Audits for groups and subsidiaries

The group test

A subsidiary checks two things: its own size, and the size of the group it belonged to during the year. Both have to come out small for the subsidiary to take the audit exemption.

From 6 April 2025 a group is small when it meets at least two of these three tests:

Turnover

£15 million net of intra-group sales, or £18 million gross

Balance sheet total

£7.5 million net of intra-group balances, or £9 million gross

Employees

an average of 50 or fewer across the group

The group means the whole group from the ultimate parent down, including companies overseas. A UK company with a large foreign parent is part of a large group.

Ineligible groups

A group is ineligible when any member is a public company, a bank, an insurer, an e-money issuer, a MiFID investment firm or UCITS manager, or has shares traded on a regulated market. Subsidiaries in an ineligible group cannot use the small company audit exemption, whatever their size.

The section 479A parent guarantee

A subsidiary of any size can avoid an audit when its parent guarantees its liabilities under section 479A of the Companies Act. The conditions are strict:

• the parent must be established under the law of a part of the UK
• every member of the subsidiary must agree to the exemption for that year
• the parent must guarantee all the subsidiary's outstanding liabilities at the year end, until they are satisfied
• the subsidiary must be included in the parent's audited consolidated accounts, which disclose the exemption
• the guarantee, the members' agreement and the parent's consolidated accounts are filed at Companies House

The guarantee is a real commitment. The parent becomes liable for the subsidiary's debts at the year end, so directors usually take advice before giving one. Since 1 January 2021 the route has been available only where the parent is established under UK law. Before then, parents in the European Economic Area could use it too.

Dormant subsidiaries

A subsidiary that has had no significant accounting transactions during the year can usually take the dormant company exemption under section 480, even in a large group. Intra-group balances that do not move and the payment of fees to Companies House do not stop a company being dormant.

How a group audit works

Where the group prepares consolidated accounts, the group auditor gives an opinion on them as a whole. It plans the audit around the components that matter most and directs the work done on them, whether its own team does it or another firm does. The auditing standard for this, ISA (UK) 600, was revised to give the group auditor more responsibility for the work on components.

In practice, having one firm audit the parent and all the UK subsidiaries removes a layer of co-ordination, and lets the same team see intra-group balances and transactions from both sides.

UK subsidiaries of overseas groups

These are some of the companies most often caught out. The UK company may have a handful of staff and modest turnover, but if the worldwide group is over the limits it needs a UK statutory audit, and the parent guarantee route is closed. The parent's auditors may also need reporting from the UK company in a particular format and to a group timetable.

When choosing a firm for a UK subsidiary, ask whether it reports under the framework the parent uses (UK GAAP, IFRS or another), whether it has worked to an overseas group's reporting timetable, and who will speak to the parent's auditors.

Questions