Could Your Subsidiary Be Audit Exempt This Year?

With upcoming changes to company size thresholds taking effect from 1 October 2024, many companies may now qualify as “small” and potentially become eligible for audit exemption.

However, if a subsidiary is part of a medium or large group, it will usually require an audit, even if the subsidiary itself qualifies as small.

A parental guarantee can often be used to avoid this requirement.

This exemption, available under Companies Act 2006 s479A, allows a qualifying UK subsidiary to bypass the audit requirement, provided the parent company agrees to guarantee its liabilities and all conditions are met.

Click here to find out more about the size threshold changes

What Is a Parental Guarantee?

A parental guarantee is a legal undertaking made by a UK parent company to cover all liabilities of a subsidiary company at its year end. If filed correctly, it allows the subsidiary to avoid a full statutory audit.

This exemption is commonly used by small subsidiaries within medium or large groups, where the subsidiary itself would be audit-exempt if not for the size of the group.

When Can a Parental guarantee be used?

To qualify for audit exemption using a parental guarantee under s479A, the following conditions must be met:

• • The subsidiary qualifies as small based on its own figures
  • The parent company is UK-based
  • The subsidiary is included in consolidated group accounts
  • A formal guarantee is filed at Companies House using form AA06
  • A statement directly below the statement of financial position advising the company is entitled to the audit exemption under Section 479A
  • No other requirements (e.g. regulatory or contractual) mandate an audit

Why might you not use this exemption?

There are reasons why a group might choose not to rely on the s479A guarantee, such as:

• • The parent company is unwilling to assume liability for the subsidiary’s debts
  • Stakeholders require an audit
  • The subsidiary is material to the group, and an audit is preferred for governance or assurance
  • A group policy to audit all entities

Important considerations

• • The parent company must be UK incorporated to file a valid s479A guarantee
  • The exemption is only appropriate if the subsidiary’s results are immaterial to the group on consolidation
  • The guarantee must be filed accurately and on time or the exemption does not apply

Summary

A s479A parental guarantee offers a useful route for small UK subsidiaries of medium and large groups to avoid an audit, provided the conditions are met and the exemption is appropriate in context.

With size thresholds increasing from October 2024, now is a good time to review your group’s structure and audit requirements.

Get In Touch

If you need help reviewing eligibility or planning your next financial year, please do get in touch with your local Whitings LLP office or your usual contact.