What is the Audit Exemption Two-Year Rule?

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Audit Posted on June 05, 2017

What is the audit exemption two-year rule?

Find out how the audit exemption two-year rule works and what it means for your business.

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For much of UK business, the annual audit is a time of frantic activity, getting the books into order and presenting everything in the best light for a group of strangers to come in and rifle through your files. This is something that is required by law for all but the smallest companies and can have important benefits in the perception of the probity and security of a company.

If yours qualifies as a small company, it may be that you’re not required to carry one out. The rules around this are altered periodically, so it’s worth checking regularly.

Back in 2012, significant changes were made to company auditing and reporting requirements that allowed more small businesses to go without an annual audit. This is called audit exemption.

Do I qualify for an audit exemption?

As originally envisaged, the exemption applied to companies that met certain conditions over a two-year rolling period. If a company had a turnover not exceeding £6.5 million and a balance sheet of less than £3.26 million it would qualify for exemption. There was also a limitation of not more than fifty employees, bringing the UK into line with other European companies.

As of 1st January 2016, the figures were amended. Whilst the two-year rule still applies in relation to qualifying conditions, the turnover and balance sheet totals rose. The audit exemption threshold for turnover became £10.2 million, whilst the balance sheet total increased to £5.1 million. The number of employees remains at fifty.

Business Advice: The exemption doesn’t apply to all small companies. Public companies, banks, insurance companies, and any other company that carries out insurance market activity do not qualify. Nor do trade unions or employers’ associations.

What is the audit exemption two-year rule?

The two-year rule takes into account the year before the one being assessed, so a company remains exempt even if it exceeds two or more of the set limits in the current year, so long as it met at least two of the limits in the previous year.

This means a company can experience rapid growth and remain exempt from audit requirements, so long as it qualified as a small company in the previous year.

How does it affect subsidiaries?

If a company cannot claim audit exemption due to not qualifying as a small company, it may still be able to qualify as a subsidiary of an EEA parent company. To do this, it just needs to meet a number of conditions.

Its parent company must be established under the law of an EEA state, and that parent company must give a statutory guarantee under section 479C of outstanding liabilities. The company or LLP must be included in the parent’s consolidated accounts, and all members must agree to the exemption.

These rules clearly widen the scope for companies to avoid the need for an audit, as it only requires a full audit of the parent company to take place, so long as those conditions are met by any subsidiaries. This represents a significant potential saving across a group.

Business Advice: Any use of the exemption under the Companies Act 2006 must be disclosed in the relevant documents filed with Companies House. These documents must be written in English.

How can the two-year rule benefit me?

There are many advantages to conducting an annual audit and, naturally, being exempt doesn’t mean you can’t carry one out regardless. That’s your choice.

However, there are significant costs involved in the audit process and for smaller companies these can be a real headache, so there are financial advantages to being able to avoid the need to get the auditors in.

This is particularly relevant where your company has experienced rapid growth, requiring additional resources to be put into equipment and staffing.

If you’re concerned about properly auditing your company and not sure how the two-year rule can affect you, it’s a wise move to consult professionals. Here at Clark Howes we’re always ready to help, and our team of accounting specialists are here to guide you through the minefield of your annual audit smoothly.

Still wondering "what is the audit exemption two-year rule?" For more advice, get in touch today.