Can a UK subsidiary qualify for audit exemption?
In managing a UK company, one crucial aspect is understanding the intricacies of audit exemption. Most small standalone UK companies are eligible for exemption, but for those operating as subsidiaries within a group, additional considerations come into play. Let's delve into the various routes a UK subsidiary can take to qualify for audit exemption and make the management of your company a seamless process.
Small Group Company Audit Exemption (s477 and s479 Companies Act 2006)
The most direct path for a UK subsidiary to claim audit exemption is through the small group company audit exemption, outlined in sections 477 and 479 of the Companies Act 2006. To initiate this process, we first need to evaluate the size of the individual subsidiary.
Size Matters – Is the Individual Company ‘Small’?
To benefit from audit exemption, a subsidiary must adhere to the conditions specified in section 477 of the Companies Act 2006. This ensures eligibility based on the definition of a 'small' company and determines the possibility of exemption from audits.
Is the Group a 'Small' Group?
If the subsidiary qualifies as a 'small' company on its own, the next step is to assess the group's status. Section 479 of the Companies Act 2006 allows eligible 'small' group companies to apply for audit exemption. The size criteria, detailed below, must be calculated based on the largest possible group on a worldwide basis.
Size Criteria for Group Company to Qualify for Exemption from Audit:
Net: As per consolidated accounts (after adjustments to eliminate group transactions).
Gross: Sum of all individual company accounts before intragroup transactions or balances are removed.
The group qualifies as 'small' in the first year of trading if it meets at least two out of three size criteria. In subsequent years, qualification persists unless it exceeds two of the three size thresholds for two consecutive years.
Could the Group be Ineligible?
Section 479 of the Companies Act 2006 prohibits audit exemption if, at any time within the financial period, the group contains an 'ineligible' company. Ineligibility arises if any group member is:
A traded company.
A body corporate with shares admitted to trading on a regulated market.
An e-money issuer, authorized insurance company, banking company, MiFID investment firm, or UCITS management company.
Engaged in insurance market activity or a regulated activity under the Financial Services and Markets Act 2000.
A scheme funder of a Master Trust scheme.
It's crucial to note that a group containing a PLC is only ineligible if the PLC is also a traded company (listed on the London Stock Exchange).
UK Subsidiaries that Do Not Qualify as Small
For UK subsidiaries that do not qualify as small, the route to audit exemption varies post-Brexit based on whether the subsidiary has a UK or EEA parent company.
UK Subsidiaries with a UK Parent Company – Audit Exemption via Parent Guarantee
For subsidiaries with a UK parent company, the process remains unchanged post-Brexit. These subsidiaries can still leverage audit exemption if:
All members agree to the audit exemption.
The UK parent company guarantees the subsidiary's liabilities.
The subsidiary is included in the audited consolidated accounts prepared by the UK parent undertaking.
The parent undertaking discloses in the consolidated accounts notes that the subsidiary is exempt from audit.
Directors deliver all required documentation to the registrar before the accounts' date.
It's important to emphasize that even if the subsidiary satisfies these conditions, audit exemption is not allowed if the company was an ineligible company at any time during the financial period.
UK Subsidiaries with a Parent Company Based in an EEA Member State
Post-Brexit, a UK subsidiary with a parent based in the EEA must obtain a statutory audit if it doesn't qualify for small company audit exemption. However, there are nuances to consider.
The providing parent company doesn't have to be the ultimate parent; an intermediate parent undertaking can facilitate audit exemption if registered under UK law and prepares consolidated accounts for filing.
A UK subsidiary with an EEA parent may still apply for exemption if the accounting period starts on or before December 31, 2020.
Audit Exemption for Dormant Subsidiaries:
Section 480 outlines that dormant subsidiaries qualify for audit exemption if they have been dormant since incorporation or for the entire financial period. The subsidiary must:
Have the right to prepare individual accounts under the small companies regime.
Not be required to prepare group accounts.
Remain dormant throughout the financial period.
However, the exemption is nullified if, at any time during the financial period, the dormant subsidiary was:
A traded company.
An authorized insurance company, a banking company, an e-money issuer, a MiFID investment firm, or a UCITS management company.
Engaged in insurance market activity.
Potential Loss of Audit Exemption
Even if a subsidiary qualifies for audit exemption, certain circumstances may necessitate a statutory audit:
When members of the company demand an audit.
If the company's articles of association require an audit.
When statutory statements are absent from the balance sheet.
When a condition in a shareholders' agreement, loan arrangement, or other contract mandates an audit.
For detailed information on these circumstances, explore our guide on how to qualify for small company audit exemption.
How PKPI can help?
Navigating the complexities of a first-time audit can be daunting for any finance team. Our seasoned finance professionals are here to alleviate the stress by offering comprehensive support throughout the audit process.
For more details on how our expertise can guide you through your initial audit post the conclusion of parent company guarantees, reach out to Gagan Singh