Subsidiary audit exemption: what are the rules for UK companies?

Subsidiary audit exemption can be useful, but it is not automatic.

A UK subsidiary may still need a statutory audit, even if it is small on its own. The answer depends on the company, the wider group, the “parent undertaking” and the exemption being claimed.

If you are a finance director, the important question is not simply whether the subsidiary is below the audit threshold. Rather, it is which exemption route applies, whether the conditions are met and whether the right documents can be filed on time.

Start with the actual exemption route

There are three common routes to consider.

A UK subsidiary may be exempt from audit because it qualifies as a small private company within a small group. It may be exempt because a UK-established parent undertaking gives a guarantee. In some cases, a dormant subsidiary can also claim audit exemption.

Each route has different conditions. The guarantee route, in particular, depends on the parent being established under the law of part of the UK. This is the point most likely to catch out overseas-owned groups. So a subsidiary should not assume that its own turnover, assets and number of employees are enough to settle the question.

Before relying on subsidiary audit exemption, you should check:

• Whether the subsidiary is trading or dormant
• If the wider group qualifies as small
• Whether a UK-established parent can give a guarantee
• Whether all members have agreed to the exemption
• When the parent’s consolidated accounts will be ready
• What the articles or shareholders require

Those points usually reveal whether exemption is realistic, or whether the subsidiary should prepare for an audit.

When can a subsidiary use the small company audit exemption?

A subsidiary may be able to use the small company audit exemption if it is a small private company and the wider group also qualifies as small.

For financial years beginning on or after 6th April 2025, a company may qualify for audit exemption if it meets at least two of these conditions:

• Annual turnover of no more than £15 million
• Assets worth no more than £7.5 million
• 50 or fewer employees on average

Those limits are useful, but they are not the whole test for a subsidiary.

The group’s position also matters. A UK subsidiary may look small on its own, but be part of a group that is not small. If that is the case, it will not usually be able to rely on the small company audit exemption, even if its own turnover, assets and employees are below the limits.

This is a common trap for growing groups and overseas-owned businesses with a small UK company. The UK subsidiary may have limited local activity, but the wider group structure can still affect the audit position.

When can a parent guarantee be used?

A subsidiary audit exemption may also be available where a parent undertaking gives a guarantee.

This is a separate route from the small company exemption. It may apply where the parent undertaking is established under the law of any part of the UK and the required Companies House filings are made.

The guarantee is not just a form. Once accepted, the parent company guarantees the subsidiary’s outstanding liabilities at the end of the financial year. That guarantee stays in place until those liabilities have been satisfied.

For that reason, the parent should understand what it is agreeing to before the exemption is claimed.

This route is often relevant where the subsidiary is part of a larger UK group. It can reduce duplication, but only if the group is comfortable with the guarantee and can supply the required documents before the filing deadline.

What must be filed for parent guarantee exemption?

Where a subsidiary claims audit exemption by parent guarantee, Companies House requires three documents.

These are:

• Written notice that all members of the subsidiary agree to the exemption
• Form AA06 from the parent undertaking
• the parent undertaking’s consolidated accounts and reports, including the auditor’s report

All three must be delivered before the subsidiary’s accounts filing deadline.

This is where timing becomes a problem: the parent’s consolidated accounts need to be ready, the auditor’s report on those accounts must be available, and member consent needs to be properly documented.

If one part is missing, late or incorrect, the exemption may not work – which can leave the subsidiary needing an audit with little time left to arrange one.

What if the parent company is overseas?

A UK company still has UK filing obligations, even when the parent company is based outside the UK. The overseas group may also have its own audit timetable, consolidation process and reporting requirements.

The parent guarantee route is not always available where the only parent is overseas. Companies House guidance says a subsidiary may claim audit exemption in certain circumstances if its parent is “established under the law of any part of the UK”. If the guarantee route is being used, the same three filings set out above must reach Companies House before the subsidiary’s accounts filing deadline.

Some groups have a UK intermediate parent that may be able to provide the guarantee. Others will need to consider a different exemption route, or may need to plan for a UK statutory audit.

This should be checked before the year end. Leaving the decision until the accounts are due can cause problems for both UK filing and group reporting.

Do dormant subsidiaries need an audit?

Dormant subsidiaries may be able to claim audit exemption, but dormant does not mean no filing responsibility.

A company is usually dormant if it has had no significant accounting transactions during the financial year. Even then, directors still need to make sure the correct accounts, statements and exemptions are used.

A dormant subsidiary may also be able to claim exemption from filing accounts if it meets the relevant conditions, including a parent undertaking guarantee.

If the company has traded in the past or is using a parent guarantee, check the filing route before assuming the process is straightforward.

Why might a subsidiary have an audit anyway?

Audit exemption is not always the best answer.

A parent company may want audited UK figures for group reporting. A lender may ask for audited accounts as part of a facility agreement. Investors, buyers or grant funders may also expect independent assurance.

An audit can also be useful where the UK subsidiary has grown quickly, taken on new contracts, changed systems or become more important to the group.

In those cases, a voluntary audit is not just a compliance cost. It can support the group’s reporting, controls and decision-making.

When should you check the audit position?

The best time to check is before the year end.

By then, the group can still decide whether an exemption is available, whether a parent guarantee is appropriate, and whether an audit should be planned.

Late decisions create avoidable pressure. If the exemption does not apply, the subsidiary may need to appoint an auditor, prepare audit evidence and meet its filing deadline in a compressed timetable.

A short review is most worthwhile where the UK subsidiary has grown, group ownership has changed, an overseas parent is involved, or lenders or investors may require audited figures – the situations where assumptions tend to cause problems.

How THP can help

THP provides statutory audit services for UK companies and groups, including privately owned businesses and subsidiaries.

Our audit team has been helping businesses since the 1980s. We work with companies that need a statutory audit for the first time, groups with more complex reporting requirements, and businesses that want a more personal, responsive audit service.

If your UK subsidiary may need an audit, or you are unsure whether subsidiary audit exemption applies, we can help you review the position and plan the next step.

This may include checking the exemption route, considering whether a parent guarantee is available, reviewing filing requirements, and deciding whether a statutory or voluntary audit would be useful for the wider group.

Speak to THP’s audit team today about a short, pre-year-end review of your subsidiary’s audit position.