Small and medium-sized companies and audit exemption - new thresholds

During the next week or so, the thresholds in the Companies Act defining small and medium-sized companies and determining which companies are exempt from the requirement to have their accounts audited will be increased. The new thresholds for small and medium-sized companies will apply in respect of financial years ending on or after 30 January 2004, and those relating to the audit exemption in respect of financial years ending on or after 30 March 2004.

Summary

• The maximum turnover for small companies will be increased from £2.8 million to £5.6 million and the balance sheet total from £1.4 million to £2.8 million. A small company with a turnover and balance sheet total which does not exceed these levels will be exempt from audit.

• The thresholds for medium-sized companies will be increased from £11.2 million to £22.8 million of turnover and the balance sheet total from £5.6 million to £11.4 million.

• The qualification conditions for small and medium-sized groups and the audit exemption thresholds for small groups will also be increased pro rata.

Current rules

At present, most companies which qualify as "small" are permitted to prepare simplified accounts for shareholders which comply with Schedule 4, instead of Schedule 8, of the Act. They may file an abbreviated balance sheet at Companies House and need not file a profit and loss account or a directors' report. Much of the information which must normally be included in the notes to accounts need not be given. Most dormant companies and small companies are also exempt from the requirement to have their accounts audited if, in respect of the financial year in question, the company's turnover is not more than £1 million and the balance sheet total not more than £1.4 million.

Companies qualifying as medium-sized cannot prepare simplified accounts for shareholders but they may file a simplified profit and loss account and certain information may be omitted from the notes to the accounts.

Small and medium-sized entities can also claim 40% first-year capital allowances for spending on plant and machinery. They can also be eligible for certain other tax allowances.

Increase in thresholds

On 15 May last year new thresholds for small and medium-sized companies were set out in a revised European directive. The Government announced last year that it intended to increase the thresholds in UK law to the maximum levels permitted by the directive.

Under the new rules, a company will qualify as small if it satisfies two or more of the following conditions:

• Turnover of not more than £5.6 million (currently the threshold is £2.8 million)

• Balance sheet total of not more than £2.8 million (currently £1.4 million)

• Not more than 50 employees on average during the year (as at present)

Consistently, the turnover and balance sheet thresholds for the audit exemption are also to increase to the same levels. The two-month delay in introducing the new audit exemption threshold is designed to allow companies and their shareholders time to decide whether or not to have their accounts audited. As a result of the increase in the thresholds, a further 69,000 companies are expected to be exempted from the requirement to have their accounts audited.

A company will be medium-sized if it has two or more of:

• Turnover of not more than £22.8 million (currently £11.2 million)

• Balance sheet total of not more than £11.4 million (currently £5.6 million)

• Not more than 250 employees on average during the year (as at present)

Groups

The qualification conditions for small and medium-sized groups and the audit exemption thresholds for small groups will also be increased pro rata.

Click here for the press release in which the DTI points out that, in addition to allowing more SMEs to take advantage of the 40% plant and machinery allowance, the increases will mean that more small businesses will be eligible for the 100% information and communication technology allowance until it expires on 31 March 2004.

The regulations amending the relevant sections of the Companies Act are expected to be published shortly. The DTI's July 2003 consultation paper 'Raising the thresholds' can be found at http://www.dti.gov.uk/cld/thresholds.pdf.

For further information, please contact Martin Mendelssohn at [email protected] or on +44 (0)20 7367 2872 or Peter Bateman at [email protected] or on +44 (0)20 7367 3145.