An estimated 132,000 UK businesses had their company size reclassified following the introduction of the new thresholds last April – resulting in thousands of companies becoming exempt from mandatory audits. Yet, one year on, smaller businesses continue to opt for this higher level of financial scrutiny. Fred Norman, director of audit compliance at Harold Sharp accountancy, explains why smaller businesses are volunteering for audits.
Over the past 12 months, as many as 132,000 businesses in the UK have seen their business classification shift to lower entity size categories following the Government’s new company size thresholds. It aimed to cut complexity for smaller businesses and reduce the unnecessary burden of financial reporting for SMEs, the first time since 2013 that these limits have been revised.
Since the introduction of the new regulations, it’s meant swathes of businesses with less than a million in turnover have entered the micro category, allowing a simpler form of accounting. But it is the small business category that has seen the biggest changes, with the turnover limit jumping by 50 per cent and resulting in thousands of multimillion-pound-turnover businesses becoming exempt from mandatory audits.
For financial years beginning on or after 6 April 2025, private limited companies are generally now audit-exempt if they meet two of the following criteria: 50 or fewer employees, assets worth no more than £7.5 million, and an annual turnover of no more than £15 million (it was previously £10.2m).
But a year on, we are seeing many SMEs who are no longer officially required to be audited, continue to do so. Many are close to the previous turnover threshold, but we’ve also seen much smaller businesses opting for voluntary audits. We are often asked why business would choose this level of financial reporting if not obliged to. From succession planning, to director fallouts and supply-chain demands, the overarching desire is to have a clearer accounting picture and be ready for their next step.
The top reasons for voluntary audits include:
- Winning new business – businesses are facing increasing pressure to secure new contracts and there are often financial and compliance hurdles to navigate – particularly when it comes to regulated industries, government contracts, and complex supply-chain tenders. Being audited is a way to show financial stability, transparency and supplier assurance, which can be crucial in successfully winning a new contract.
- Securing financial backing – eyes are firmly on the numbers when it comes to securing funding and attracting investors. Many smaller businesses want to be on the front foot with audited accounts – and ensure that the all-important EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) is accurate.
- Aiming for an exit – likewise, many business owners and managers are preparing to exit the business and want a robust financial picture to attract a buyer and be ready for the due diligence checks. My colleague Charlotte has written about this in more detail for SME Today.
- Getting the value right – audited accounts can help ensure a business valuation is a true reflection of its worth – to avoid it being impacted by inaccurate accounts. Important for a sale, but also high on the agenda for those looking into family divestment and inheritance tax planning.
- Overcoming issues – for some, the audit is simply a way of ensuring business accounting is being handled appropriately. This could be in response to the working relationship between company directors turning sour, prompting an audit to ensure financial transparency.
- Preparing for growth – for others it’s focused on being ready for growth. There’s been a rise in the role of fractional CFOs supporting smaller businesses over recent years – and they often introduce the business to financial auditing as part of their growth plans.
Whilst not widely spoken about, the trend for voluntary audits is not new to the UK accountancy industry. A decade ago, the ICAEW (Institute of Chartered Accountants in England and Wales) reported that 57 per cent of small businesses said they have had an audit even though it wasn’t mandatory. With financial scrutiny playing an increasingly important role today, we expect the trend to be on an upward trajectory
Author: Fred Norman, Harold Sharp