Whether a UK subsidiary needs a statutory audit depends on two things: the subsidiary’s own circumstances and, where the small-company exemption under section 477 of the Companies Act 2006 is being considered, the size and eligibility of the wider group. A UK subsidiary in a large overseas group will commonly need a UK statutory audit even where the UK company itself is small. A separate exemption under section 479A may be available in certain cases where there is a qualifying parent undertaking established under the law of a part of the United Kingdom and all of the statutory conditions are met. We deal with subsidiary audits where the parent sits in the US, EU, or Asia, and where group reporting deadlines are tight.
The rules below come from the Companies Act 2006 and current Companies House guidance. They apply to a UK subsidiary of a foreign parent in the same way as to any other UK company, but the group dimension is what most often changes the answer.
Does a UK subsidiary company need an audit?
The starting point is section 475 of the Companies Act 2006: a company’s annual accounts must be audited unless the company qualifies for one of the statutory exemptions. For a UK subsidiary, the two exemptions that usually matter are the small-company exemption (s.477) and the subsidiary exemption (s.479A). Dormant companies have their own exemption under s.480. Each route has its own conditions, and the default position is that the accounts must be audited unless one of them applies.
For the small-company exemption, the first question is whether the UK subsidiary itself qualifies as small. For financial years beginning on or after 6 April 2025, a company satisfies the small-company size criteria where it meets at least two of the following three qualifying conditions:
- Turnover: not more than £15 million
- Balance sheet total: not more than £7.5 million
- Average number of employees: not more than 50
For financial years beginning from 1 January 2016 to 5 April 2025 the limits were: turnover not more than £10.2 million, balance sheet total not more than £5.1 million, and average employees not more than 50. The test is based on when the financial year begins, not on when the accounts are filed. For companies beyond their first financial year, the two-year rule in s.382 means a change in size classification generally only takes effect once the qualifying conditions are met (or not met) in two consecutive financial years.
A UK subsidiary that fails the small-company size test on its own numbers cannot use s.477 and will need a statutory audit unless s.479A applies. But passing the size test on its own is not enough where the company is a group company. The group condition, covered next, catches many “small” UK subsidiaries of large international groups.
Audit exemption for small UK subsidiaries: the s.477 group condition
Where a company is a group company (a parent company or a subsidiary undertaking), the s.477 small-company exemption is subject to s.479. Broadly, a non-dormant group company cannot rely on the s.477 audit exemption merely because the UK subsidiary itself is small. The group of which it is a member must also qualify as a small group, and must not at any time in the year have been an ineligible group.
Put simply: a UK subsidiary may satisfy the individual small-company size tests but still be unable to claim the s.477 audit exemption because it is a member of a group that does not qualify as small or is an ineligible group.
For this purpose “the group” means the company together with all its associated undertakings – its parent undertakings and fellow subsidiaries, wherever they are incorporated. For a UK subsidiary of a foreign group, the worldwide group is considered, not just the UK companies in the ownership chain. So a small UK subsidiary of a large US, German, French or Japanese group will typically be unable to use s.477 and will need a UK statutory audit unless another exemption applies, such as s.479A where its conditions are met, or the dormant-company rules where relevant.
For financial years beginning on or after 6 April 2025, a group qualifies as small where it meets at least two of the following three conditions on an aggregate basis:
- Aggregate turnover: not more than £15 million net (or £18 million gross)
- Aggregate balance sheet total: not more than £7.5 million net (or £9 million gross)
- Aggregate number of employees: not more than 50
A group is ineligible if any of its members is a traded company, a body corporate whose shares are admitted to trading on a UK regulated market, an FCA-authorised person carrying on a regulated activity (other than a small company), an e-money issuer, or one of the other entities listed in s.384. Certain companies are also excluded from the small-company exemption in their own right under s.478, including public companies, banks and insurers.
Even where the s.477 exemption is available, members representing at least 10% in nominal value of the company’s issued share capital (or any class of it), or at least 10% in number of the members where the company has no share capital, can require an audit for a financial year by giving notice under s.476. The notice must be given during that financial year and no later than one month before its end.
For UK subsidiaries of overseas groups, then, size alone doesn’t tell the whole story. The group structure, and whether there is a UK-established parent undertaking within it, both matter.
Section 479A subsidiary audit exemption: when does it apply?
Section 479A is a separate subsidiary audit exemption. It does not depend on the subsidiary being small – a UK subsidiary well above the small-company thresholds can, in principle, use it. But it is narrower than many overseas groups assume.
For current financial years, s.479A applies only where the company is itself a subsidiary undertaking and its parent undertaking is established under the law of a part of the United Kingdom. Before the end of the Brexit transition period on 31 December 2020, the section referred to a parent established under the law of an EEA state. That wording was changed following Brexit and is no longer the general rule. An overseas parent, including a parent in an EEA country, does not qualify to give the s.479A guarantee merely because it owns the UK company or consolidates it into audited group accounts.
That does not mean s.479A is irrelevant to foreign-owned groups. The qualifying parent does not have to be the ultimate parent. Section 479A may be available where the subsidiary has a qualifying parent undertaking established under the law of a part of the United Kingdom – for example a UK intermediate holding company that consolidates the subsidiary – and all of the statutory conditions are satisfied.
Under s.479A(2), all of the following conditions must be met for the financial year in question:
- All members of the subsidiary agree to the exemption in respect of that financial year (unanimous agreement, not a majority)
- The qualifying UK parent undertaking gives a statutory guarantee under s.479C of all the subsidiary’s outstanding liabilities at the year end. The guarantee statement is delivered to Companies House on form AA06 and is enforceable by the subsidiary’s creditors
- The subsidiary is included in consolidated accounts drawn up for that year (or to an earlier date in that year) by that parent undertaking in accordance with the requirements of Part 15 of the Companies Act 2006 where the parent is a company, the legal requirements that apply to that parent’s consolidated accounts if it is not a company, or UK-adopted international accounting standards
- The parent discloses in the notes to the consolidated accounts that the subsidiary is exempt from audit by virtue of s.479A
- On or before the date the subsidiary’s accounts are filed, its directors deliver to Companies House written notice of the members’ agreement, the s.479C guarantee statement, a copy of the consolidated accounts, a copy of the auditor’s report on those accounts and a copy of the consolidated annual report
Giving a guarantee on its own is not enough – every one of these conditions has to be met, and the process is repeated for each financial year the exemption is claimed. The exemption also has effect subject to s.475 (the directors’ statements on the balance sheet) and s.476, so members holding at least 10% of the issued share capital (or the equivalent test where there is no share capital) can still require an audit by giving the required notice. Certain companies, including traded companies, banks and insurers, cannot use s.479A at all under s.479B, and the exemption does not remove any audit requirement imposed by a regulator or lender.
When foreign parents should consider a UK audit anyway
Even where an exemption is available, some overseas groups choose to have their UK subsidiaries audited. Common reasons include:
- The parent’s own auditor requires audited subsidiary accounts, component audit work or specified procedures for group consolidation purposes
- Local management want independent assurance over accounts filed with the registrar
- Banks or lenders in the UK require audited accounts as a condition of lending
- The parent’s jurisdiction has reporting requirements that effectively demand audited figures at subsidiary level
- HMRC enquiries are easier to handle when accounts have been independently audited
A voluntary audit of the UK subsidiary can actually save time and money overall if it avoids problems with the group engagement or satisfies lender covenants without further negotiation. And where no UK statutory audit is needed, the group auditor may still need a reporting package, component audit work or agreed procedures on the UK numbers – work we carry out to the group’s timetable.
What does the UK subsidiary audit involve?
The audit follows International Standards on Auditing (UK) – the same framework as any other statutory engagement. The auditor obtains sufficient appropriate evidence on the subsidiary’s accounts and expresses an opinion on whether they give a true and fair view and have been properly prepared in accordance with the Companies Act 2006.
For UK subsidiaries of foreign groups, certain areas typically get extra attention:
- Intercompany transactions – transfer pricing, management charges, and loan balances between the subsidiary and parent need proper documentation and arm’s-length justification
- Currency translation – where the subsidiary transacts in currencies other than sterling, the accounting treatment and any hedging arrangements are reviewed
- Tax position – UK corporation tax, withholding tax on dividends to the parent, and any permanent establishment considerations
- Filing obligations – ensuring accounts are filed on time at Companies House and in the correct format
The report is addressed to the subsidiary’s shareholders (typically the foreign parent) and filed alongside the annual accounts.
Choosing an auditor for your UK subsidiary
Your UK subsidiary needs a registered auditor. They must be registered with a Recognised Supervisory Body – in practice, that means firms regulated by the ICAEW, ACCA or ICAS. The parent’s overseas auditor can’t sign the UK report unless they hold UK registration.
Many UK subsidiaries of foreign groups prefer a UK statutory auditor that can coordinate with the parent’s overseas auditor on group reporting timetables. At Audit Group, we regularly act for many UK subsidiaries of overseas parents across Europe, North America and Asia. We’re part of Jack Ross Chartered Accountants, ICAEW-regulated, and experienced in working alongside international firms on group engagements.
If your overseas group needs a UK subsidiary audit or wants advice on whether an exemption applies, send us the group structure, the year end and the approximate size of the group and the UK subsidiary and we’ll assess the position. Call us on 0161 832 4451 or visit our contact page.
