Does your UK subsidiary require an audit?

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Many overseas groups with UK subsidiaries still need to familiarise themselves with the statutory requirements for audit under UK law. You must comply with the rules to avoid non compliance with the local laws. Here, we provide a clear and thorough guide to the audit standards for UK subsidiaries.

Table of contents

Who can claim audit exemption
What is the exemption for a parental guarantee?
Case Study
Special cases
What to do if my subsidiary is not audit-exempt?
What are the penalties for failing to comply with the rules?

Who can claim audit exemption

Every company in the UK requires an audit. However, certain companies can claim exemptions on fulfilling specific criteria.

The size of the business and the group as a whole are the two factors determining whether someone is eligible to claim an exemption from an audit. In this context, the term “group” refers to the consolidated position in an accounting sense, i.e. the parent company consolidated with its subsidiaries.

Small standalone UK companies can qualify for audit exemption unless it exceeds two of the following three criteria.

●  Turnover/revenue: £10.2m or less
●  Total assets: £5.1m or less
●  Number of employees: 50 or less

If the company is non-small or breaches two of the above criteria, it will not qualify for audit exemption.

If the company is small and is part of a global group, the management must consider the global group size of which it is a part. If the worldwide group exceeds any two of the three criteria or thresholds are given below, the UK subsidiary probably needs an audit.

●  Turnover/revenue: £10.2m(net) or £12.2m(gross)
●  Total assets: £5.1m (net) or £6.1m (gross)
●  The average number of employees working: 50

Here, the term “net” refers to the after-consolidation adjustments. Turnover is prorated for a duration longer or shorter than 12 months.

A group may satisfy the relevant exemption standards on the gross amount, net amount, or combination of the two.

According to the prior year’s rules, a business can breach two or more of these thresholds in a year and still qualify as a small company providing that they don’t breach two or more thresholds in the prior year.

What is the exemption for a parental guarantee?

UK-based companies with an overseas parent can take audit exemption under certain circumstances. Such an exemption is available for a company whose parent company is established in the European Economic Area (EEA) for the period on or before 31st December 2020.

Among other eligibility conditions, the EEA parent company must guarantee the subsidiary, and any noncontrolling interests in the subsidiary must also consent to the exemption. In cases where the exemption is applicable, the consolidated audited accounts of the parent company must be filled in English on the UK public register.

It is good to take advice when considering a parental guarantee, as under certain circumstances, this information can go on the public record that would not otherwise be readily accessible.

For accounting periods on or after 1st January 2021, the parental guarantee must apply to the UK subsidiaries of parent companies registered within the country. Furthermore, any UK subsidiary of an EEA parent needs to be audited unless they meet an alternative exemption.

Any dormant company and LLPs that don’t have any transaction at all are also exempt from audit (s480 exemption).

Case Study

AB Ltd, for instance, is a UK subsidiary of YZ Inc., a Canadian holding company with multiple subsidiaries spread globally. This small company has six employees, with a turnover of £1.8 million and gross assets of £3,000,000 in its own right. Its primary function is to provide sales and marketing support services in the UK for the Canadian parent.

The entire group has 100 employees, a turnover of $50 million and gross assets of $100 million.

The question is: Does AB Ltd qualify for audit exemptions?

No. As the size of the global group exceeds the “small group” thresholds, and the Canadian parent company is outside the EEA, the company cannot apply for a parental guarantee.

Special cases

Even when a company qualifies for audit exemption due to its size, there are certain circumstances where it needs an audit.

A company must give an audit

●  Under its Articles of Association, the shareholders have asked for an audit.
●  As a condition of the shareholders’ agreement, debt instrument or other similar obligations
●  It is a public limited company
●  It is in a group where any member of the group is a Public Interest Entity
●  A Financial Conduct Authority (FCA) regulated entity performing specific regulated functions
●  A business conducting particular insurance, investment or banking services
●  A group subsidiary in which the group auditor feels the subsidiary is significant enough to do an audit as a part of the group audit

You must always take advice when uncertain about whether your company will fall under these categories.

What to do if my subsidiary is not audit-exempt?

The company’s directors need to appoint a statutory auditor. These experts work by auditing the accounts and disclosures, looking into evidence supporting the transactions and balances, and reviewing changes from the previous year to the next.

The auditor then reports on whether or not the accounts present a true and fair view. This report will be included with the annual report and sent to the shareholders, to the Companies House for public record filing, and to HMRC with the tax return.

What are the penalties for failing to comply with the rules?

The directors must comply with a broad range of audit duties and responsibilities. Failing to abide by the rules leads to penalties that range from fines to criminal proceedings taken against the directors personally.

Additionally, there may be significant consequences when an audit is not planned and organised when necessary, like

● Annual accounts from earlier periods for the business may need to be audited, and directors may need to decide whether to refile their unaudited statements, both of which can be expensive and time-consuming;

● Deadlines are exceeded, such as if you miss accounts filing deadlines, the Companies House will levy fines of up to £1,500 for private and up to £7,500 for public companies; and

● Failure to prepare audited accounts may hamper or delay a business’s ability to seek investment or funding.


It is good to take advice from a company with experience advising UK subsidiaries of overseas parent companies. They can help plan and organise efficient and value-added audits, work on overseas management, implement suitable transfer fee arrangements between parents and subsidiaries, and more.

You can always discuss with an expert whether or not your UK subsidiary meets the eligibility criteria for audit exemption