Consultation outcome

Increasing audit thresholds for co-operatives and community benefit societies: consultation

Updated 1 December 2017

1. Introduction

Co-operatives and community benefit societies play a key role in rebalancing the economy and promoting diversity across ownership models. Co-operatives are unique because they are not owned by institutional investors or shareholders, but by their members. They have community values embedded into their culture.

Co-operatives enable their members to take control of the society and have a stake in its future. The financial success of the co-operative sector in the years following the economic crisis of 2008 shows what a resilient model it is. Community benefit societies also play a key role in supporting not just their members, but their local community as well. The government therefore supports the sector and wants to create the right environment for it to grow and thrive.

In 2014, the government consolidated the existing laws relating to these societies. This provided for a more modern, up to date description of the statute, making it easier for co-operatives and community benefit societies to understand and apply the legislative framework and the rules governing them.

However, account auditing and reporting requirements can be burdensome for small co-operatives and community benefit societies, especially in comparison with those for companies of the same size, including Community Interest Companies (CICs). The government wants to reduce the administrative burden faced by smaller societies.

At Spring Budget 2017, the government announced that the turnover threshold at which co-operatives and community benefit societies will have to appoint an auditor will increase from £5.6 million to £10.2 million and the assets threshold will increase from £2.8 million to £5.1 million.

This change has been requested by the sector and will help to level the playing field for co-operatives and community benefit societies, allowing them to use more of their resources to benefit their members instead of completing onerous administration.

This consultation invites comment on the proposal and the draft regulations.

2. Increasing the audit thresholds

2.1 Current treatment

The government announced at Spring Budget 2017 that the thresholds above which small co-operatives and community benefit societies have to appoint an auditor will increase, in line with the treatment for companies.

The current audit and reporting requirements are set out in the Co-operative and Community Benefit Societies Act 2014. The Financial Conduct Authority (FCA) has published guidance for societies on these.

Under these rules, some societies can choose to disapply the requirement to appoint an auditor and prepare a less onerous audit report instead if they meet all of the following conditions:

• turnover is less than £5.6 million
• assets are less than £2.8 million
• their members have passed a resolution to disapply the requirement
• they are not on the list of exempted societies that cannot disapply this requirement (see FCA guidance for further details)

The requirements for companies of the same size are different. Private limited companies are exempted from the requirement to be subject to audit if they meet two of the following conditions:

• turnover is less than £10.2 million
• assets are less than £5.1 million
• they have 50 or fewer employees

Table 1 compares the requirements between companies and co-operatives.

Table 1: Comparison of audit treatment for societies and companies

Size	Audit treatment for societies	Audit treatment for companies
Less than £5,000 receipts/payments, less than £5,000 assets and under 500 members	Lay audit	None
Between £5,000 and £90,000 turnover	None	None
Between £90,000 and £5.6m turnover and less than £2.8m assets	No full audit but a less onerous audit report must be produced	None
Greater than £5.6m turnover or £2.8m assets	Full audit	None
Greater than £10.2m turnover, £5.1m assets and 50 employees	Full audit	Full audit

2.2 Proposed change

The exemption thresholds for co-operatives and community benefit societies outlined above have not been updated since 2006. In that time they have become burdensome due to inflation and are out of step with companies legislation, which has been updated in the interim.

At Spring Budget 2017, the government announced that the turnover threshold above which co-operatives and community benefit societies are required to appoint an auditor will increase from £5.6 million to £10.2 million and the assets threshold from £2.8 million to £5.1 million.

This small but important change has been requested by the sector and will help level the playing field for co-operatives and community benefit societies, allowing them to use more of their resources to benefit their members.

The government expects that up to 250 societies that currently have turnover between £5.6 million and £10.2 million and assets between £2.8 million and £5.1 million will benefit from this change in their next accounting period.^{[footnote 1]} In addition to this, societies that are close to the current full audit exemption thresholds will benefit from this change in future years. This change will save each co-operative and community benefit society that will no longer have to appoint an auditor around £5,000-£10,000 per year, this is the average cost of undertaking a full audit.^{[footnote 2]}

Out of a total of 7,000 co-operatives and community benefit societies in the UK, this change will mean that over 5,000 of them could be eligible to disapply the requirement to appoint an auditor.

However, this change will not undermine the accountability of a society to its members. Co-operatives and community benefit societies below the new threshold will not be required by law to appoint an auditor. However, unless the members of a co-operative or community benefit society pass a resolution to disapply the audit requirement, they are still legally obliged to do so. The FCA also retain the right to prevent a society disapplying their audit requirement. This change will benefit those societies whose members pass a resolution to disapply the audit requirement and will reduce the burden of regulation on them. This will be in alignment with the treatment for companies.

This change will only apply to co-operatives and community benefit societies. The current audit requirements for credit unions will remain.

Question 1

Do you support the proposal outlined in this document? Do you think it will help deliver on the stated aim of helping co-operatives and community benefit societies compete on a level playing field with companies?

2.3 Implementation

After responding to this consultation, the government plans to lay a Statutory Instrument (SI) to change the thresholds in autumn 2017. This will follow the affirmative procedure and will be debated in both houses of Parliament. A draft SI can be found at Annex A.

The SI and new thresholds are expected to come into force from 1 April 2018.

Question 2

Do you think the draft legislation achieves the intention of the policy? Please specify any concerns.

3. Consultation questions and how to respond

The purpose of this consultation is to seek views on the proposals outlined in this document and on whether the draft SI delivers on the aims set out.

3.1 Consultation questions

The government invites responses from all interested parties, in particular co-operatives and community benefit societies that would likely be affected by the new thresholds and representative bodies, on the following specific questions.

1. Do you support the proposal outlined in this document? Do you think it will help deliver on the stated aim of helping co-operatives and community benefit societies compete on a level playing field with companies?

2. Do you think the draft legislation achieves the intention of the policy? Please specify any concerns.

3.2 How to respond

This consultation will run from 25 August to 22 September 2017.

Responses should be sent by email to retailbankingandmutuals@hmtreasury.gsi.gov.uk.

Alternatively please send responses by post to:

Retail Banking and Mutuals Unit
Banking and Credit team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

When responding, please say if you are making a representation on behalf of a co-operative, community benefit society, individual or representative body. In the case of representative bodies, please provide information on the number and nature of people you represent.

3.3 Confidentiality

Information provided in response to this consultation, including personal information, may be published on disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1988 (DPA) and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory code of practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Treasury.

HM Treasury will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.

1. Based on figures obtained by Co-operatives UK. ↩

2. Internal Co-operatives UK research ↩