The UK subsidiary audit exemption for EEA Parents who submit a company guarantee has ended for periods commencing on or after 1 January 2021


The UK subsidiary audit exemption for EEA Parents 

Are you impacted by the recent Brexit changes to the parent company guarantee audit exemption?

For period’s commencing on or after 1 January 2021, UK subsidiaries of a parent company registered in the European Economic Area (‘EEA’), will no longer be able to take advantage of the parent company guarantee to exempt the UK subsidiary from an audit.

This could mean many UK subsidiaries will require a statutory audit by law for the financial year ended 31 December 2021!

Old audit exemption rules reminder

Under section 475 of the Companies Act 2006, a company’s annual accounts are required to be audited unless the company is exempt based on any of the following criteria:

  • Small companies not in a group (section 477)
  • The company is a subsidiary of a UK or EEA group and is taking advantage of a parent undertaking guarantee (section 479A)
  • The company is dormant (section 480)

This article focuses on Section 479A exemption.

Audit exemption by way of parent company guarantee

Section 479A allows a subsidiary of an EEA parent to take the exemption from audit if:

  • All members of the company agree to the exemption in respect of the financial year in question;
  • The EEA parent undertaking provides a guarantee for all of the subsidiary’s outstanding liabilities at the financial period end, in accordance with section 479C;
  • The subsidiary is included in the EEA parent’s consolidated, audited accounts for that period and disclosure is made in these consolidated accounts stating that the subsidiary is exempt from audit of individual accounts by virtue of this section;
  • These consolidated, audited financial statements are filed at Companies House; and
  • The other relevant filings listed in section 479a are delivered to Companies House before the date the accounts are filed for that financial period.

The impact of Brexit

For accounting periods commencing on or after 1 January 2021, the audit exemption under section 479a can only be taken if it is a UK parent preparing the consolidated, audited accounts and providing the guarantee.

EEA state parent companies can no longer take this audit exemption and its UK subsidiary will require an audit potentially as early as the financial year ended 31 December 2021.

What’s the impact for parent company guarantees?

Most companies are now only a couple of months away from their financial year-end and now is the time to consider whether parent company guarantees will still be available. Companies that previously didn’t need to worry about an audit must now be confident that their accounting policies, systems, processes and controls can stand up independently to the level of scrutiny of the auditor, which was not required in the previous financial year.

On a practical level to help the audit go smoothly, you should consider the following questions:

  • Do you have policies written to explain how you have accounted for significant and judgmental area transactions and balances that are likely to face added scrutiny?
  • Are all your ledgers reconciled and reviewed for disputes, old items and irrecoverable balances?
  • Do you have supporting evidence for all large and unusual balances?
  • Are your accounting policies up to date?
  • Have you considered the balances most likely to require management judgement and ensured these are reviewed prior to the finalisation of the financial information?

It is important to start planning now as items such as stock may need to be physically counted and verified by the auditor on the day for the financial year end. The auditor may want to complete an interim visit to understand the company’s systems, processes and procedures.

How can Ellacotts help?

If you think your company may have been affected by the changes to audit exemption criteria, please do not hesitate to contact us to confirm your understanding.

We know that facing an audit for the first time can be a timely and demanding process for a company. However, our experienced team of auditors can help guide you through the audit process step by step, and provide value-added recommendations to your finance systems and procedures.

Please contact the corporate services department to find out more or phone +44 (0)1295 250401.

Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.