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Increases in UK audit thresholds

The Companies (Non-financial Reporting) (Amendment) Regulations 2024 are anticipated to be presented to the UK parliament this summer, with the threshold changes expected to take effect for accounting periods beginning on or after 1 October 2024.

Last year, the Department for Business and Trade (DBT) issued a call for evidence on non-financial reporting as part of this initiative. While this article focuses on the proposed changes to UK audit thresholds, the regulations are also expected to introduce changes to the narrative reporting requirements for certain companies.

These modifications aim to balance reducing regulatory burdens on small and medium-sized enterprises (SMEs) with maintaining sufficient oversight and protection for investors and stakeholders. In this blog post, we will explore the details of these changes, their implications, and their impact on businesses throughout the UK.

Understanding UK audit thresholds

Audit thresholds determine if a company must undergo a statutory audit of its financial statements. The small company audit exemption in section 477 of the Companies Act 2006 is directly referenced to the small company thresholds in section 382 of the Act.

In case a company is using an audit exemption it must include the following statement on the balance sheet of its accounts:

“For the year ending [your company’s 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.”

Companies that exceed specific size criteria are required to conduct audits to ensure transparency, accountability, and compliance with financial regulations. The audit exemption threshold will therefore rise accordingly along with the other UK audit thresholds, as set out in the table below:

Annual turnover≤£632k to   ≤£1m≤£10.2m to ≤£15m≤£36m to ≤£54m£36m+ to £54m+
Total assets≤£316k to ≤£500k≤£5.1m to ≤£7.5m≤£18m to ≤£27m£18m+ to £27m+
 Employees no.≤10 no changes≤50 no changes≤250 no changes *251+ no changes *

* Later this year, the government will consult on increasing the average employee number threshold for medium-sized enterprises from 250 to 500.

Predicted impact for SMEs

The revised UK audit thresholds are expected to exempt approximately 132,000 SMEs from mandatory audits. This shift will streamline financial reporting requirements for these businesses, leading to several advantages, such as saving time and resources, and allowing funds typically spent on audits to be redirected towards business development and growth initiatives.

Additionally, about 5,000 large companies will be reclassified as medium-sized, promoting more balanced and suitable reporting. Around 14,000 medium-sized businesses might be reclassified as small-sized, potentially benefitting from audit exemptions and simplified reporting.

A further 113,000 small companies would be reclassified as micro-sized companies which will allow them to file simpler accounts.

Implications and benefits

The adjustments of UK audit thresholds reflect an effort to balance regulatory requirements with business needs, particularly for SMEs. By raising these thresholds, the government aims to reduce the regulatory burden on smaller companies while ensuring transparency and accountability in the corporate sector.  Reduced financial and administrative burdens can make UK SMEs more competitive in both domestic and international markets. This could spur entrepreneurship, innovation, and job creation, driving economic growth and prosperity.

Potential downsides

Despite the benefits, the changes of UK audit thresholds may also introduce challenges. Reduced audit requirements and decreased transparency in financial reporting could negatively affect stakeholder confidence, including that of investors and lenders. SMEs can still choose to undergo voluntary audits, but it’s important to weigh the costs against the less tangible benefits of enhanced financial accuracy and stakeholder trust.

Upcoming proposals for UK audit thresholds

The government plans to conduct further consultations later this year, considering introducing further changes. Aside from increasing the average employee number for UK audit thresholds, as mentioned previously in the article, the government is planning to removing redundant or overlapping requirements from the Directors’ Report and Directors’ Remuneration Report, providing exemptions for medium-sized companies from including a strategic report in the annual report, and exempting smaller public interest entities from audit tendering and rotation requirements.

If you would like to discuss how your company can stay compliant with the amendments in UK audit thresholds or other changes such as the one relating to UK Company Law, you can check our website page “contact us”.

UK audit thresholds

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