UK Audit requirements (that may affect UK subsidiaries that are members of worldwide groups)
What You Need to Know
Requirements for an audit
Companies Act 2006 (CA2006) section 475 requires a company’s annual accounts for a financial year to be audited unless it is exempt from audit. There are four potential ways to obtain audit exemption:
- As a small standalone company (section 477)
- As a small member of a small group (worldwide) which is not ineligible (section 479)
- As a company of any size in a UK group with parent guarantee (section 479A)
- As a dormant company (section 480)
Each of these potential ways to obtain audit exemption contains its own requirements and conditions but we will focus on the first two so that UK subsidiaries that are members of worldwide groups and their parent entities can ensure that they are compliant.
Exemption from an audit
Small standalone company (CA 2006 section 477)
A company that qualifies as small (by virtue of S382) in relation to a financial year is exempt from the requirements to have its financial statements audited (by virtue of S477). The conditions for audit exemption are met in a year in which the company satisfies two or more conditions i.e. turnover <£10.2m, gross assets <£5.1m and less than 50 employees. From 6 April 2025 the exemption thresholds will be: turnover <£15m, gross assets <£7.5m and less than 50 employees. Where the financial year is not a full year then turnover must be proportionately adjusted. A company ceases to meet the qualifying conditions only if it occurs in two consecutive years. A company is not entitled to this exemption if it is: a public company, an authorised insurance company, a banking company, an e-money issuer, a company which carries on investment market activities, a special register body etc.
Small member of a small group worldwide (CA 2006 section 479)
A small company that is a member of a group may be entitled to the audit exemption if the group qualifies as small (see conditions below) and is not at any time in that year ineligible. The small company will need to consider the size of the entire group (including overseas entities) of which it is a member. A group ceases to meet the qualifying conditions only if it occurs in two consecutive years. A group is ineligible if any of its members is: a traded company, a body corporate whose shares are trading on a UK regulated market, a person who has permission to carry on a regulated activity, an e-money issuer, an authorised insurance company, a banking company, a person who carries on insurance market activity etc.
The conditions for audit exemption are met in a year in which the group satisfies two or more conditions as set below:
Gross assets (balance sheet total) mean the aggregate of the amounts shown as assets (excluding liabilities) in the balance sheet.
The number of employees mean the average number of persons employed in the year (add number of employees for each month and divide by number of months in the financial year).
Gross means before consolidation adjustments; Net means after consolidation adjustments.
Example:
A US parent company has subsidiaries in the UK, in other European territories, and in the USA. In order for the UK subsidiary to determine if it qualifies for the audit exemption, the total turnover, total gross assets and total number of employees of all of the members of the group (i.e. UK, other European territories and the USA) should be considered. If two or more of the conditions above are breached for two consecutive years, then the UK subsidiary will not qualify for the audit exemption.
What is a parent and subsidiary undertaking (CA 2006 section 1162)
An undertaking is a parent undertaking in relation to a subsidiary undertaking if: it holds a majority of the voting rights in the subsidiary; or it is a member of it and has the right to appoint or remove a majority of its board of directors; or it has the right to exercise dominant influence by virtue of provisions contained in the subsidiary’s articles or by virtue of a control contract; or it is a member of the subsidiary and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in the subsidiary.
Right of members to require an audit
Under section 476 of CA 2006, members of a company have an option to require the company to have an audit. Where effective notice is given, a company will not be entitled to claim audit exemption. The notice must be given by: members representing not less in total than 10% in nominal value of the company’s issued share capital or any class of it, or if the company does not have share capital, not less than 10% in number of the members of the company. The notice must be given not later than one month before the end of that year and not before the financial year to which it relates. Notice must be provided each year.
Articles and governing documents
Directors should also review the company’s articles and other governing documents to check whether they contain specific provisions in relation to audits. A company which could claim exemption from audit may still require an audit if its articles contain such a provision.
