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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Tax and accountancy: relevance of audit

The requirement for the taxable profits of a trade to be computed in accordance with generally accepted accounting practice does not, in itself, impose any audit requirement. See S25(2)(b) Income Tax (Trading and Other Income) Act 2005 and S46(2)(b) Corporation Tax Act 2009. UK companies, however, must have their accounts audited unless one of the exemptions for small companies, certain subsidiaries and dormant companies applies.

A company must keep such accounting records as will enable its directors to comply with the requirements of the Companies Act (S386 Companies Act 2006 (CA 2006)).

The auditor’s report, where required, must state whether in the auditor’s opinion the balance sheet and profit and loss account give a true and fair view of the company’s affairs and of its profit or loss. If the accounts do not represent a true and fair view the auditor must qualify the report accordingly (S495 CA 2006).

Audit and small companies

The Companies Act requirement for accounts to be audited does not apply to certain small companies (S477 Companies Act 2006). The directors of such companies remain responsible for ensuring that the accounts show a true and fair view and that other Companies Act accounting, reporting and record-keeping requirements are satisfied. The companies affected are, broadly, those which satisfy two of the following three conditions:

  • annual turnover not more than £6.5 million;
  • balance sheet total not more than £3.26 million;
  • not more than 50 employees.


Small companies requiring audit

A company within these limits is not entitled to dispense with the audit if it falls within a number of exclusions, most importantly, if:

  • it is a PLC,
  • it is regulated under the Financial Services Act,
  • sufficient shareholders object.

The Companies Act requires the accounting policies of a company to be disclosed in its annual accounts.

For large companies Sch1 paragraph 45 to the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008, SI 2008 No 410 requires confirmation that accounts have been prepared in accordance with the applicable accounting standards. Particulars of any departure from this and the reasons for it should be given. Finally there are provisions in the Companies Act for the High Court, through the Conduct Committee of the Financial Reporting Council, to review sets of accounts to ensure that they comply with accounting standards.