Scottish government announces plans to increase the charity audit threshold

The Scottish government has committed to increasing the income criterion of the Scottish charity audit threshold from gross income of £500k per annum to gross income of £1m.

This is a much-needed change to an aspect of the audit threshold that has remained static since the Charities Accounts (Scotland) Regulations 2006 were first implemented.

Inflation means that a charity with an income for £500k today is a much less sophisticated operation than a charity of this size in 2006. There are approximately 24,700* charities on the Scottish charity register maintained by OSCR, the Scottish charity regulator, including about 1,300 charities based elsewhere in the UK but who’s activities in Scotland are sufficient to require registration.

Under the existing audit threshold just over 10% of charities require an audit. With the threshold change this will reduce to just over 7% of charities, freeing approximately 730 charities from audit. This includes charities based in England and Wales who only require an audit due to the Scottish charity audit threshold.

*OSCR Sector Overview at 31 December 2024

The increase brings the Scottish charity audit threshold into closer, although not precise, alignment with the audit threshold in England and Wales. There’s also pressure from the charity sector to raise the current gross income criterion of £1m, so any alignment could be short lived.

New Charities Accounts (Scotland) Regulations are to be introduced in the autumn, but beyond the threshold increase there’s no further detail.

There’s no indication that the new regulations will be subject to public consultation meaning that the extent of the changes this time round may be minimal. However, the Scottish government’s reference to ‘new’ regulations, could indicate a plan to consolidate the content of the original Charities Accounts (Scotland) Regulations 2006 and subsequent amendments into a single up to date set of regulations. That would be enormously helpful.

When will the audit threshold increase? This isn’t clear, but it would make sense for the increase to apply to periods beginning on or after 1 January 2026. This would coincide with the implementation of changes to Financial Reporting Standard (FRS) 102 arising from the FRC’s latest Periodic review amendments.

Changes to the Charities Statement of Recommended Practice (SORP) are required to reflect the FRS 102 changes and the accounting regulations reference a specific version of the SORP. This means the accounting regulations need to be amended to refer to the latest edition of the SORP or, at least, remove the reference to the outgoing edition.

What other changes would be desirable?

A Scottish charity is required to receive an audit in any year it exceeds the financial criteria of the audit threshold. This means that if a charity which isn’t on a growth trajectory receives income on a one-off basis such as a legacy or a grant, it may need an audit in a single year. In these circumstances it’s difficult to conclude that the benefits outweigh the costs. The introduction of a year’s grace for a breach in the financial criteria would be a further sensible change to the audit threshold and would not be a radical move.

Charities in England and Wales can apply to the Charity Commission for England and Wales for dispensation from audit in the first year of an audit threshold breach, and company law provides a year’s grace in these circumstances. 

A parent charity must prepare group accounts if its gross income is £500k or more per annum, meaning that all group accounts prepared as a result of exceeding this threshold must receive an audit. It would make sense to continue to link the group accounts threshold to the audit threshold. This would be a proportionate increase and would prevent the group accounts of some charities falling within the scope of the independent examination regime. If a year’s grace were introduced for the audit threshold, the same approach would be needed towards the group accounts threshold to keep these aligned.

A commitment to the Scottish government to review the audit threshold on a regular basis, say every three to five years, to take account of inflation would also be helpful, but this is unlikely to be regulated for.

We believe that there are other reforms to the accounting regulations that would improve their clarity and bring them up to date with developments elsewhere. We’d specifically welcome:

• Clarification of the term ‘statement of account’ which sometimes appears to include the trustees’ annual report and sometimes not. This is a particular challenge for auditor’s who have to give reasonable assurance on whether a charity’s accounts give a true and fair view.
• The alignment of trustees’ responsibilities towards the trustees’ annual report with the responsibilities of directors towards the directors’ report under the Companies Act 2006.

What will the revised audit threshold be?

Following the threshold increase, but without the introduction of a year’s grace, a charity will require an audit by a registered auditor (i.e. a firm included in the register of statutory auditors) if in any financial year:

• It has gross income of £1m or more, or
• the aggregate value of its assets (before deduction of liabilities) at the end of the financial year exceeds £3.26m, or
• it is required to do so by the constitution of the charity, any other enactment, or on the instruction of its trustees.

Gross income is defined in the 2006 accounting regulations as:

“Incoming resources of the charity in all restricted and unrestricted funds but excluding the receipt of any donated asset in a permanent or expendable endowment fund.”

The new Charity Accounts (Scotland) Regulations were announced alongside the publication  by the Scottish government of the analysis report on its 2024 consultation Review of charity regulation. Some further additional and welcome next steps were also announced.

There remains uncertainty about the timing and scope of a wider review of Scottish charity law, but any wider review is unlikely to take place until the next parliamentary term, which will begin following elections on 7 May 2026.

We’ve contributed to this consultation and provided evidence in support of an increase in the audit threshold. The following key documents highlight our recent work on charity law reform:

• The ICAS member firms survey on shaping Scottish government policy on charity scrutiny (February 2025)
  
• The ICAS case for reforming the Scottish charity audit threshold prepared for OSCR (August 2024)
  
•  Response to the Scottish government on its Review of charity regulation consultation (July 2024)
•  A letter to the Scottish government’s Cabinet Secretary for Social Justice calling for a wider review of Scottish charity law to be scoped (August 2023)