What potential exemptions from the audit are available to entities registered in the UK?
There are three principle exemptions from audit available to UK entities:
- Dormant entities are exempt from audit (i.e. those with no transactions in the year);
- Small Groups and small entities which are not members of a Group are exempt from audit (see below for criteria); and
- Subsidiary undertakings can also obtain an exemption from audit if they meet certain conditions (see below).
What are the criteria for an exemption relating to entity size?
Entities that qualify as small under the Companies Act 2006 are usually exempt from audit unless they are members of a group or are charities and required to follow the charity audit thresholds.
The definition of a small entity:
An entity is small if for both this year and last year it was not “ineligible”, and it met two out of three of the following criteria:
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- Turnover less than £10.2m (annualised if period less than 12 months);
- Total assets less than £5.1m (“gross” assets – the sum of all assets before deducting any liabilities);
- The average number of employees less than 50.
An “ineligible” company is one which a PLC, authorised insurance, banking, e-money issuer, MiFID investment firm or UCITS management company (or a member of a group in which a member is ineligible by the same definition).
What are the conditions for exemption for a subsidiary?
Under s479A, an entity is exempt from the requirements of the Act relating to the audit of its individual accounts for a financial year if:
- it is a subsidiary undertaking;
- its parent undertaking is established under the law of an EEA state;
- all of the members of the entity agree unanimously to the exemption in respect of the financial year in question (usually in the form of a written resolution which must be renewed each year to retain the exemption);
- the parent undertaking gives a guarantee under section 479C in respect of that year (see below);
- the entity is included in the consolidated accounts drawn up for that year (or to an earlier date in that year) by the parent undertaking;
- the parent undertaking discloses in the notes to the consolidated accounts that the entity is exempt from the requirements of the Act relating to the audit of individual accounts by virtue of s479A; and
- the directors/designated members of the entity deliver to the registrar on or before the date that they file the accounts for that year:
- a written notice of the agreement by members of the entity;
- the statement (of guarantee) by the parent entity;
- a copy of the consolidated accounts of the parent which has provided the guarantee;
- a copy of the auditor’s report on those accounts; and
- a copy of the consolidated annual report (i.e. directors’ or members’ report) drawn up by the parent undertaking.
What is the guarantee required from the parent entity?
The guarantee is effected by delivering a statement to Companies House (form AA06 signed on behalf of the parent undertaking). No contract is required between the parent giving the guarantee and the parties who benefit from the guarantee.
The guarantee has the effect that:
- the parent undertaking guarantees all outstanding liabilities to which the subsidiary is subject at the end of the financial year to which the guarantee relates until they are satisfied in full; and
- the guarantee is enforceable against the parent undertaking by any person to whom the subsidiary is liable in respect of those liabilities.
This can potentially be an issue and should be considered carefully by any Group seeking to rely on the guarantee to obtain an exemption from the audit as the scope of the guarantee does not just cover the liabilities on the subsidiary balance sheet but also contingent and prospective liabilities (e.g. litigation or future rentals on a lease).
How can Williamson & Croft help?
If you are uncertain whether your business may benefit from one of the exemptions from audit available then we will be pleased to review this with you and advise fully on whether an exemption is available and how we can assist you in providing an audit which adds value to your business, the benefits of non-statutory audit and assurance reports as well as preparation of unaudited accounts, tax and business advisory services.
We will always present all available options to you and advise on the potential benefits and risks associated with each option so that you can make an informed decision which is best for your business.