UK entity with international ownership: Audit regulations

Do you represent an international company which has expanded operations via a UK company? Or a UK company which has been acquired by an international company? If either of these apply, make sure you’re clear on the audit exemption rules. These rules are not always straightforward to navigate, but here we outline some which will be of particular interest to UK companies with international ownership.

Size thresholds

In the UK, the Companies Act 2006 states that every UK registered company is required to have an audit unless an exemption can be claimed. Whilst small companies may be eligible for audit exemption under certain criteria, it’s important to note that the exemption does not apply to groups above the small size thresholds.

In UK company law, this applies to the entire group which heads up a UK company, who have breached any two of the three the following size limits for two consecutive years:

  • Turnover – £10.2 million
  • Balance sheet total – £5.1 million
  • Employees – 50

To provide some explanation for these terms and a summary of how these thresholds are applied in this context, the balance sheet total is the total of a group’s fixed and current assets and employees refers to the average number of employees employed by the group throughout the year. The thresholds are for a full financial year, and hence should be pro-rated for any financial periods of differing lengths. The figures cited above are net limits, however gross limits are available which can also be used interchangeably which allow for intra-group transactions. Understanding whether these thresholds have been exceeded can therefore be a complex task and hence it is important to seek professional advice if such an exercise is required at the margins.

What does this all mean?

Whilst it may be logical to assume a UK company claiming a small company audit exemption could continue to do so where there was just a change in ownership, if the acquiring group falls above these size thresholds, it is likely that an audit will be required for that UK company immediately on acquisition, i.e. the company will require an audit for the year it has been acquired.

It’s therefore important to assess the size of the group with reference to the thresholds, as incorrectly relying on an audit exemption could result in a number of undesirable consequences.

Parent guarantees

A UK company can obtain an audit exemption by obtaining a parent company guarantee, provided a number of conditions can be met. Prior to periods commencing 1 January 2021, this exemption was applicable to UK companies with a parent based in either the UK or the European Economic Area. However, as a result of Brexit, the scope of this exemption has narrowed and is now only available to UK based parent entities. Parent companies providing this guarantee need to be wary and fully understand the legality of the guarantee provided as this has come as a surprise to some on occasion years down the line, even after a subsidiary has been sold and guarantees were provided in the past.

Ineligible groups

To further complicate matters, a company that is small in size and headed by a small group may still be ineligible for audit exemption if the company itself or any members within the group fall under any conditions such as having certain business activities e.g. banking, insurance; or having shares traded in a UK regulated market.

The above examples of audit exemption do not represent an exhaustive list of the rules. It’s therefore important to seek professional advice from firms that are well versed in UK regulations to ensure compliance.

Whilst a statutory audit brings with it numerous benefits such as enhancing the credibility of a company’s financial statements and providing a source of valuable insights, there are practical implications such as finding a UK auditor to partner with.

If you are a member of an international group or due to become one very soon, our team have a wealth of experience in assisting multinational companies. If you have any questions, please get in touch with a member of our international services team by calling 01903 234094.