The UK Government has announced several proposed changes to the audit requirements of companies in response to its consultation on Audit Exemptions and Change of Accounting Framework. These will have a direct benefit to companies, when the changes come into force.

Firstly the Government has decided that the mandatory audit thresholds should be aligned with accounting thresholds. This will allow SMEs to obtain an exemption from a statutory audit if they meet two out of the three following EU criteria: they must have no more than 50 employees; no more than £3.26m on their balance sheet; and less than £6.5m in turnover. This is a shift from the current situation under which to be eligible for an audit exemption in the UK, small companies must be less than a certain size in terms of balance sheet and turnover. The Government will also exempt most subsidiary companies from a mandatory audit, as long as their parent company guarantees their liabilities.

As a result of these changes, SMEs will be able to make a commercial decision on whether to have a statutory audit. It is estimated that the changes will allow 36,000 companies to decide whether or not to have an audit. A further 83,000 subsidiaries will benefit and 67,000 dormant subsidiaries will no longer need to prepare and file annual accounts, provided their parent company also guarantees their liabilities.

Lastly following consultation by the Financial Reporting Council (FRC) on changes to UK Generally Accepted Accounting Principles (UK GAAP), the Government has also decided to allow companies that prepare their accounts under International Financial Reporting Standards (IFRS) to move to UK GAAP and take advantage of reduced disclosures.

These new regulations will remove EU gold-plating and ensure UK SMEs are not at a disadvantage compared to their European counterparts. The changes are all part of the Government’s “Plan for Growth” published in the 2011 Budget. The Government hopes these changes will allow SMEs to expand their businesses and will generally make the UK a more attractive place to start, finance and grow a business. Ultimately these changes will ease the annual accountancy and administration costs for SMEs by reducing the auditing and reporting requirements placed on them. The Department for Business, Innovation and Skills (“BIS”) estimates that the new audit exemption measures will save businesses at least £100m and possibly as much as £390m per year. Moreover, according to BIS, the net benefit of permitting companies more flexibility to change their accounting framework will save around £2.4m per year.

The regulations introducing these changes are expected to come into force for accounting years ending on or after 1 October 2012.

SMEs should begin assessing whether they satisfy two out of the three criteria required to be eligible for an exemption and if they do, they should be considering whether it makes sense to take advantage of this exemption.