A Big Advantage to Being Small…

07 January 2013

Author: Neasa Quigley
Practice Area: Commercial Law

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Wider audit thresholds and flexible accounting requirements for small businesses are a welcome change

Background

The Government has committed itself to reducing the number of UK businesses required to undertake a statutory audit of their accounts and to substantially reduce the burden of financial accounting. Historically, audit requirements in the UK have not offered as much flexibility to companies as is currently available under EU requirements and the effect has created market inequality.

Under the Companies Act 2006 private limited companies are required to have their accounts independently audited on an annual basis. This is subject to an existing exemption for small businesses. If, however, a company does not fall within this exemption, it can prove a costly and time consuming obligation.

Wider exemptions applying to small business have now been implemented by the Companies and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012 and apply to financial years ending on or after 1 October 2012. The effect is not only to widen existing exemptions from audit for small companies and LLPs, but also to create new exemptions from the audit, preparation and filing of the individual accounts of subsidiary companies and LLPs for a given financial year, provided certain qualifying conditions are met.

The Criteria

If a company's financial year ends on or after 1 October 2012, it may be eligible for an audit exemption providing it meets two of the following conditions:

  • 1. It has an annual turnover of no more than £6.5 million;

  • 2. It has assets worth no more than £3.26 million; and

  • 3. It has 50 or fewer employees on average.

The relevant company should also include the following statement on the balance sheet of its accounts:

For the year ending [year end date], the company was entitled to exemption from audit under section 477 of the Companies Act 2006 relating to small companies.

The members have not required the company to obtain an audit of its accounts for the year in question in accordance with section 476.

The directors acknowledge their responsibilities for complying with the requirements of the Act with respect to accounting records and the preparation of accounts.

These accounts have been prepared in accordance with the provisions applicable to companies subject to the small companies' regime.

It is expected that the changes will exempt a further 36,000 companies from having to have an audit.

Shareholder request

Shareholders owning at least 10% of shares (by number or value) of the company can require that the company arranges for its accounts to be audited, regardless of whether the accounts would otherwise benefit from an exemption. The request must be in writing and sent to the company's registered office address. It must also arrive at least 1 month before the end of the relevant financial year.

And for the rest?

A subsidiary company or a dormant subsidiary may be exempt from mandatory audit providing it is unlisted and is not an insurance or banking company.  Its parent must be incorporated in the EU and must provide a statutory guarantee in respect of the subsidiary's outstanding liabilities in respect of that year. The subsidiary must be included in the consolidated accounts prepared by the parent and the use of the exemption must be disclosed. The shareholders must unanimously agree not to proceed with the audit. The unanimous agreement of the shareholders, the statutory guarantee and the parent company's accounts must then be filed with Companies House.

It is estimated that 83,000 UK subsidiaries will now qualify for audit exemptions as a result of these changes. It is likely, however, that a substantial number of parent companies will be unwilling to provide a statutory guarantee in respect of its subsidiary's liabilities.

Flexibility to Change Accounting Framework

Companies who currently prepare their accounts under International Financial Reporting Standards (IFRS) are offered more flexibility to change their accounting framework to UK GAAP for a reason other than a relevant change of circumstances, provided they change their accounting framework no more frequently than once every 5 years. Parent companies who prepare consolidated group accounts under IFRS are offered similar flexibility, provided they are not required to continue using IFRS by the IAS Regulation (EC) 1606/2002. 

Comment

The flexibility offered to companies and their subsidiaries is a welcome cutting of regulatory tape, in respect of both audit and accounting requirements. Companies should however evaluate the effect of dispensing with the statutory audit and the benefits of continuing for commercial purposes. An audit can act as an opportunity to identify areas of weakness, allowing companies to develop and maximise their business. It can also assist the company to protect its credit rating, prevent fraud and offer confidence to shareholders or potential buyers and suppliers. On the other hand, for those companies which embrace the changes offered by the regulations, the actual impact and financial saving to their business remains to be seen.

For more information please contact:

NEASA QUIGLEYT. +44 (0) 28 90348 816E. [email protected]

REBEKAH NEVINT. +44 (0) 28 9024 4951E. [email protected]

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