The Audit Threshold Two-Year Rule: What Companies Need to Consider

As Chartered Accountants with almost 50 years of experience supporting businesses of all sizes, we understand how confusing audit regulations can be. One area that companies should review is the audit threshold two-year rule.

This is important in determining whether a company requires a statutory audit. With new audit thresholds effective from April 2025, it is important to understand how the two-year rule applies and how it affects a company’s audit obligations.

What is the Audit Threshold Two-Year Rule?

The two-year audit exemption rule is designed to create consistency and prevent companies from frequently switching in and out of audit requirements due to short-term changes in their financial position.

• To obtain audit exemption, a company must meet at least two of the three size criteria for two consecutive financial years.
• If a company breaches two of the three thresholds for two years running, a statutory audit will be mandatory.

Changes in a single year will not affect a company’s  requirement for a statutory audit. It is the changes in a company’s size and structure over a two-year period that would affect this..

New Audit Thresholds from April 2025

From 6 April 2025, new size thresholds apply for accounting periods commencing on or after that date (6th April 2025). These thresholds will determine whether a company qualifies as “small” and hence therefore eligible for audit exemption.

A company must meet at least two of the following criteria to be considered small:

• Annual turnover not exceeding £15 million (increased from £10.2 million)
• Total assets must not exceed £7.5 million (up from £5.1 million)
• Average number of employees must not exceed 50 (unchanged)

An example of the Audit Threshold Two-Year Rule

As an example, if a company exceeds the new turnover and asset limits in the 2025/26 financial year, under the two-year rule, it will not automatically lose audit exemption. It would need to exceed the same thresholds again in the 2026/27 year before it would be required to undergo an audit.

Conversely, if a company was over the old thresholds in 2024/25 but meets the new exemption limits in 2025/26 and 2026/27, it could regain audit exemption, due to transitional arrangements.

Transitional Relief and The Audit Threshold Two-Year Rule

To help companies adjust to the changes in audit criteria, transitional relief may be available. When preparing accounts for a financial year from 6 April 2025, a company may retroactively apply these new thresholds to the previous year to evaluate whether it meets the exemption.

This allows companies to potentially benefit from audit exemption a year earlier than they would with the revised limits. This may provide some flexibility during this transitional period.

Companies That Cannot Claim Audit Exemption

Not every company can avoid audits based on turnover, asset size, or number of employees. The following types of companies are required to undertake statutory audits regardless of the threshold criteria:

• Public limited companies
• Companies in regulated industries, such as banking or insurance
• Those with traded shares on regulated markets
• Companies that are part of a group, where the group exceeds the threshold limits

The Audit Threshold Two-Year Rule and Managing Audit Requirements – considerations

If a company qualifies for audit exemption, it should consider ongoing audit requirements. In such circumstances, the following should be considered on an ongoing basis:

Maintain Strong Financial Controls

Robust internal controls help prevent errors and fraud and prepare your business for any future audit requirements. Systems should be in place for regular reconciliation, accurate reporting, and robust documentation.

Proactively Monitor Size Criteria

Keep turnover, assets, and headcount under review each year. A sudden increase could result in the need for future statutory audits.

Consider Group Structures

If a company joins a group or an existing group grows, it may become eligible for statutory audits, even if the subsidiary company remains small. Always assess group-wide eligibility when changes occur.

Consider other reasons where audits may benefit a company

If a company is seeking investment, planning to sell a business, or applying for finance, having audited accounts, even when not legally required to, can improve credibility and trust with stakeholders.

Summary: The Audit Threshold Two-Year Rule – Be Audit-Ready, Even When Exempt

The UK audit threshold two-year rule offers stability for growing businesses, however, it does require planning. With updated audit thresholds from April 2025, it is important to understand a company’s current and potential future audit position.

By understanding a company’s (or a group’s) audit obligations early and continually monitoring financial metrics, a company will be best placed to understand its ongoing audit requirements.

Further reading

• Alexander & Co audit services
• Alexander & Co tax services
• Tolley’s Taxation Awards – Alexander & Co shortlisted for two awards in industry ‘Oscars’