Audit exemption for small, subsidiary and dormant companies

The three exemptions

• Section 475(1) requires accounts to be audited unless the company is exempt under section 477 (small companies), section 479A (subsidiary companies) or section 480 (dormant companies).
• The rest of this guide covers the small company and dormant company exemptions.

Small company size limits for audit exemption

Turnover

Not more than £15 million (GOV.UK: audit exemptions)

Balance sheet total

Not more than £7.5 million

Employees

50 or fewer on average

Test

At least two of the three

Applies to

Financial years beginning on or after 6 April 2025; before that, £10.2 million turnover and £5.1 million balance sheet total

Qualifying as small

Section 477 exempts a company that qualifies as a small company in relation to the financial year, with qualification decided under section 382(1) to (6). The exemption is subject to the balance sheet statements, the members' right to require an audit, the exclusions in section 478 and the group rules in section 479. The size tests themselves are in FRS 105 and FRS 102 Section 1A compared.

The balance sheet statements

A company is not entitled to the exemption unless its balance sheet contains a statement by the directors identifying the exemption and confirming that the company qualifies for it (section 475(2)). The balance sheet must also state that the members have not required an audit under section 476, and that the directors acknowledge their responsibilities for complying with the Act on accounting records and preparing accounts (section 475(3)). The statements go above the director's signature (section 475(4)).

Companies House's wording for a small company reads: "For the year ending (dd/mm/yyyy) 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." (Companies House guidance).

Members' right to require an audit

Members holding at least 10% in nominal value of the issued share capital, or of any class of it, can require an audit by notice to the company (section 476). For a company without share capital it is 10% in number of the members. The notice may not be given before the financial year it relates to and must be given no later than one month before the end of that year.

Companies that cannot use the small company exemption

• Under section 478, a company is excluded if at any time in the year it was a public company.
• An authorised insurance company, a banking company, an e-money issuer, a MiFID investment firm or a UCITS management company, or a company carrying on insurance market activity.
• A special register body or an employers' association under the trade union legislation.
• A scheme funder of a Master Trust pension scheme.

Group companies

A parent or subsidiary undertaking can take the small company exemption only if the group qualifies as a small group for the year and was not at any time an ineligible group (section 479). The group means the company with all its associated undertakings, and the test treats every body corporate in the group as if it were a company.

A group is ineligible if any member is a traded company, a body corporate with shares admitted to trading on a UK regulated market, a person other than a small company with Part 4A permission under the Financial Services and Markets Act 2000, an e-money issuer, a small insurance, banking, MiFID or UCITS company, a person carrying on insurance market activity, or a Master Trust scheme funder (section 384(2)).

A company that was a subsidiary undertaking and dormant throughout the time it was a group company is not excluded by the group rule (section 479(3)).

Dormant companies

Section 480 exempts a company that has been dormant since formation, or since the end of the previous financial year if it is entitled to prepare accounts under the small companies regime (or would be, but for being a public company or a member of an ineligible group) and is not required to prepare group accounts. Traded companies and the financial companies listed in section 481 cannot use it. The balance sheet statements and the members' right to an audit apply in the same way. See dormant company accounts.

From April 2028

Companies claiming audit exemption will have to give an enhanced statement from the directors on the balance sheet for filings from 1 April 2028 (Companies House guidance; campaign site). The wording has not been published on those pages.

Questions