The Companies Act 1985 (Accounts of Small and Medium-Sized Enterprises and Audit Exemption) (Amendment) Regulations 2004

These Regulations implement Council Directive 2003/38/EC of 13th May 2003 amending Directive 78/660/EEC on the annual accounts of certain types of companies as regards amounts expressed in euro (OJNo. L 120, 15.5.2003, pages 22 to 23). The Regulations take further advantage of existing Member State options on annual accounts and audit exemption in Council Directive 78/660/EEC of 25th July 1978 on the annual accounts of certain types of companies as amended (OJNo. L 222, 14.8.1978, pages 11 to 31) and existing Member State options on consolidated annual accounts in the Seventh Council Directive 83/349/EEC of 13th June 1983 on consolidated accounts as amended (OJNo. L 193, 18.7.1983, pages 1 to 17).

Regulations 2 and 3 raise the thresholds contained in sections 247 and 249 of the Companies Act 1985 for the exemptions applicable to small and medium-sized companies and groups. The turnover limit is increased from £2.8 million to £5.6 million for small companies and the balance sheet total is increased from £1.4 million to £2.8 million for small companies. The turnover limit is increased from £11.2 million to £22.8 million for medium-sized companies and the balance sheet total is increased from £5.6 million to £11.4 million for medium-sized companies. The aggregate turnover limit for small groups is increased from £2.8 million net (or £3.36 million gross) to £5.6 million net (or £6.72 million gross) and the aggregate balance sheet total limit for small groups is increased from £1.4 million net (or £1.68 million gross) to £2.8 million net (or £3.36 million gross). The aggregate turnover limit for medium-sized groups is increased from £11.2 million net (or £13.44 million gross) to £22.8 million net (or £27.36 million gross) and the aggregate balance sheet total limit for medium-sized groups is increased from £5.6 million net (or £6.72 million gross) to £11.4 million net (or £13.68 million gross). The thresholds for small and medium-sized companies are also relevant for the purposes of expenditure of small or medium-sized enterprises under sections 47 and 48 of the Capital Allowances Act 2001 (c. 2).

Regulation 4 increases the turnover limit in section 249A(3)(b) and balance sheet total in section 249A(3)(c) of the Companies Act 1985 which a small company other than a small charitable company must not exceed in respect of a financial year if it is to be exempt from audit. The turnover limit is increased from £1 million to £5.6 million (for small charitable companies the gross income limit remains at £90,000). The balance sheet total is increased from £1.4 million to £2.8 million.

A company which would otherwise be disqualified from claiming exemption from audit under section 249A for a financial year because it was a parent company or subsidiary undertaking for any period in that year, may nevertheless claim the exemption if it is a member of a small group which satisfies the conditions specified in section 249B(1C). Regulation 5 increases the turnover limit for a group to qualify as a small group for the purposes of section 249B(1C) of the Companies Act 1985 from £1 million net (£1.2 million gross) to £5.6 million net (£6.72 million gross) (the limit as it applies for small charitable companies remains unchanged). Regulation 5 increases the aggregate balance sheet total for a group to qualify as a small group for the purposes of section 249B(1C) from £1.4 million net (£1.68 million gross) to £2.8 million net (£3.36 million gross).

Regulation 6 further amends section 249D of the Companies Act 1985, as inserted by the Companies Act 1985 (Audit Exemption) Regulations 1994 (S.I.1994/1935), by adding to the bodies listed in section 249D(3) the Institute of Chartered Secretaries and Administrators. Section 249D specifies those accountants who are entitled to act as reporting accountants for companies which are charities within section 249A(2).

Regulation 7 contains transitional provisions. Regulation 7(1) provides for regulations 2 and 3 to have effect in relation to financial years ending on or after the commencement date. Regulation 7(2) makes transitional provision to enable companies to take early advantage of the new thresholds for small and medium-sized companies. Regulation 7(3) provides that references to financial years ending on or after the commencement date in paragraphs (1) and (2) of regulation 7 do not include financial years which only end on or after that date by reason of an exercise of the power conferred by section 225 of the Companies Act 1985 (alteration of accounting reference date) by the giving of a notice to the registrar on or after the date on which these Regulations are made. Regulation 7(4) provides for regulations 4 and 5 to have effect in relation to financial years ending two months or more after the commencement date. Regulation 7(5) provides for regulation 6 to have effect in relation to financial years ending on or after the commencement date.

Regulatory Impact Assessments of these Regulations are available from the Department of Trade and Industry, Corporate Law and Governance Directorate, Bay 4100, 1 Victoria Street, London SW1H 0ET. Copies have been placed in the libraries of both Houses of Parliament. Transposition notes setting out how these Regulations implement Council Directive 2003/38/EC and further implement Council Directive 78/660/EEC and Council Directive 83/349/EEC have been placed in the libraries of both Houses of Parliament and are also available from the above address.