UK: Is An Audit Necessary For A UK Subsidiary?

Frequently, many UK subsidiaries of international businesses are not aware that they need an audit and are at risk of costly penalties, and even criminal proceedings, for failing to plan for and organise an audit when required.

In this blog, Stephan Schmitt, outlines the key requirements for UK subsidiaries of overseas groups who are determining whether they require a statutory audit.

In the UK, all companies are mandated by law to undergo an audit, unless they meet specific requirements that make them eligible for exemption. In the context of this article, the size of the subsidiary and its group, where the term 'group' refers to the parent company consolidated with its subsidiaries, will determine if they reach the eligibility criteria for exemption from a statutory audit.

Small companies with an overseas parent may be exempt provided they meet two of the following thresholds:

• turnover of £10.2million or less,
• total assets of £5.1million or less, or
• an average number of 50 or fewer employees during the period.

Non-small subsidiaries that breach two or more of these thresholds for two years in a row will not qualify for exemption and therefore it is mandatory for them to undergo an audit.

If a company is considered to be small, and not in breach of the above criteria, then the size of the overseas group it is part of should be considered. If the overseas group exceed any two of the following thresholds, an audit for the UK subsidiary is likely to be required:

• net turnover of £10.2million / gross turnover £12.2million
• net total assets of £5.1million / gross total assets of £6.1million
• average number of 50 employees during the period.

Additionally, there are certain groups that cannot be classified as small based on their characteristics. These include groups where any entity is a MiFID investment firm, a UCITS management company, authorised under the Banking Consolidation Directive or the Insurance Directives, an e-money issuer, or listed in an EEA state such as listed on the London Stock Exchange.

If my subsidiary is not eligible for an audit exemption, what steps should I take?

In such a situation, the directors of the company will need to appoint a UK statutory auditor. The auditor will then carry out an analysis of the accounts and disclosures, examine supporting evidence for transactions and balances, and review any changes from one year to the next.

The auditor's findings will be included in a report that determines whether the accounts are deemed "true and fair", and this report will form part of the Annual Report.

How can Price Bailey support your subsidiary with an audit?

We recognise the importance of establishing early communication with the management and auditors of subsidiaries that are part of UK or international parent companies. This is crucial, given the multiple layers of management and diverse shareholder group that typically exist in group engagements. Effective communication is key to ensuring the quality of such engagements.

Due our expertise in working with both UK subsidiaries of larger international groups and UK groups with overseas subsidiaries, we are able to gain a comprehensive understanding of your business.

Our commitment lies in our ability to navigate the complexities and unique challenges presented by these scenarios, making us a valuable partner for your business needs.

We are also more than your traditional auditors and can provide your group advice on how to circumvent a statutory audit through group rearrangement or reorganisations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.