A significant number of overseas groups with UK subsidiaries remain unaware of the statutory requirements for audit under UK law. Failing to comply can be costly – we set out a simple but comprehensive guide to the audit requirements of UK subsidiaries.

By law, all UK companies require a statutory audit. However, there are certain exemptions from this rule available, based on meeting specific criteria.

Eligibility criteria for taking an exemption from audit are based on the size of both the individual subsidiary company and the group as a whole. ‘Group’ in this case refers to the consolidated position in an accounting sense, ie the parent company consolidated figures which include its subsidiaries.

Is the company a small company?

A company will be a small company if it meets any two of the following thresholds:

• Turnover: £10.2 million or below.
• Total assets: £5.1 million or below.
• Average number of employees in the period: 50 or fewer.

Turnover is pro-rated for periods longer or shorter than 12 months. A company must satisfy the size criteria for two consecutive accounting periods before they can qualify as small.

It is worth noting that the newly elected UK government has confirmed its intention to increase the company size thresholds. The small turnover and gross asset thresholds are proposed to increase to £15 million or below and £7.5 million or below respectively. There is currently no expected change to the employee number figure of 50. These changes are expected to apply from 6 April 2025 once the relevant legislation has passed through government. Further details of these changes are available.

In addition to the quantitative size criteria, to qualify as small, a company must also not be any of the following as they are excluded from the small company regime:

• A public company.
• An authorised insurance company, banking company, an e-money issuer, a MiFID investment firm, or a UCITS management company.
• A companying carrying out insurance market activity.
• A scheme funder of a Master Trust scheme.
• A member of an ineligible group (see section below on ‘Is my UK subsidiary part of an ineligible group?’).

Advice should be taken where there is uncertainty whether a company will fall within these categories.

An exemption from audit is available to small companies who qualify for the small companies regime. Small companies that are members of a group must also consider the size of the group.

Is the company a small company in a small worldwide group?

If the company itself is small, management must then consider the size of the global group of which it is a member. Where the global group exceeds any two of the three thresholds set out below, it is probable that the UK subsidiary will require an audit:

• Turnover: Net: £10.2 million, or gross: £12.2 million.
• Total assets: Net: £5.1 million, or gross: £6.1 million.
• Average number of employees in the period: 50.

‘Net’ means after consolidation adjustments. A company can satisfy the relevant requirements on either a net or gross basis or a combination of the two. Turnover is pro-rated for periods longer or shorter than 12 months. As noted above, the UK government has announced in March 2024 its intention to increase the size thresholds; the group thresholds will change in line with the company thresholds.

Is my UK subsidiary part of an ineligible group?

A UK subsidiary will be ineligible for the small companies regime if it was a member of an ineligible group at any time during the financial year. A group is an ineligible group if any member (including UK and non-UK entities) is:

• A traded company.
• A body corporate (other than a company) whose shares are admitted to trading on a UK regulated market.
• A person (other than a small company) who has permission under Part 4A of the Financial Services and Markets Act 2000 (c.8) to carry out a regulated activity.
• An e-money issuer.
• A small company that is an authorised insurance company, a banking company, a MiFID investment firm or a UCITS management company.
• A scheme funder of a Master Trust scheme.

This is a complex area of UK company law and therefore advice should be taken where there is uncertainty whether a company will fall within these categories.

Please get in touch if you would like any support in understanding if your subsidiary is part of an ineligible group.

Audit exemption

UK companies of any size with a parent established under UK law may also want to consider audit exemption by parental guarantee. Various conditions need to be met in order to claim this exemption.

Among other detailed qualifying conditions, the UK parent company is required to give a guarantee over the subsidiary and any non-controlling interests in the subsidiary must also agree to the exemption.

Where this exemption is taken, the subsidiary taking the audit exemption must be included in the parent company’s consolidated audited accounts; these consolidated accounts must then be filed on the UK public register alongside the accounts of the subsidiary claiming the exemption. The parent company must also disclose within the consolidated accounts that the subsidiary is exempt from the audit of its individual accounts by virtue of the s479A parental guarantee. Certain types of company are excluded under s479B of the Companies Act, including traded companies (ie a company any of whose transferable securities are admitted to trading on a UK regulated market) and authorised insurance and banking companies.

Please get in touch if you are considering taking this exemption.

Other considerations

Even where a company achieves an audit exemption due to its size, there are wider circumstances which may mean an audit will still be required, for example if it is:

• Required to do so by virtue of its articles of association or its shareholders have required an audit to be obtained.
• Required to do so as a condition of a shareholders’ agreement, debt instrument or other similar obligation.
• Required as part of a wider consolidated audit process of the whole group, if the UK subsidiary is material to the wider group.

If you would like to discuss whether or not your UK subsidiary meets the qualification criteria for audit exemption either as a small company within a small worldwide group or via parental guarantee then please do get in touch with Jamie Lane e: [email protected]

This article is based on law at 9 December 2024.

***

Name: Claudia Painter

Role: Associate – Personal Tax

Time at Saffery: 2 years

What’s the best bit about your job?

The opportunity to work on a variety of clients, it ranges from Individuals, to Partnerships, to Trusts and Estates. Having such a mixed portfolio means every job is interesting and creates different challenges. Being able to meet these challenges is motivating and feels really good.

The culture of Saffery is really important to the business and the people within it – what do you think you bring to the team and what do you contribute?

I am a team player who is very happy to help my team when the going gets tough during the busier times of the tax cycle. Separate from the professional side, I am a social member of the office and have been able to build up good friendships across the different teams.

If you weren’t doing this role, what might you be doing?

I really enjoyed art and product design in school, so something creative I expect.

What do you enjoy doing outside of work?

I love spending time with family, dancing (Ballroom and Latin which I have now being doing for a good 19-20 years) and going to the gym. I am an active member of Girl Guiding UK. I joined as a Brownie and completed my leadership qualification a couple years ago and help with running a Ranger unit. I also have great fun being part of our Saffery mixed netball team.

Tell us something about yourself that we don’t know.

I’m a MacBean clan descendant. Something I only found out recently – We have our own tartan and a piece of tartan was taken to the Moon in 1969 on the Apollo XII mission by Alan Bean.

Who or what inspires you?

This might seem a bit naff, but I would say my partner Harvey is probably the person who inspires me the most. He is driven, ambitious and one of my biggest cheerleaders.

What’s your favourite place in Dorset?

Brownsea Island. I have lots of memories from visiting the Island with family growing up, to the multitude of trips as a Girl Guide, including bivvying under the stars after walking across the island getting a heat rash from my wellies.

Give 3 words to describe yourself.

Dependable, Analytical and Creative.