Does your UK

subsidiary require an audit?

A significant number of overseas companies with UK subsidiaries remain
unaware of the statutory requirements for audit under UK law. Failing to
comply can be costly; we set out here a simple but comprehensive guide to the
audit requirements of UK subsidiaries.

All UK companies are legally required

to have an audit and can only avoid
an audit by taking advantage of the
specific exemptions available. This
includes UK registered subsidiaries of
overseas parent companies.

Eligibility criteria for taking exemption

from audit are based on the financials
of the group as a whole, not just the UK
company itself.

For financial years ending on or after 1

October 2012, if your group exceeds
any two of the three limits set out
below then it is probable that the UK
subsidiary will require an audit:
1. Turnover
Net: 6.5 million, or
Gross: 7.8 million.
2. Gross assets
Net: 3.26 million, or
Gross: 3.9 million.
3. Number of employees
50
Net means after consolidation
adjustments.
A group can satisfy the relevant
requirements on either a net or gross
basis or a combination of the two.
Prior year rules state that two or more
of these thresholds can be breached in
a year and a company can still qualify
as small, providing that two or more
thresholds were not breached in the
prior year.
Exemptions
UK companies with an overseas parent
will be able to take an exemption from
audit in certain circumstances.
However, this only applies to UK
companies which have a parent
established within the European
Economic Area (EEA). Among other
detailed qualifying conditions, the EEA
parent company is required to give a
guarantee over the subsidiary and all
members of the company must agree to
the exemption.
Case study
Action Ltd is a UK subsidiary of Action
Group, a US holding company. Action Ltd
has five employees, a turnover of
1 million and gross assets of 250,000.
Its principal activity continued to be that
of providing sales and marketing support
services in the UK for the US parent.
The group as a whole has 78 employees,
a turnover of 70 million and gross
assets of 15 million.
Q: Can this UK company qualify for an
audit exemption?
A: No. The group financials are well in
excess of the small thresholds and as the
US parent is outside the EEA, no audit
exemption is available for the subsidiary.
Penalties for failing to comply yy Critical dates may have passed, yy Transfer pricing arrangements
such as accounts filing deadlines between overseas parents and UK
UK company directors are required to
for which Companies House levy subsidiaries;
comply with a broad range of duties
penalties of up to 1,500 for
and responsibilities. Penalties for failing yy Bespoke assurance assignments on
private and up to 3,000 for public
to comply with these range from fines behalf of shareholders; and
companies.
to criminal proceedings taken against
yy Analysis of impacts of reporting
the directors personally.
under either IFRS (optional in UK)
How we can help you or UK GAAP (including full GAAP,
Failing to plan and organise an audit
We have extensive experience of FRSSE & FRS 101/102).
when required can also have practical
advising UK subsidiaries of overseas
consequences: If you would like a discussion about
parent companies. Our expertise
whether or not your group meets the
includes:
yy For the company itself, prior years qualification criteria for a UK audit
accounts may require an audit exemption then please do get in touch.
yy Negotiating accounts filing
and directors need to consider
extensions to allow time for audits
if previously filed un-audited
to be completed;
accounts should be refiled, both
of which can be costly and time yy Working with overseas
consuming; and management on overseas GAAP to
UK GAAP transition;

Richard Collis Nick Kelsey

Partner Partner

T: +44 (0)20 7841 4257 T: +44 (0)20 7841 4000

E: richard.collis@saffery.com E: nick.kelsey@saffery.com

Richard is based in London and advises clients across a range
of sectors, including technology, staffing, investment, media,
consulting, professional services, manufacturing, retail and
certain regulated sectors, including acting for several listed
companies.
Through his diverse and highly international client base,
Richard has considerable experience advising on cross-
border issues and supporting complex international groups
of companies and regularly works closely with other
professional advisers overseas. Richard is also involved
in the Nexia International network and helps to facilitate
international projects and business.
Nick is based in London, advising commercial clients that
range in size from new start-ups to businesses with an income
of more than 100 million and include industries such as
property, retail and utilities.
Nick has been involved with the firms international network
for the past 20 years. He is an active member of the Nexia
International Main and EMEA Boards and one of the firms
principal contact points for international business queries and
referrals.

T: +44 (0)20 7841 4000 E: info@saffery.com www.saffery.com

The firm is regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales. Saffery Champness
is a member of Nexia International, a worldwide network of independent accounting and consulting firms. No responsibility for loss occasioned to any
person acting on or refraining from action as a result of the material in this publication can be accepted by Saffery Champness. J5647