover figure needs to be proportionally adjusted.
The balance sheet total means the total of the assets shown in the balance sheet without deducting any liability.
View the legislation here.
Limitations on claiming audit exemption
The ability of a small company or LLP to claim audit exemption is limited by the right of members to require an audit and by the statutory exclusion of certain entities.
Members representing not less than 10% of the issued share capital, or not less than 10% of the members in number, if the company does not have a share capital, may require an audit of the accounts of a company under section 476 of Companies Act. Please note that such limitation only applies to companies and not to LLPs.
Some companies and LLPs are not able, under section 478 of Companies Act, to claim audit exemption if they were at any time during a financial year:
- a public company
- an LLP whose securities are admitted to trading on a regulated market in an EEA state
- a company or LLP that:
(i) is an authorised insurance company, a banking entity, an e-money issuer, a MiFID investment firm or a UCITS management company, or
(ii) carries on insurance market activity - a special registered body or an employers’ association as defined in the Trade Union and Labour Relations (Consolidation) Act 1992 or the Industrial Relations (Northern Ireland) Order 1992.
View the legislation here and here.
Companies and LLPs qualifying as small
Section 382 of Companies Act 2006 outlines the conditions for a company or LLP to qualify as small. To qualify as small in its first financial year a company or LLP must meet at least two of the following three conditions:
- its turnover should not be more than £6.5m in that year
- its total balance sheet for the year is not more than £3.26m
- the average number of its employees should not be more than 50.
To qualify as small in a subsequent financial year, the company or LLP will need to meet the qualifying conditions in that period and the period before. However, if a company or LLP qualified as small for a period and does not meet the conditions in the following period only, or it did not meet them in that period only, it will still qualify as small in the next period. The company or LLP will not qualify as small, even if it qualified as small in the previous period, if it does not meet the conditions for both a period and the period before. This is referred to as the 'two-year rule'.
If the accounting period in question is actually more or less than a year, the turnover figure needs to be proportionally adjusted.
The balance sheet total means the total of the assets shown in the balance sheet without deducting any liability.
The average number of employees is calculated by taking the number of persons employed under contracts of service by the company or LLP in each month, totalling the amount and dividing it by the number of months in the financial year.
Some companies and LLPs cannot qualify as small, under section 384 of Companies Act, if at any time during a financial year they are one of the following:
- a public company
- an LLP whose securities are admitted to trading on a regulated market in an EEA state
- a company or LLP that:
(i) is an authorised insurance company, a banking entity, an e-money issuer, a MiFID investment firm or a UCITS management company, or
(ii) carries on insurance market activity - member of an ineligible group.
A group is ineligible if any of its members is:
- a public company
- a body corporate (other than a company) whose shares are admitted to trading on a regulated market in an EEA state
- a person (other than a small company or small LLP) who has permission under Part 4 of the Financial Services and Markets Act 2000 (c 8) to carry on a regulated activity
- a small company or small LLP that is an authorised insurance company, a banking company or banking LLP, an e-money issuer, a MiFID investment firm or a UCITS management company
- a person who carries on insurance market activity.
View the relevant legislation here and here.
Dormant companies and LLPs
A dormant company or LLP may be able to claim exemption from audit under section 480 of Companies Act 2006 if:
- it has been dormant since its formation
- it has been dormant since the end of the previous financial year and the conditions below are met.
The conditions are that the company or LLP:
- as regards its individual accounts for the financial year in question:
(a) is entitled to prepare accounts in accordance with the small companies or LLPs regime, or
(b) would be so entitled but for having been a member of an ineligible group, and
(c) is not required to prepare group accounts for that year.
Some dormant companies or LLPs will not be able to claim exemption from audit if at any time during the financial year in question they were:
- an authorised insurance company, a banking company or banking LLP, an e-money issuer, a MiFID investment firm or a UCITS management company
- carried on insurance market activity.
A dormant company or LLP is defined by section 1169 of Companies Act as one that does not have any significant accounting transactions, i.e. one that needs to be entered into its accounting records. The issue of shares in the company by a subscriber in connection with the formation of the company or the payment of some fees or penalty to the registrar are not considered significant accounting transactions.