The Government estimates more than 100,000 UK businesses could save millions of pounds in annual accountancy and administration costs under its proposals for reduced auditing and reporting requirements.
Following consultation, it has confirmed plans to allow more companies to make a commercial decision about whether or not to have a statutory audit.
New regulations will remove EU "gold-plating" and ensure UK SMEs are not at a disadvantage compared to their European competitors. These changes are part of the Government's wider drive to reduce unnecessary burdens on business.
Currently, to be classified as 'small' for accounting purposes, a company must meet two out of three criteria - SMEs must have no more than 50 employees; no more than £3.26m on their balance sheet; and less than £6.5m in turnover.
New regulations will align mandatory audit thresholds with accounting thresholds, meaning 36,000 more small companies may choose not to have an audit.
The Government also proposes to exempt most subsidiary companies from mandatory audit as long as their parent company guarantees their liabilities, potentially benefitting 83,000 subsidiary companies. The guarantee made by the parent undertaking will be a statutory guarantee and made in respect of all liabilities of the subsidiary which are outstanding at the end of the financial year for which an exemption from audit is being sought.
However, the Government concedes there may be concerns raised over the impact of the guarantee on matters such as a company's distributable reserves, dividend payments and cross guarantees. Companies and parents considering taking advantage of exemptions should seek legal advice.
Companies wishing to take advantage of the qualifying subsidiary exemptions must file the documents required to claim the exemption within the time period for filing their accounts. If they fail to do so they and their directors will be subject to the normal penalties for the late filing or the failure to file accounts and reports.
Companies can still choose to have an audit should they feel it is in their commercial interests to do so. The interests of shareholders are protected by safeguards existing in company law. Under section 476 Companies Act 2006, shareholders holding at least 10% of the share capital may require an audit.
Dormant companies can currently take advantage of an exemption from audit if they fulfill the conditions of section 480 Companies Act 2006. The Government felt that, owing to a lack of trading activity and a lack of significant accounting transactions, the preparation and filing of dormant company accounts provides little additional information for the public record and that there is minimal risk associated with extending the scope of the exemptions to include the preparation and filing of accounts.
Therefore, under the proposals another 67,000 dormant subsidiaries will no longer need to prepare and file annual accounts, provided they receive a similar guarantee. They will still need to file an annual return at Companies House.
The proposals may have a limited effect in cases where the company or group requires finance, as banks and other lending institutions will be able to request additional information or an audited set of accounts. Companies which are considered more systemically important, such as quoted companies, banks and insurers, are excluded from the scope of the audit exemption proposals.
The regulations are expected to come into force for accounting years ending on or after 1 October 2012 and will also apply to LLPs.
The Government response to the consultation and associated documents are available here.