In the UK, most small and medium-sized enterprises (SMEs) can qualify for audit exemption if they meet at least two of the following three criteria: annual turnover, balance sheet total, and number of employees. This system helps eligible companies save time, money, and administrative costs. Companies that qualify for audit exemption may prepare their accounts using Small Company Accounts or Micro-Entity Accounts formats, depending on their size. These formats are simplified and designed specifically for SMEs to reduce unnecessary complexity, while still fully complying with UK company law and accounting standards. The ability to use these formats is a regulatory privilege and does not imply any relaxation in the quality or preparation requirements of the accounts.
The UK system balances high standards with flexibility, allowing businesses to adopt a proportionate compliance approach based on their size. For SMEs, this represents a significant advantage in improving efficiency and reducing costs, but the accounts should still be prepared by qualified accountants and strictly adhere to statutory requirements. The requirement for small companies and micro entities are less but yet it is one of the most stringent for compliance, thus the UK is being recognised as most reputable financial centre worldwide.
The Financial Reporting Council (FRC) is currently exploring further ways to simplify audit requirements for small and medium-sized enterprises (SMEs). While a full adoption of the International Standard on Auditing for Less Complex Entities (ISA for LCE) may not happen immediately, the FRC is expected to release a new Practice Note later this year. This guidance could help make future audits more proportionate and practical — even for companies that still require an audit.
From 6 April 2025, the UK government will increase the audit exemption thresholds. This update will allow more SMEs to qualify for audit exemption. Under the new criteria, a company will be exempt from audit if it meets at least two of the following three conditions:
· Annual turnover not more than £15 million (previously £10.2 million)
· Balance sheet total not more than £7.5 million (previously £5.1 million)
· No more than 50 employees (unchanged)
This adjustment reflects the economic impact of inflation and aims to reduce compliance pressure on smaller businesses. It’s the first major update to audit thresholds since 2013.
If your company has grown in recent years and now meets two of the updated thresholds, you may soon be eligible for audit exemption. This could mean fewer reporting obligations and lower accountancy fees, especially for owner-managed businesses.
· Review Your Financials: Check your company’s turnover, assets, and staff numbers to see if you meet the new thresholds.
· Speak with Your Accountant: Understand the implications of audit exemption and how it may benefit your business.
· Update Your Financial Statements: If your company qualifies, your accounts must include a statement confirming the exemption.
It’s worth noting that some companies may still require an audit regardless of size — for example, if it's required by your articles of association, or if shareholders holding at least 10% of shares request one.
It’s important to clarify that audit exemption does not mean lower standards. Even unaudited accounts must be professionally prepared in accordance with UK accounting standards and legal formats.
Unlike in Hong Kong, where all limited companies must undergo statutory audit, the UK adopts a proportionate compliance model based on company size. This difference in structure reflects a more flexible approach — but not a reduction in quality. In fact, the UK’s financial reporting framework is widely regarded as one of the most rigorous and transparent in the world, attracting many multinational companies to establish a presence in the UK.
Businesses should avoid applying assumptions or practices from other jurisdictions when navigating UK financial requirements. The systems may differ, but the standards remain high.
If you have questions or would like to assess whether your company qualifies for audit exemption under the new thresholds, please contact us. We’re here to help you navigate the process confidently. Choosing the right reporting format isn’t just a paperwork decision — it’s a strategic one that impacts tax efficiency, legal risk, and your long-term business direction. Don’t rely on guesswork or generic advice found online. At Elaga Accountancy, our experienced team can help you evaluate your specific circumstances and determine the most suitable structure for your goals — whether you're just starting out or planning to scale. From compliance to strategy, think of us as your trusted financial partner — guiding you toward clarity, confidence, and long-term success.
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