In his speech to the British Chambers of Commerce on Tuesday 4 April 2000 Stephen Byers, Secretary of State for Trade and Industry, announced changes to the thresholds below which companies may opt to dispense with auditing their accounts. This followed a wide consultation in which four out of five respondents favoured a significant increase in the thresholds.

He also announced the results of two other separate consultation exercises on simplifications to the regulations relating to dormant companies and on the Companies Act 1985 small and medium-sized company accounting thresholds.

The regulations implementing these changes – 2000 No. 1430: "The Companies Act 1985 (Audit Exemption) ( Amendment) Regulations 2000" – have been approved by Parliament and came into force on Friday 26 May 2000. The new thresholds will apply to annual reports and accounts in respect of financial years ending on or after 26 July 2000.

Copies of the regulations may be obtained from the Stationery Office.

Details of the announcements are outlined below:

Press Release

The press release accompanying the Secretary of State’s announcement on 4 April 2000 can be viewed online by clicking here.

Summaries of the responses to the consultations and consultation documents

Summaries of the responses to the consultations can be obtained from:

Simon Masterton-Smith
Company Law and Investigations Directorate
Department of Trade and Industry
1 Victoria Street
London, SW1H 0ET

Tel: 020 7215 0412
Email: simon.masterton-smith@dti.gsi.gov.uk

Or can be viewed online by clicking here audit exemption responses ( 37kb), dormant company responses (18kb), small company accounting responses (12 kb).

The original consultation documents can be viewed online: audit exemption thresholds ( 71 kb), dormant companies (44 kb), small company accounting thresholds.

Audit exemption thresholds

In October 1999 the Department issued a consultation document on raising the threshold below which small companies (subject to some exemptions) are able to opt to dispense with having their accounts audited. The announcement made on 4 April 2000 proposed raising this threshold to £1,000,000 this year and considering a further move to £4.8 million in the light of the proposals of the Company Law Review.

The immediate change to increase the audit threshold to £1,000,000 will apply to annual accounts and reports for financial periods ending on or after 26 July 2000.

Exemption from audit for individual companies: The regulations implementing the increase – The Companies Act 1985 (Audit Exemption) ( Amendment) Regulations 2000 – amend section 249A of the Companies Act 1985 so that a small company, subject to certain other exclusions, need not have its annual accounts audited if it meets the following criteria:

• It qualifies as a small company in relation to that year in accordance with section 246 of the Companies Act 1985 – Click here for small company thresholds;
• Its turnover in that year is not more than £1 million; and,
• Its balance sheet total for that year is not more than £1.4 million

Charitable companies: The thresholds below which a small charitable company may claim exemption from audit remain unchanged i.e. total exemption where gross income of £90,000 or less: gross income between £90,000 and £250,000, reporting accountant's report required.

Exclusions: Certain types of small company are not able to take advantage of the exemption from audit and these will remain as in the current legislation. These are public companies, special register bodies or employers’ associations under the Trade Union and Labour Relations (Consolidation) Act 1992, and certain financial services companies (banking or insurance companies, companies enrolled in the list maintained by the Insurance Brokers Registration Council under the Insurance Brokers (Registration) Act 1977, authorised persons or representatives under the Financial Services Act 1986).

Exemption from audit for companies which are members of groups: The consultation paper examined the existing ability for a company which is a member of a group to take advantage of exemption from audit where the total turnover of the group does not exceed the threshold for individual company exemption. It was decided in the light of consultation not to change this provision, other than to increase the group threshold in line with the threshold for individual companies.

Companies which are subsidiary undertakings may claim exemption from audit for a financial year where they are dormant throughout the period in that year for which they were subsidiary undertakings.

Otherwise, companies which are members of groups may only take advantage of exemption from audit where they fulfil the following criteria:

• The group qualifies as a small group in relation to that year in accordance with section 249 of the Companies Act 1985 and was, at no time during that year, an ineligible group as defined in section 248(2) – Click here for small group thresholds;
• The group’s aggregate turnover in that year, calculated in accordance with section 249, is not more than £1 million net (or £1.2 million gross) (the group thresholds where the company claiming exemption is a charitable company remain unchanged),
• The group’s aggregate balance sheet total for that year, calculated in accordance with section 249, is not more than £1.4 million net (or £1.68 million gross).

The regulations also amend the Companies Act 1985 so that exemption from audit for small groups may apply to small groups where not every member of the group is a company within the meaning of section 735 of the Act.

Estimated savings: It was estimated that the increase in the threshold to £1 million would enable up to an additional 150,000 companies to take advantage of exemption from audit this year. Responses to the consultation exercise indicated that cost of a typical audit for companies of this size would be in the region of £1,200. This would produce a potential saving for business in the order of £180 million. The further move to £4.8 million, taking into account the Company Law Review's proposals, would affect up to an additional 75,000 companies.

Related issues: The consultation paper also examined the safeguard that 10% of shareholders in a company can require an audit . It was decided not to change that provision.

Company Law Review: The Steering Group of the Company Law Review published their latest set of proposals in March 2000. The proposals relating to small company audit consider whether, for companies in the range of £1 million to £4.8 million turnover, the audit should be replaced by a lighter, less costly form of assurance. The Review is due to produce its final recommendations next year.

Dormant companies

Dormant status is designed to distinguish between those companies that are actively trading and those that are not. It allows dormant companies to claim exemption from audit. Companies must satisfy various criteria to be eligible for dormant status.

In March 1999 the Department published a consultative document on the legislative framework for dormant companies. It set out a number of proposals to simplify the provisions which apply to dormant companies and sought views on dormant companies which act as agents. The changes announced by the Secretary of State on 4 April 2000 which have been implemented by The Companies Act 1985 (Audit Exemption) (Amendment) Regulations 2000 :

• remove the need for companies to pass a special resolution to gain exemption from audit;
• allow 10% of shareholders in a dormant company to require an audit;
• exclude certain payments to Companies House from the definition of a "significant accounting transaction" for the purposes of determining dormant status. The transactions exempted by the regulations are:
• payment of change of name fee;
• payment of re-registration fee;
• payment of late filing penalty;
• payment of annual return filing fee.
• require that dormant companies which act as agents disclose in the notes to their annual accounts the fact that during that financial period they have acted as agents. They will not be required to identify the principal on whose behalf they have acted.

The changes to the provisions applying to dormant companies will apply to annual accounts and reports for financial periods ending on or after 26 July 2000.

Accounting threshold levels for small and medium-sized companies and groups

Individual companies: Currently companies which meet the criteria for small and medium-sized status may take advantage of the ability to prepare less detailed accounts for their shareholders and to and file abbreviated accounts. The Department also consulted on this in 1999. The current conditions are that a company should meet two out of the following three requirements:

Groups of companies: Thresholds also exist under the Act which allow the parent of a group of companies not to prepare group accounts for the group provided that during the financial year in question the group headed by that company is not an ineligible group (i.e. none of its members was: a public company or another form of corporate vehicle allowed under its constitution to offer its shares or debentures to the public; an authorised institution under the Banking Act 1987; an insurance company to which Part II of the Insurance Companies Act 1982 applies; or, an authorised person under the Financial Services Act 1986) and qualifies as small or medium sized. The current conditions are that a group should meet two out of the following three requirements:

Company Law Review: The Secretary of State will also consider increasing the individual and group thresholds to the maxima allowed under EU law taking account of the Company Law Review's final recommendations on small group accounts. The current maximum threshold levels allowed under EU law are:

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