Subsidiary audit exemption

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:

The government has announced changes to the size thresholds to reflect historic inflation and future-proof the thresholds for some time. Note that there is no change to the average employee figures.

These new thresholds will be effective for accounting periods commencing on or after 6 April 2025 eg year ended 31 December 2026. The changes aim to simplify reporting requirements for certain businesses and reduce regulatory burdens for companies.

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. A transitional provision will apply for a company’s first accounting period starting on or after 6 April 2025. This rule allows companies to assume that the new thresholds were already in place during the previous financial year when determining their size under the ‘two-year rule’.

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, or
• 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:

‘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.

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, or
• 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’re considering taking this exemption.

Case study Q&A

Fred Ltd is a UK subsidiary of Wilma Inc., a US, privately-owned, holding company with subsidiaries around the world. Fred Ltd has five UK employees, turnover of £1 million, and gross assets of £250,000, so is a small company in its own right. Its principal activity is to provide sales and marketing support services in the UK for the US parent.

The Wilma global group has 100 employees, turnover of $90 million and gross assets of $15 million.

Q: Does Fred Ltd qualify for any audit exemptions?

A: No. The size of the worldwide group exceeds the ‘small group’ thresholds and as the US parent company is outside the UK, Fred Ltd cannot apply a parental guarantee.

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, or
• Required as part of a wider consolidated audit process of the whole group, if the UK subsidiary is material to the wider group.

How we can help

We have extensive experience of advising UK subsidiaries of overseas parent companies. Our experience includes:

• Planning and organising efficient and value-add audits of UK subsidiaries,
• Working with overseas management on overseas GAAP to UK GAAP transition issues,
• Implementing suitable transfer pricing arrangements between overseas parents and UK subsidiaries,
• Bespoke assurance assignments on behalf of shareholders, and
• Analysis of impacts of reporting under either UK endorsed International Financial Reporting Standards (IFRS) (which are optional in UK) or UK GAAP (including FRS 101 and 102).

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 get in touch with Richard Collis.

This article is based on law at 1 August 2025.