“Do we need an audit?” It sounds like a question with a simple yes-or-no answer. Sometimes it is. More often, it isn’t.
Under the current Company Audit Rules, most UK private companies are exempt from a statutory audit if they qualify as “small” meeting at least two of three conditions: turnover of no more than £15 million, a balance sheet total of no more than £7.5 million, and an average of no more than 50 employees.
But size alone doesn’t settle it. Group membership, shareholder requests, your articles of association, lender covenants and investor expectations can all override the headline exemption.
This guide walks through the Company Audit Rules in detail, including the thresholds that apply to financial years beginning on or after 6 April 2025.
Key Takeaways
- The Company Audit Rules use a two-out-of-three test: turnover (£15m), balance sheet total (£7.5m), and average employees (50).
- A company generally needs to meet or fail the conditions for two consecutive years before its audit status changes.
- Being below the thresholds doesn’t automatically mean no audit: excluded sectors, group membership, shareholder requests, articles of association and lender requirements can still apply.
- Shareholders holding at least 10% of shares can legally require an audit, even where the Company Audit Rules would otherwise grant exemption.
- Non-compliance with filing and audit obligations carries escalating financial penalties, potential criminal liability for directors, and the risk of the company being struck off.
- Roughly 113,000 UK companies moved from “small” to “micro” status, and around 14,000 from “medium” to “small,” under the April 2025 threshold changes.
- Even where an audit isn’t legally required, a voluntary audit can support a sale, an investment round, or a larger tender.
What Is an Audit?
A statutory audit is an independent examination of a company’s financial statements by a registered auditor, who gives an opinion on whether the accounts give a true and fair view and comply with the relevant financial reporting framework.
That’s different from an accountant preparing your annual accounts. Accountants help produce the financial statements from the records a client supply. An auditor has a different role: they must be independent of the company and must obtain evidence to support their opinion. That additional work and the responsibility behind it is why an audit costs considerably more than routine accounts preparation.
So, the first question should always be: does the company actually require one under the current Company Audit Rules?
The UK Audit Thresholds from April 2025
For financial years beginning on or after 6 April 2025, a company may qualify as small and therefore potentially exempt from audit if it meets at least two of the following three conditions:
Broadly, a company may qualify as small if it meets at least two out of the following three conditions:
- Annual turnover of no more than £15 million.
- Balance sheet total of no more than £7.5 million.
- An average of no more than 50 employees.
This matters because business owners often assume there’s a single audit turnover figure. There isn’t. The test works on two out of three, and it’s easy to misapply it if you only look at one number.
How the Two-Out-of-Three Test Works
Suppose a company has:
- Turnover of £12 million;
- A balance sheet total of £8 million;
- 35 employees.
It exceeds the £7.5 million balance sheet threshold under the Company Audit Rules, but remains below the turnover and employee thresholds.
It satisfies two of the three criteria and, subject to other conditions, may still qualify as small.
Now consider a business with
- Turnover of £16 million
- A balance sheet total of £8 million
- And 40 employees.
It exceeds both the turnover and balance sheet thresholds. Despite having fewer than 50 employees, it has failed two of the three tests, which changes its company-size classification and, consequently, its audit position.
This is why “what’s the audit turnover limit?” can produce a misleading answer on its own. You need to look at all three figures together.
The Two-Year Rule: One Year Doesn’t Necessarily Change Everything
Company-size classification generally works over a two-year period under the Company Audit Rules. Broadly, a company normally has to qualify as small for two consecutive financial years before gaining small-company status, or fail the conditions for two consecutive years before losing it.
That matters for a growing business. If turnover jumps above £15 million in one unusually strong year, that doesn’t automatically make an audit compulsory. Equally, a company that has recently shrunk may not immediately regain an exemption it previously held. There are also special rules for a company’s first financial year.
The practical lesson: don’t wait until the accounts are being prepared to ask whether an audit is required. If you’re growing towards the thresholds, know before the year end.
What Does “Balance Sheet Total” Mean?
This phrase causes plenty of confusion. For this purpose, balance sheet total broadly means the total amount of the company’s assets before deducting liabilities.
It is therefore not the same thing as:
- Cash in the bank;
- Shareholders’ funds;
- Net assets;
- Or the amount the company is “worth”.
A business can have relatively modest net assets while still carrying a much larger balance sheet total.
For example, where it holds substantial:
- Stock;
- Trade debtors;
- Plant and machinery;
- Property;
- Cash;
- Or other assets,
How Do You Calculate the Average Number of Employees?
The employee test is based on the average number of employees during the financial year, not a headcount on the last day of the year. Broadly, the calculation looks at the number of employees each month and averages that across the year.
This matters particularly for businesses with seasonal workers, rapid recruitment, substantial staffing changes, or employees joining and leaving throughout the year. Directors who are employees can also count. It’s worth calculating this properly rather than assuming that 48 people on today’s payroll automatically satisfies the test.
What Is Audit Exemption, and How Do You Claim it?
Audit exemption is the legal right, under section 477 of the Companies Act 2006, for a qualifying small company to file accounts without a statutory audit. Claiming it isn’t automatic directors need to actively confirm eligibility each year and make the correct statement on the balance sheet.
Here’s how it works in practice:
- Check the company qualifies as small: Meet at least two of the three Company Audit Rules thresholds (turnover, balance sheet total, employees) for the current and preceding financial year.
- Confirm the company isn’t excluded: Public companies, authorised insurance companies, certain financial services firms and some regulated entities cannot claim exemption regardless of size.
- Check group status: If the company is part of a group, the group itself must also qualify as small under the Company Audit Rules.
- Check for shareholder objections: No shareholder holding at least 10% of shares (or a relevant share class) should have validly requested an audit for the year.
- Check the articles of association: The company’s own constitution must not require an audit, even where the size test would otherwise exempt it.
- Include the correct statement on the balance sheet: Directors must state that the company is entitled to exemption under the relevant section of the Companies Act 2006, that members haven’t required an audit, and that directors acknowledge their responsibilities for accounting records and accounts.
- File accounts as normal: Exemption from audit does not remove the obligation to prepare and file annual accounts with Companies House on time.
Getting this wrong claiming exemption when a company doesn’t actually qualify under the Company Audit Rules can invalidate the accounts and expose directors to the compliance risks set out below.
Being Below the Thresholds Doesn’t Automatically Mean No Audit
No, Meeting the size test is only the starting point of the Company Audit Rules several other factors can still require a statutory audit even for a company comfortably below the thresholds.
Certain companies are excluded from small-company audit exemption because of what they do or the regulatory regime they sit within.
Examples include:
- Public companies;
- Authorised insurance companies;
- Certain financial services companies;
- And some regulated entities
For most ordinary owner-managed businesses, the thresholds are only the starting point you still need to establish whether the company is actually entitled to claim the exemption.
What If My Company Is Part of a Group?
If your company is part of a group, you can’t simply look at the individual company in isolation the Company Audit Rules require the group itself to qualify as small.
Group structures are one of the easiest places to get the audit question wrong. Broadly, for financial years beginning on or after 6 April 2025, the small-group thresholds on a net basis are:
- Turnover not exceeding £15 million
- Balance sheet total not exceeding £7.5 million
- No more than 50 employees
The corresponding gross thresholds, before consolidation adjustments, are:
- Turnover of £18 million;
- Balance sheet total of £9 million.
It’s tempting to look at three subsidiaries that each sit comfortably below the individual thresholds and conclude none of them needs an audit.
But the group position needs to be considered, and certain group members can affect whether an exemption is available at all. If you have a holding company, subsidiaries or a more complex structure, don’t assume the answer by looking at each set of accounts in isolation.
Can Shareholders Demand an Audit?
Yes, and this is one of the more overlooked parts of the Company Audit Rules. Even where a company would otherwise qualify for exemption, shareholders holding at least 10% of the nominal value of the company’s issued share capital, or 10% of a particular class of shares, can require an audit.
The request must be made properly, generally at least one month before the end of the relevant financial year.
This right matters most where ownership and management have separated.
In a company owned:
- 70% by one shareholder
- 20% by another
- 10% by a third
The majority shareholder can’t simply assume audit exemption settles the matter the minority shareholder may have a statutory right to require an audit regardless.
Your Articles of Association May Also Matter
Companies sometimes concentrate on statutory thresholds and forget their own governing documents.
The company’s articles of association may contain provisions requiring an audit, which is more likely with older companies or bespoke articles rather than standard model articles.
The result can be slightly awkward: the Company Audit Rules may say an audit isn’t necessary, while the company’s own constitution says otherwise.
Before assuming exemption applies, check the articles and any shareholders’ agreement.
Banks, Lenders and Investors Can Require Audited Accounts
There’s an important distinction between “the law doesn’t require an audit” and “nobody requires an audit.”
A bank or lender may make audited financial statements a condition of finance, particularly for:
- substantial borrowing;
- asset-based lending;
- significant working-capital facilities;
- acquisition finance;
- or more complicated banking arrangements.
A lender taking on financial risk may want a higher degree of independent assurance than unaudited accounts provide.
The same principle applies to external investors. A founder running their own company has intimate knowledge of what’s happening day to day; an outside investor doesn’t, and may place greater value on independently audited financial statements. That doesn’t mean every business seeking investment should rush out and commission an audit but as ownership becomes more dispersed, the argument for independent assurance strengthens.
Why Would You Have a Voluntary Audit?
If the strict answer under the Company Audit Rules is “no audit needed,” should you have one anyway? For most small owner-managed businesses, probably not an audit involves additional work, disruption and cost, and there’s little point buying assurance nobody needs. But a voluntary audit can make commercial sense in a few situations:
- You’re planning to sell. Audited statements support due diligence and give a buyer added confidence in the historic numbers.
- You’re seeking significant investment. Institutional investors may want greater assurance over the numbers behind their decision.
- You’re tendering for larger contracts. Some organisations expect suppliers to demonstrate financial strength.
- Ownership and management are separate. An independent audit adds accountability where the people running the company aren’t the people who own it.
- You want stronger financial controls: The audit process examines systems and controls in depth, and issues can surface.
What an Audit Doesn’t Do
An audit does not guarantee that:
- The company will never fail
- Every fraud will be discovered
- Every transaction is correct
- The business is worth a particular amount
- Or management has made good commercial decisions
The auditor gives an opinion based on the work required by auditing standards valuable assurance, but not a certificate that nothing can possibly be wrong.
How Much Does an Audit Cost?
There is no sensible universal figure.
The cost depends heavily on:
- Size;
- Complexity;
- Quality of accounting records;
- Number of locations;
- Group structure;
- Stock;
- Systems and controls;
- Unusual transactions;
- And how much work is required to obtain sufficient appropriate audit evidence.
A well-run business with clean records is considerably easier and cheaper to audit than one where year-end balances first have to be reconstructed. Industry estimates suggest audit exemption typically saves a small UK company between £5,000 and £15,000 a year in fees, though this varies with complexity.
What Happens If a Company Doesn’t Comply with Audit Requirements?
Non-compliance with the Company Audit Rules whether that means filing unaudited accounts when an audit was actually required, or simply missing your filing deadline carries automatic financial penalties, potential personal and criminal liability for directors, and in serious cases, the risk of the company being struck off the register.
Companies House imposes automatic late filing penalties that escalate the longer accounts are overdue, starting from £150 for a private company filing up to one month late and rising to £1,500 for delays of more than six months; these penalties double if a company files late in two consecutive years (GOV.UK). Failing to deliver accounts at all is a criminal offence, and Companies House has been taking an increasingly active approach to prosecuting directors, who can face personal fines and, in the most serious cases, disqualification.
Beyond the direct penalties, non-compliance under the Company Audit Rules tends to cause knock-on damage: late or missing filings are public record, so they’re visible to credit reference agencies, lenders, suppliers and customers, and can weaken a company’s credit rating and access to finance. Where a company incorrectly claims audit exemption.
For example, because it misapplied the two-out-of-three test or ignored a valid shareholder request for an audit the accounts themselves can be treated as non-compliant, which creates a further filing and compliance problem on top of the original error. This is exactly why it pays to check the Company Audit Rules properly before assuming exemption applies, rather than discovering the mistake after the event.
Practical Examples
The growing owner-managed business.
A company has grown from £7 million to £14 million turnover over several years and has never needed an audit.
A major new contract arrives: turnover rises towards £16 million, the balance sheet expands because the company carries more stock and debtors, and employee numbers move into the high forties.
Directors should be looking ahead now not because an audit necessarily becomes compulsory immediately, but because turnover, the balance sheet and staff numbers are all moving at once, and the two-year rule needs to be considered.
If there’s also a subsidiary or holding company, the group rules enter the picture too.
The £5 million business that wants to sell.
A profitable company turning over £5 million, with 25 employees and a modest balance sheet, is nowhere near requiring a statutory audit. But if the shareholders expect to sell within three years, should they voluntarily have the accounts audited? It depends on the likely buyers, how complicated the business is, whether external finance is involved, and what due diligence a buyer is likely to undertake. The answer might still be no but it’s now a commercial question rather than a mechanical reading of a threshold.
Does CCM Carry Out Statutory Audits?
No. Carter Collins & Myer (CCM) does not carry out statutory audit work, and it’s worth being clear about that rather than dressing up one service as another. CCM prepares accounts and advises owner-managed businesses on the Company Audit Rules, but where a statutory audit is required, the audit itself needs to be undertaken by an appropriately registered audit firm.
What CCM can do is help determine whether your company actually requires an audit under the current Company Audit Rules, make sure your accounting records and year-end accounts are properly prepared, and work alongside an external auditor where necessary. For clients approaching the thresholds, that preparation matters discovering at the last minute that an audit is required can make an already busy accounts timetable considerably more difficult.
The Bigger Point: Audit Shouldn’t Be a Surprise
For most of CCM’s owner-managed clients, statutory audit isn’t an immediate concern. But growing businesses can reach the thresholds surprisingly quickly, groups can complicate the position, and external requirements can arise long before the Companies Act itself demands an audit.
So, treat audit as part of the company’s wider financial planning. If turnover is moving towards £15 million, don’t just watch turnover watch the balance sheet, watch employee numbers, look at the group, check the previous year, check financing agreements, and think about where the business is going next.
The statutory question under the Company Audit Rules is “must we have an audit?” The better commercial question is “does anybody need independent assurance over these accounts now or in the foreseeable future?” For a well-run business, neither question should first be asked after the year has finished.
Think You May Be Approaching the Audit Threshold?
If your company is growing quickly, has become part of a group, is taking on outside investment or is approaching the new thresholds, it’s worth reviewing your position against the current Company Audit Rules before the year end.
At Carter Collins & Myer, we can help you establish whether your company is likely to require an audit, consider the effect of the two-year and group rules, and make sure your accounting records are ready if an external audit becomes necessary. And if you don’t need one, we’ll tell you that too there’s no prize for buying an expensive professional service your business doesn’t require.