Does my UK subsidiary require an audit?

May 17, 2024

FCCA, Audit Partner
East London


Does my UK subsidiary require an audit?

Often international companies are not aware that their UK subsidiary company may require an audit here in the UK.

Under UK law, all companies require an audit, unless they qualify for audit exemption. Failing to meet UK audit requirements can be costly, so overseas parent companies and worldwide groups with a UK subsidiary need to understand UK audit exemptions and requirements.

In this blog we look at whether a UK subsidiary company will require an audit and the audit exemption criteria that your subsidiary may qualify for.

UK audit requirements

Here in the UK a company will need to get an audit if your articles of association say they must, or the shareholders ask for one.

Generally, a company’s annual accounts for a financial year must also be audited unless the company and the group:qualifiy for audit exemption by meeting specific financial thresholds

How can a UK subsidiary qualify for audit exemption?

Under the small companies’ regime, your UK subsidiary may be exempt from audit if it has at least 2 of the following for two consecutive periods:

  • Turnover: an annual turnover of no more than £10.2 million.
  • Gross assets: fixed and current assets worth no more than £5.1 million.
  • Average number of employees: 50 or fewer employees on average.

Legislation has been proposed to increase the turnover and gross assets numbers with effect from periods commencing on or after 1 October 2024.

Worldwide groups

As above the eligibility criteria for audit exemption is based on the size of both the company and the whole worldwide group. ‘Group’ refers to the consolidated position, i.e. the parent company consolidated with its subsidiaries.

Where the worldwide group exceeds any two of the three thresholds below for two consecutive years, it is likely that the UK subsidiary will require an audit:

  • Turnover: Net: £10.2 million, or gross: £12.2 million.
  • Gross Assets: Net: £5.1 million, or gross: £6.1 million.
  • Average number of employees: 50.

Note: ‘Net’ means after consolidation adjustments. A group can satisfy the relevant requirements on either a net or gross basis or a combination of the two.

As above the above limits may increase for year ends commencing on or after 1 October 2024.

Are there any audit exemptions?

There are other ways to qualify for audit exemption for UK subsidiaries of overseas parent companies as follows:

Audit exemption by parent guarantee

Any UK company that is a subsidiary can qualify for exemption from audit under S479A Companies Act 2006 if the following conditions are met:

  • The UK parent company provides a guarantee under S479C Companies Act 2006, and
  • The UK parent company prepares and includes the relevant subsidiary in its consolidated statements for that period (or an earlier period), and
  • The parent undertaking must disclose in the notes to the consolidated accounts that the company is exempt from the requirements of auditing the individual accounts, and

The directors of the company must deliver to the registrar on or before the date that they file the accounts for that year:

  • a written notice of the agreement that no members have required an audit
  • the statement referred to in section 479C(1),
  • a copy of the consolidated accounts including the audit report,

It could be beneficial for groups with numerous UK companies to use a parent guarantee to reduce audit costs. However, as the guarantee covers all outstanding liabilities of the subsidiary company at year end until they are repaid in full careful consideration is required. The guarantee can be used flexibly i.e. some subsidiaries can take the guarantee and others not.

The group auditor may still need to undertake audit work on any UK based subsidiaries if the exemption is taken.

Audit exemption for dormant subsidiaries

Dormant subsidiaries will not require a statutory audit if they have been dormant since incorporation, or for the whole of the financial period concerned and:

  • have been entitled to prepare individual accounts in accordance with the small companies’ regime (or would have been entitled but for being a public company or a member of an ineligible group); and
  • have not been required to prepare group accounts for that financial period.

The ability to claim exemption from audit is lost if at any time during the financial period the dormant subsidiary was:

  • a trading company;
  • an authorised insurance company, a banking company, an e-money issuer, a MiFID investment firm, a UCITS management company; or
  • a company that carries out insurance market activity.

What does a UK audit entail?

An audit entails an examination of the accounts and records of the company to form an opinion.

Auditors are required to state whether the financial statements give a `true and fair’ view or that they are ‘presented fairly in all material respects.’

An unqualified opinion will be expressed where the auditor concludes that the financial statements give a true and fair view/present fairly. Auditors may also give a modified opinion.

An audit includes the following areas:

  1. Risk assessment: auditors will need to get a detailed understanding of the business in order to highlight and assess the key areas in the financial statements most at risk of material misstatement.
  2. Evidence-gathering: once higher risk areas are identified, an auditor will focus on the identified higher-risk areas
  3. Reporting: auditors report their opinion to the shareholders and the report is included in financial statements of the audited company.

An audit must be performed by a UK statutory auditor that is registered and must comply with strict standards.

What do I need to do if my subsidiary is not audit exempt?

If your UK subsidiary is not exempt from statutory audit using the above criteria, then the company must appoint a registered UK audit firm such as Barnes Roffe.

If your company is not exempt from requiring an audit, you will need to carry an audit out every year once your financial year end date has passed. If your company is a private limited company you will have nine months to complete an audit which is due to be submitted to HMRC and Companies House at the same time as your annual accounts filing deadline.

Penalties for failing to comply with UK audit requirements

Failing to comply with a statutory annual audit can carry financial and non-financial penalties. This includes company fines or even criminal proceedings against company directors.

Not having audited accounts can also hamper longer term growth by limiting your company’s ability to obtain funding or future investment.

How can Barnes Roffe help?

At Barnes Roffe, we advise many UK subsidiaries and overseas groups on UK audit requirements. We can advise your overseas parent company on all UK companies audit requirements.

We work with UK subsidiaries with international groups to ensure compliance with UK statutory audit regime. We’ll make sure you are aware of changes in regulations that could affect your business.

Contact us for more help and advice on UK subsidiaries audit services.

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