Most UK companies do not need an audit. The small company thresholds rose on 6 April 2025 to turnover £15 million, balance sheet total £7.5 million and 50 employees, meeting two of the three. What an audit delivers is narrower than the marketing suggests — and worth being honest about, because several commonly claimed benefits have no evidence behind them.
Who is exempt
A company qualifying as small is exempt from the audit requirement. The thresholds are two or more of:
- Turnover not more than £15 million;
- Balance sheet total not more than £7.5 million;
- Not more than 50 employees.
These apply to financial years beginning on or after 6 April 2025, replacing £10.2m, £5.1m and 50. Usefully, the transitional provisions let prior years be re-tested as if the new criteria had always applied, so the two-year rule is not broken by the uplift.
On timing: in a company's first financial year it qualifies if it meets the conditions in that year. Afterwards, meeting or ceasing to meet them only affects qualification if it happens in two consecutive financial years. Turnover is proportionately adjusted for a short period.
Groups
A company in a group cannot use the small company exemption unless the group qualifies as small and was not at any time in the year an ineligible group. The small group thresholds are two or more of aggregate turnover not more than £15m net or £18m gross, aggregate balance sheet total not more than £7.5m net or £9m gross, and not more than 50 employees — either the net or gross figure may be used.
A group is ineligible if any member is a traded company, a body corporate with shares admitted to a UK regulated market, a person with Part 4A FSMA permission, an e-money issuer, a small authorised insurance company, banking company, MiFID investment firm or UCITS management company, a person carrying on insurance market activity, or a Master Trust scheme funder. One such member anywhere in the group removes the exemption for everyone in it.
There is a narrow carve-out: a company is not excluded if throughout the relevant period it was both a subsidiary undertaking and dormant.
Subsidiary audit exemption
Section 479A allows a subsidiary to escape audit on conditions that are administratively strict:
- The parent is established under the law of any part of the United Kingdom — note that an EEA-only parent no longer suffices;
- All members agree to the exemption for the year;
- The parent gives a guarantee of all outstanding liabilities of the subsidiary at the end of the financial year, until satisfied in full, enforceable by any person to whom the subsidiary is liable;
- The subsidiary is included in consolidated accounts prepared under Part 15 or UK-adopted IAS;
- The parent discloses in the notes that the company is exempt;
- The directors deliver to the registrar the member-agreement notice, the guarantee statement on form AA06, the consolidated accounts, the auditor's report on them, and the parent's consolidated annual report.
All three documents must reach Companies House before the subsidiary's accounts filing deadline, the exemption takes effect only when they are accepted, and it must be claimed every year. The guarantee is an open-ended commitment — which is the reason groups often decide the audit is cheaper.
Dormant companies
A company dormant since formation, or dormant since the end of the previous year and entitled to prepare small-companies-regime accounts and not required to prepare group accounts, is exempt under section 480.
"Dormant" means having no significant accounting transaction — one required to be entered in the accounting records. Disregarded: subscriber shares on formation, registrar's fees for a change of name, re-registration or confirmation statement, and late-filing penalties. Note that form AA02 is available only where the company has not traded since incorporation, so it does not suit every dormant company.
Shareholders can demand an audit
Exemption is not the directors' decision alone. Members representing 10% in nominal value of the issued share capital, or of any class of it — or 10% in number of the members where there is no share capital — may require an audit.
The notice cannot be given before the financial year it relates to and must be given not later than one month before the end of that year. For companies with minority investors, that is a real governance feature rather than a technicality.
The statement on the balance sheet
An exemption is not available unless the balance sheet carries a directors' statement to that effect, together with a statement that the members have not required an audit and that the directors acknowledge their responsibilities for accounting records and the preparation of accounts. It must appear above the directors' signature.
One thing to watch: the Economic Crime and Corporate Transparency Act substituted an enhanced version of this statement, requiring directors to identify the exemption relied on and confirm the company qualifies. That version is not yet in force — only the original short-form statement currently applies. A commencement instrument could change that, so it is worth re-checking.
Who can never take exemption
At any time in the year: a public company; an authorised insurance company, banking company, e-money issuer, MiFID investment firm or UCITS management company; a company carrying on insurance market activity; a Master Trust scheme funder; a special register body; or an employers' association.
What an audit actually gives you
Here it is worth separating what the law delivers from what gets claimed.
Evidenced. An audit produces an independent opinion on whether the accounts give a true and fair view, have been properly prepared in accordance with the relevant financial reporting framework, and comply with the Companies Act. The auditor must also form an opinion on whether adequate accounting records have been kept, whether the accounts agree with those records, and whether all information and explanations necessary were obtained — reporting by exception where they were not. That sits alongside the directors' own duty not to approve accounts unless satisfied they give a true and fair view. And section 476 gives minority shareholders a statutory right to demand that assurance.
Not evidenced. Several familiar claims have no primary-source support: that audit improves access to finance or credit ratings, that it adds value on a sale, or that it reduces the risk of an HMRC enquiry. More pointedly, audit should not be sold as fraud deterrence — there is no statutory fraud-detection duty in the auditor's reporting obligations, and the professional framework speaks of reasonable assurance against material misstatement, not a guarantee.
On quality statistics. The FRC's 2026 Annual Review of Audit Quality found 79% of the 116 inspected audits good or requiring limited improvements, with three requiring significant improvements; among firms inspected by the recognised supervisory bodies, 92% were good or generally acceptable. But these are Public Interest Entity audits, file selection is weighted towards higher risk, and the FRC itself warns against extrapolating its findings to a firm's whole audit population. They say nothing about the value of a voluntary small-company audit.
Deciding voluntarily
The honest reasons to audit when you do not have to are specific rather than general: a funder or grant agreement requires it; minority shareholders want independent comfort; a sale is in prospect and a buyer will want audited history; or the group's reporting needs it. Our guide to external audits covers what the process involves and subsidiary audit exemption the group mechanics.
Acumon provides statutory audit and audit readiness work, with statutory accounts and group audits alongside. If your turnover crossed £15 million this year, the two-consecutive-years rule decides whether you need an audit yet — and it is worth checking before assuming you do.