The Department for Business, Energy and Industrial Strategy (BEIS) polled 400 small and medium-sized businesses (SMEs) to analyse the take up of new audit exemption reforms in 2015 and calculated the overall £4.6bn saving on the basis of reduced audit fees and less time spent on paperwork.

But takeup of the new audit threshold exemption has been lower than expected with less than a third of eligible SMEs using the exemptions. Original government estimates expected up to 80% of companies would take up the exemption and drop their annual audits. 

The BEIS report argued that the reason for the lower than expected take-up was ‘inertia and the fact that some companies have always undergone audits’.

Some respondents told BEIS that ‘the potential savings from not having audits are insufficient to offset potential negative consequences, such as the impacts on lenders’.

The research identified examples of audits being required as preconditions for loans, which was always an area of concern for audit experts and the professional institutes when the original decision was taken to slash the audit threshold.

Aside from financial considerations, a lack of publicity about the changes has also been an issue. BEIS stated: 'There is also a lack of awareness of eligibility for audit exemptions. Awareness of eligibility criteria is significantly lower among those undergoing audits and many survey respondents either thought they were ineligible or did not know if they were eligible, most of whom had wrongly assumed they exceeded the eligibility thresholds.'

One of the main reasons to continue with an audit is down to lending and banking requirements, which mean that it is not viable for small businesses to simply drop the audit requirement. Until a new alternative is devised which will satisfy lenders and stakeholders, there is unlikely to be a surge in adoption.

While three out of four SMEs undergoing audits felt they would benefit from exemptions, 80% of companies agreed that taking up audit exemptions reduce red tape and costs for for small businesses.

The department estimates that over a million SMEs qualify for the exemption, which requires them to meet two out of three criteria. These are having fewer than 50 employees; an annual turnover below a specified maximum amount (now £10.2m); or assets worth no more than a maximum (currently £5.1m).

Business Minister Margot James said: ‘We are committed to making the UK the best place in Europe to start and grow a business. That means supporting SMEs and removing unnecessary burdens to their growth, including by reducing regulation.

‘The number of businesses saving money from the new audit exemptions is already huge and I would encourage those who haven’t signed up to do so as soon as possible.

The BEIS Impact of exempting small companies from statutory audit is available here