Out-Law News 2 min. read
10 Oct 2011, 3:33 pm
The Department for Business, Innovation and Skills (BIS) said it would like to take advantage of exceptions within EU law that allow member states to "reduce the burdens of financial reporting" on small and medium enterprises (SMEs).
Under the Companies Act businesses that qualify as being "small" generally do not have to submit full audited accounts. Currently, if companies employ 50 or fewer employees, recorded an annual turnover of £6.5 million or less and have an annual balance sheet worth no more than £3.26 million then they can generally produce unaudited "abbreviated" accounts. If companies satisfy two of those criteria then they can generally submit abbreviated accounts, but they must be audited.
Under EU law member states can choose to alter the obligations so that companies that only qualify for two of the criteria for being 'small' would generally not have to produce audited accounts. The BIS said removing the current "gold plating" of EU law requirements from the Act would save 36,000 businesses a total of £206 million a year.
"At present, EU rules mean that a company must fulfil two out of three criteria (turnover, balance sheet total and number of employees) in order to be classified as 'small' (subject to certain exclusions) for accounting purposes," the BIS said in a consultation paper (32-page / 226KB PDF) announcing its proposals.
"However, to obtain the audit exemption in the UK, a small company must fulfil both the balance sheet and turnover criteria. Under new proposals set out here for consultation, a small company would be able to obtain the audit exemption if it met any two out of the three criteria above. This could release 36,000 small companies from the legal obligation to have an audit. Similar changes will be applied to the audit requirements for Limited Liability Partnerships (LLPs). Additional savings for small companies under this proposed policy are estimated at £206m per year," the BIS consultation said.
The BIS also outlined proposals to introduce new laws that would "exempt" subsidiary companies from being subject to a "mandatory statutory audit" under certain conditions.
Under the proposals a subsidiary would not have to file and prepare accounts or be audited if its parent company is registered in the EU and the parent firm has guaranteed its debts in a declaration published at Companies House. The parent firm would have to include the subsidiary in its own audited "consolidated accounts" filed with the company registry and those accounts would have to state that the subsidiary had taken up its exemption rights, the BIS said.
To qualify for the exemption the subsidiaries' shareholders would also have to "unanimously" declare "to dispense with an audit" each year and make that announcement in a published declaration at Companies House.
The exemptions would not apply to companies in the banking or finance sector or those that trade shares on formal stock markets, the BIS said.
Subsidiaries will save £406 million between them annually if the changes go through, the BIS said.
Minister responsible for Corporate Governance Ed Davey said that the proposed changes would benefit the UK economy.
"Over time, both the volume and costs of reporting requirements for UK companies have increased, and businesses have stressed to us the need for more flexible and targeted rules," Davey said. "Tackling these problems now will save UK SMEs millions every year and give them more opportunities to expand and grow their business."
“Audit is very valuable for many companies. But the proposals we’ve published today are aimed at removing EU gold plating and freeing up enterprise, which ultimately benefits the whole UK economy and will help put us on the path to long-term, sustainable growth. So I encourage businesses to read the consultation document and share their views with us," Davey said.
Respondents have until 29 December to reply to the BIS consultation. The BIS said it hopes to implement the proposals from 1 October next year.
