When Does My Company Need to Have an Audit?

When should a company have an audit?

Regarding financial regulation within the UK, all company directors must comply with specific regulations to remain in operation. One of these regulations is an audit, which is an independent examination of the company’s financial records and accounts. All Companies House registered companies are required to have an audit in the UK, unless they are exempt or qualify to submit a ‘small companies’ exemption.

An audit will ensure that a company's accounts and financial records are fair and accurate, as well as compliance with UK legislation. It can also help assess the company’s performance, strengthen financial management systems, identify areas for improvement and help to achieve the maximum sale price.

There are various reasons to have an audit done for your business, and complying with legal regulations is simply one of them. There are many companies who will purposely seek out an audit to be carried out so that there is an extra layer of confidence when it comes to their financials. If you are planning to sell your business, then it can also be helpful for an audit to be performed, as it can help you achieve the highest possible sale price. Essentially, having an audit performed will ensure that all your financial records are in good shape in the eyes of the law.

Who is exempt from audit in the UK?

For smaller companies in the UK, there are several exemptions from the statutory requirement for an audit. Charities with an annual turnover below £25,000, small companies with a turnover of less than £10.2 million, a balance sheet total of no more than £5.1 million and fewer than 50 employees are automatically exempt from having an audit. All subsidiaries should also be exempt if they are included in their parent company’s consolidated accounts and are subject to an audit.

These audit exemptions are determined by the Companies Act 2006, providing evidence that the company meets the conditions of a ‘small’ company under those conditions set out by the Companies Act 2006. Generally, companies will meet the criteria if their turnover amounts to £6.5 million or less and their balance sheet total is £3.26 million or less. If a company does not meet these criteria, it will be required to carry out an audit.

How to apply for an audit exemption?

If a company meets the audit exemption criteria, it must notify Companies House and submit the appropriate accounts to confirm its eligibility. This must take place on an annual basis, meaning you will need to carry out this process once a year. A company may also be able to file additional documents, such as a tender notice, to support its application for an audit exemption. At least one director must certify the accounts and, if necessary, the documents submitted with the accounts.

In order to apply for an audit exemption, the company must submit a copy of its accounting documents and a copy of the audit exemption form, which can be downloaded from the Government website. The documents must be signed and dated by the company’s appointed auditor and sent to Companies House. Once the application is approved, the company will be exempt from having an audit for the next financial year unless it fails to meet the necessary requirements.

Keep in mind, even if under usual circumstances, your company is exempt from audits, it is required for you to have your accounts audited if shareholders who own a minimum of 10% shares (by either value or number) ask you to have the business audited. This could come from an individual shareholder or a group of shareholders.

What happens during a tax investigation?

A tax investigation is when HM Revenue and Customs (HMRC) has reason to believe that there may be discrepancies between the tax returns conducted by a business and the actual financial information declared. During the investigation, HMRC officers will review the business's financial records and may ask to speak to the directors or employees.

The first sign that HMRC wants to investigate a business' tax details will come through a formal notice of enquiry into the returns of either you, your company or your partnership. The enquiry will request that information is handed over to them by a specific date. This notice will be sent to both you and your accountant. It will include the areas of the business that will be investigated, for example, VAT returns, company tax returns, and tax calculations. Over the course of the investigation, the investigators will review your accounts and records in great detail.

HMRC officers may also visit the premises to request additional documents, visit customers or suppliers and ask questions. The visits will normally take place during business hours, and any documents requested must be provided. At the end of the investigation, HMRC will either issue a closure notice, requiring the company to pay a penalty or confirm that no further action is needed.

What triggers an HMRC audit?

HMRC can trigger an audit for a number of reasons. Firstly, although this is rarely spoken about, sometimes HMRC can receive a tip-off that there are some unreliable tax practices happening within a business which can sometimes lead to the start of an investigation. Next, and this is a common cause for an HMRC audit to begin, there are a lot of regular mistakes made on tax returns. One-off small mistakes are nothing to be worried about, not everyone is a tax expert after all, but regular mistakes when it comes to inaccurate figures can quickly make HMRC become suspicious. If you have been contacted by HMRC more than two years in a row for mistakes on your tax returns, then it is recommended that you hire an accountant to ensure that the process goes smoother in the future. The same goes if a business' margins are hugely changing from year to year. Even if there is an explanation for this, HMRC will likely want to investigate further.

Large periods of unprofitability will also draw the attention of HMRC. This does happen under some circumstances, but years of handing in tax returns telling HMRC that you owe zero tax will definitely gain their notice. If there are reasons for the unprofitability, it is essential to inform HMRC. Across the majority of industries, HMRC has a firm idea of what the average business is capable of earning. If the figures you hand into HMRC vary a lot from the industry standard, then this can lead to tax investigations.

Another trigger that can lead to HMRC investigating a business would be the company directors earning less than the employees. This is seen as highly suspicious. HMRC will view this kind of behaviour as attempting to pull profits out of business through an avoidance scheme. Some more reasons for the beginning of tax evasion can be the omission of income or no representation from an accountant.