Dormant Companies - Audit Exemption
URN No: n/a
Attention has been drawn to an incorrect cross-reference in section 249AA(2) of the Companies Act 1985 (“the 1985 Act”) concerning when a company is dormant, and so exempt from having its accounts audited for a financial year. This note sets out the Department of Trade and Industry’s interpretation of that cross-reference.
Background
2. Section 249AA of the 1985 Act provides that a company is exempt from having its accounts for a financial year audited if-
(a) it has been dormant since its formation, or
(b) it has been dormant since the end of the previous financial year and subsection (2) applies.
It is companies falling within (b) with which this note is concerned.
3. Section 249AA(2)(a) of the 1985 Act provides that to be exempt the company must be entitled in respect of its individual accounts for the financial year in question to prepare accounts in accordance with the provisions of section 246 relating to small companies, or that the only reason why it is not so entitled is that it falls within section 247A(1)(a)(i) or (b). It is the underlined cross-reference which is no longer correct.
4. On 21st March 2005 the Companies Act 1985 (Operating and Financial Review and Directors’ Report etc) Regulations 2005 were made (S.I. 2005/1011) (“the 2005 regulations”). Regulation 6 amended section 247A of the 1985 Act, the amendments coming into force on 22 March 2005, and having effect for financial years beginning on or after 1st April 2005. What was previously section 247A(1)(a)(i) (company not entitled to exemption under section 246 if public) became section 247A(1B)(a). What was previously section 247A(1)(b) (company not entitled to exemption under section 246 if member of an ineligible group) became section 247A(1A)(b). The cross-reference in section 249AA(2)(a) was not amended due to an oversight.
Interpretation
5. It is the Department’s view that meaning must be given to the cross-reference in section 249AA(2)(a). At the time when the 2005 regulations were made, and for financial years beginning before 1st April 2005, the meaning of the cross-reference can be easily ascertained. Companies are not disqualified from being dormant by reason only of being public companies or members of ineligible groups.
6. For financial years beginning on or after 1st April 2005, the Department considers that the cross-reference (which is to provisions of section 247A which no longer exist) must be construed as a reference to the provisions of new section 247A which correspond to section 247A(1)(a)(i) and (b) ie to new section 247A(1B)(a) and 247A(1A)(b).
7. There was no intention to remove the section 249AA exemption from any class of dormant companies. Had there been such an intention, then in the Department’s view it should have been clearly provided for, given that directors are required to make a statement in the balance sheet that the company is entitled to exemption under section 249AA (section 249B(4)) and that failure to do so, or giving an incorrect statement, could give rise to criminal liability under section 233.
8. The Department intends to amend the cross-reference in section 249AA(2)(a) by regulations under section 257 of the 1985 Act when a suitable opportunity arises. In the meantime, it considers that the cross-reference should be given the construction set out above.