What is the audit exemption and what must I state to claim it?

Companies Act 2006, section 477(1): a company that qualifies as a small company in relation to a financial year is exempt from the audit requirements for that year. Whether it qualifies is decided under section 382(1) to (6). Section 382(3): the qualifying conditions are met in a year in which the company satisfies two or more of: turnover not more than £15 million; balance sheet total not more than £7.5 million; not more than 50 employees. Section 382(5): the balance sheet total is the aggregate of the amounts shown as assets in the balance sheet. Section 382(6): the number of employees is the average number of persons employed under contracts of service, found month by month and divided by the number of months in the financial year. Section 382(2): for a later financial year, meeting or ceasing to meet the conditions affects the company's qualification only if it occurs in two consecutive financial years. Section 382(4): for a financial year that is not in fact a year, the turnover limit is proportionately adjusted.

These limits apply to financial years beginning on or after 6 April 2025. For periods beginning between 1 January 2016 and 5 April 2025, Companies House gives small company limits of £10.2 million turnover and £5.1 million balance sheet total. The micro-entity limits are £1 million turnover, £500,000 balance sheet total and 10 employees (section 384A).

SourcesThe law·GOV.UK·Companies House

Companies House's model statement for the small companies exemption, to go above the director's printed name and signature: "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. These accounts have been prepared in accordance with the provisions applicable to companies subject to the small companies regime." GOV.UK gives the same four sentences.

Section 475(1): accounts must be audited unless the company is exempt under section 477 (small companies), section 479A (subsidiary companies) or section 480 (dormant companies), or under section 482. Section 475(3): a company is not entitled to exemption under sections 477, 479A or 480 unless the balance sheet contains a statement by the directors 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 the preparation of accounts. Section 475(4): the statements must appear on the balance sheet above the signature required by section 414. That signature is a director's, on behalf of the board (section 414(1) and (2)).

Section 475(2), as legislation.gov.uk now shows it, requires a statement identifying the exemption and confirming that the company qualifies. That wording was substituted by the Economic Crime and Corporate Transparency Act 2023, section 57. Section 57 is in force only for specified purposes. Under section 219 of that Act, its provisions start on a day set by regulations, except so far as they confer powers to make regulations. Read together, the displayed wording is not yet the operative rule.

Section 476: members representing not less than 10% in nominal value of the issued share capital, or any class of it, may by notice require an audit. If the company has no share capital, the test is 10% in number of the members. The notice may not be given before the financial year and must be given not later than one month before it ends.

SourcesThe law·GOV.UK·Companies House

Section 414(3): if accounts are prepared under the small companies regime, the balance sheet must contain, in a prominent position above the signature, (a) for individual accounts prepared under the micro-entity provisions, a statement to that effect, or (b) otherwise, a statement that the accounts have been prepared in accordance with the provisions applicable to companies subject to the small companies regime. FRS 105, the accounting standard for micro-entities, paragraph 3.14, requires the same statement on the balance sheet, in a prominent position above the signature.

Companies House's wording: "The accounts have been prepared in accordance with the micro-entity provisions and have been delivered in accordance with the provisions applicable to companies subject to the small companies regime." It must be in a prominent position above the director's signature and printed name.

Companies House's accounts guide, GOV.UK's audit exemption page and FRS 105 give no wording that combines this with the audit exemption statements, and none says in which order they go. Read with section 414(3)(a), the two models suggest a micro-entity could use the micro-entity sentence in place of the fourth sentence of the small companies model. Neither Companies House nor FRS 105 prints that combined wording.

SourcesThe law·GOV.UK·Companies House·FRC