AUDIT EXEMPTION … RAISING THE THRESHOLDS

AUDIT EXEMPTION … RAISING THE THRESHOLDS

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5 December 2005 Audit Exemption - Raising the Thresholds Issued by: Income Tax Division nd 2 Floor Government Office Buck’s Road Douglas IM1 3TX The Treasury, Yn Tashtey Income Tax Division Audit Exemption – Raising the Thresholds Public Response Document AUDIT EXEMPTION – RAISING THE THRESHOLDS PUBLIC RESPONSE DOCUMENT Introduction The Income Tax Division, on behalf of Treasury, issued a proposal document “Audit Exemption – Raising the Thresholds” on 15 March 2005. Treasury can now respond to the consultation exercise by reviewing the feedback received and outlining a way forward in this important area. In total, sixteen responses were received from members of the public and the accounting profession. With the impending implementation of a corporate taxation regime and a general 0% rate of income tax for companies in the Isle of Man, the Treasury Minister confirmed in his 2004 Budget Statement that audit exemption limits for Manx companies would also be updated. Significant changes elsewhere had already taken place. In November 2003 the United Kingdom Department of Trade and Industry had announced that a new audit exemption limit would be set for companies having turnover of up to £5.6 million, a figure equal to the EU maximum. In comparison, the current ...

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5 December 2005











Audit



Exemption




- Raising the Thresholds























Issued by:

Income Tax Division
nd 2 Floor Government Office

Buck’s Road
Douglas

IM1 3TX The Treasury, Yn Tashtey Income Tax Division

Audit Exemption – Raising the Thresholds
Public Response Document

AUDIT EXEMPTION – RAISING THE THRESHOLDS
PUBLIC RESPONSE DOCUMENT

Introduction

The Income Tax Division, on behalf of Treasury, issued a proposal document
“Audit Exemption – Raising the Thresholds” on 15 March 2005.

Treasury can now respond to the consultation exercise by reviewing the
feedback received and outlining a way forward in this important area.

In total, sixteen responses were received from members of the public and the
accounting profession.

With the impending implementation of a corporate taxation regime and a
general 0% rate of income tax for companies in the Isle of Man, the Treasury
Minister confirmed in his 2004 Budget Statement that audit exemption limits
for Manx companies would also be updated.

Significant changes elsewhere had already taken place. In November 2003
the United Kingdom Department of Trade and Industry had announced that a
new audit exemption limit would be set for companies having turnover of up
to £5.6 million, a figure equal to the EU maximum. In comparison, the current
turnover figure giving audit exemption in the Isle of Man in accordance with
The Companies (Exempt and Non-Resident Private Companies) (Audit
Exemption) (Amendment) Regulations 1994 is £45,000.

Benefits of an Audit

An audit allows the stakeholders of a business to make informed decisions
about how it is performing. It gives people and other companies additional
comfort when deciding whether they wish to invest in, provide finance to or
to trade with that business.

An audit can be important to the Income Tax Division as it is an independent
review of a company’s financial affairs.

An audit of any set of accounts can be carried out regardless of the fact that
the exemption limit may not have been exceeded.

Responses to the Proposal Document

Treasury sought views regarding the raising of the audit exemption limit to
£5.6 million. This is the figure that the United Kingdom moved to for financial
periods ending on or after 30 March 2004 and is equal to the EU maximum.

Issue Date: 5 December 2005 1/5
The Treasury, Yn Tashtey Income Tax Division

Audit Exemption – Raising the Thresholds
Public Response Document

A variety of views were expressed in the feedback that we received. Every
respondent was in favour of raising the exemption limit with some suggesting
£5.6 million, some £1 million and others suggesting between £250,000 and
£500,000.

Comments from Small to Medium Sized Businesses

All replies from this sector were in favour of increasing the limit to £5.6
million. Removing the need for an audit can reduce costs and save
management time. In addition, many small businesses are owner-managed
and the directors and shareholders have access to financial information on a
daily basis.

Concerns were also raised that the audit limit might be kept at a low figure to
protect the business of audit firms.

Further comments were:

• Reducing costs for small businesses especially in the start up years
would be welcome.
• Many small companies would welcome the removal of the audit
requirement as it is a large financial burden compared with un-
incorporated businesses of similar size.
• Audits have little value but high cost where a business already
prepares professional accounting statements and has involved
shareholders.
• An audit increases the costs of an average-size company which it
would not incur if it was registered in a different jurisdiction.
• Shareholders or directors could still arrange for an audit should they
require one.
• The audit limit should be abolished entirely for private companies,
except for those in which there is a public interest or a third party
requests one.
• Shareholders should determine whether an audit should be carried out
regardless of the size of the company.
• An audit could be carried out if it is in the public interest or requested
by a shareholder if a 10% stake or greater is held.

Comments from the Accountancy Profession

Although in favour of increasing the exemption limit, the profession did not
unanimously support the proposed £5.6 million. Most respondents seemed to
favour a limit of around £1 million. Various views mentioned a potential
increase in economic crime, such as money laundering, with a high exemption
limit, and a fall in the overall standard of accounts.

Issue Date: 5 December 2005 2/5
The Treasury, Yn Tashtey Income Tax Division

Audit Exemption – Raising the Thresholds
Public Response Document

Further comments were:

• The increase proposed will result in smaller audit firms leaving the
market and increasing the competition for the larger companies.
• If the limit is raised it may result in an increase in non-compliance and
a poorer quality of accounts.
• An increase to the level proposed would inevitably lead to smaller
accountancy practices ceasing to offer audit services. This could drive
the costs up for those companies requiring an audit.
• If there is a £5.6 million limit there would be an increase in money
laundering, economic crime, manipulation of tax liabilities and a lower
standard of accounts being prepared.
• The rise in the audit exemption could lead to an increase in economic
crime - supported by UK statistics. The removal of many companies
from audit requirements will lessen the chance that criminal activity is
reported, i.e. money laundering.

Compliance Issues

The accountancy firms also raised concerns in respect of the overall
compliance of companies:

• Under company law both the auditors and the directors are responsible
for compliance with anti-money laundering legislation.
• Banks could develop their own safeguards when dealing with small
companies instead of relying on an audit.
• Banks make more Suspicious Transaction Reports than accountants. It
is generally thought that the Manx anti-money laundering legislation is
more robust than the United Kingdom’s.

Additional Comments

One respondent suggested that if the audit exemption limit was set at £5.6
million an accountant’s report could be produced where the accountant
prepared the financial statements for companies with turnovers between
£500,000 and the exemption limit. This would be a declaration that a review
had been conducted by a qualified auditor or accountant and that the
financial affairs of the company were in order. However, one small business
mentioned and rejected this idea.

One respondent suggested that the limit be set at £1 million to protect the
Island’s reputation as a well regulated financial centre.




Issue Date: 5 December 2005 3/5
The Treasury, Yn Tashtey Income Tax Division

Audit Exemption – Raising the Thresholds
Public Response Document

Further comments were:

• If an increase to the level proposed led to smaller accountancy
practices ceasing to offer audit services, costs would be driven up for
those companies still requiring an audit.
• If the company has a qualified accountant producing accounts in-house
an audit is a statement of his accuracy and proficiency by another
accountant. He is putting his professional reputation on the line.
• Consideration of audit exemption should be made in the context of
wider Companies Acts changes under the auspices of the Financial
Supervision Commission rather than the Income Tax Division.
• Consider obtaining an independent review.
• Make the changes effective immediately as new companies will find it
difficult to obtain an auditor for just one year.

Charities

Under the Charities Registration Act 1989, all charities must submit audited
accounts regardless of their size. Various comments were made as follows:

• The cost of audit is very high for charities.
• Consider removing the audit requirement for charities with income of
less than £15,000.
• Consider using standard forms for small charities as is done in the
United Kingdom.
• Set an audit exemption limit for charities of £25,000.

Any change to the audit exemption for charities would require a change to the
Charities Registration Act 1989.

Treasury’s Conclusions

The area of audit exemption for companies is both complex and emotive. It is
clear from the consultation exercise that there is no general consensus on the
turnover limit below which companies will not require an audit.

Having reviewed the comments from all interested parties, Treasury has
determined that the audit exemption limit should be raised to a turnover
figure of £1 million as soon as possible. In order to achieve this, an
amendment to the Companies (Exempt and Non-Resident Private Companies)
(Audit Exemption) (Amendment) Regulations 1994 will be brought before
Tynwald for approval in December. The new limit of £1 million will have effect
on the day that it is approved by Tynwald.



Issue Date: 5 December 2005 4/5
The Treasury, Yn Tashtey Income Tax Division

Audit Exemption – Raising the Thresholds
Public Response Document

Treasury will continue to monitor the issue and will review the £1 million
turnover limit again in future. The review will also consider whether to
introduce an audit exemption for charities and how to ensure that the current
audit position for exempt companies is maintained within the new 0%
corporate tax rate regime.
Issue Date: 5 December 2005 5/5