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When can companies and LLP that are parents of subsidiaries of a group opt for audit exemption?

The guidance applies to companies and LLPs that are parents or subsidiaries of a group.

Articles of association
The articles of association of a company may prescribe that an audit of the accounts should be carried out regardless of the fact that audit exemption may be available in accordance with relevant legislation. The articles would therefore need to be carefully considered when determining whether exemption from audit could be claimed. The articles of association supplement but do not replace statutory audit requirements.

Statutory conditions
In order to be able to claim exemption from audit in accordance with Companies Act 2006, group companies and LLPs need to meet first the conditions applicable to non-group entities (see Audit exemption for companies and LLPs) and also further conditions set out in section 479 of the Act.

The conditions to be met to claim audit exemption in respect of a financial year under section 479 are that:

a) The group:
i) qualifies as small in respect of that financial year, and
ii) was not at any time in that year an ineligible group
b) The group’s aggregate turnover in that year is not more than £6.5m net or £7.8m gross, and
c) The group’s aggregate balance sheet for the year is not more than £3.26m net or £3.9m gross.

The aggregate figures for turnover and balance sheet are obtained by aggregating the relevant figures for each member of the group.

‘Net’ aggregate turnover and balance sheet means after any set-offs and other adjustments to eliminate intra-group transactions under applicable accounting standards. ‘Gross’ means without such set-offs and adjustments. The conditions may be satisfied by using either the net of the gross figure.

The figures to be used for each subsidiary undertaking are those included in its individual accounts ending on the same date as the accounts of the parent undertaking or those included in the accounts ending before the financial year end of the parent.

View relevant legislation here.   

Small group conditions
Section 383 of Companies Act outlines the conditions for a group to qualify as small. Section 383 also mandates that a parent company or LLP qualifies as small in respect of a financial year only if the group headed by it qualifies as a small group.

A group would qualify as small in respect of its parent undertaking’s first financial year if it meets at least two out of the three conditions outlined below:

• its aggregate turnover in that year is not more than £6.5m net or £7.8m gross
• its aggregate balance sheet for the year is not more than £3.26m net or £3.9m gross
• the aggregate average number of its employees is not more than 50.

To qualify as small in a subsequent financial year, the group will need to meet the qualifying conditions in that period and the period before. However, if the group qualified as small for a period and does not meet the conditions in the following period only, or it did not meet them in that period only, it will still qualify as small in the next period. The group will not qualify as small, even if it qualified as small in the previous period, if it does not meet the conditions for both a period and the period before. This is effectively the ‘two-year rule’ as applied to groups.

The meanings of aggregate and net and gross figures are the same as in the previous section.

View relevant legislation here.

Ineligible groups
Under section 384 of Companies Act, a group is ineligible if any of its members is:

• public company
• a body corporate (other than a company) whose shares are admitted to trading on a regulated market in an EEA State
• a person (other than a small company or small LLP) who has permission under Part 4 of the Financial Services and Markets Act 2000 (c 8) to carry on a regulated activity
• a small company or small LLP that is an authorised insurance company, a banking company or banking LLP, an e-money issuer, a MiFID investment firm or a UCITS management company
• a person who carries on insurance market activity.

View relevant legislation here.

Dormant subsidiaries
A company or LLP is not subject to the limitations and conditions in terms of audit exemption under section 479 of Companies Act if throughout a financial year it was a dormant subsidiary undertaking (section 479 (3)).

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