For many corporate groups, especially those with multiple subsidiaries, the annual audit process can be both time-consuming and costly. However, a lesser-known provision within the Companies Act 2006 offers a potential solution: audit exemption through a parent company guarantee.
A strategic opportunity for group structures
While the use of this exemption remains relatively uncommon – particularly among insurance intermediaries – it presents a valuable opportunity for groups to streamline their audit requirements. By leveraging the parent guarantee, qualifying subsidiaries can be exempted from statutory audit, provided they are included in the consolidated accounts of a UK parent company. This approach allows groups to focus audit resources on key entities, while reducing compliance costs across the wider structure.
Understanding the criteria
To qualify for the exemption under section 479A of the Companies Act 2006, several conditions must be met:
- The parent company must be incorporated in the UK.
- All shareholders of the subsidiary must unanimously agree to the exemption.
- The parent must provide a formal guarantee covering all liabilities (including contingent and prospective liabilities not included in the balance sheet) of the subsidiary at the balance sheet date.
- The subsidiary must be included in the parent’s consolidated financial statements, prepared in accordance with the Companies Act 2006 or UK-adopted IFRS.
- The exemption must be disclosed in the notes to the consolidated accounts.
- Specific documentation must be filed with Companies House alongside the subsidiary’s annual accounts.
It’s important to note that this exemption is not restricted by company size. However, certain entities—such as traded companies (those with securities on a UK regulated market) and authorised insurance or banking firms—are excluded.
Points to consider
- Annual Consent: Shareholder approval must be obtained each year the exemption is claimed.
- Liability Assumption: The parent company assumes full responsibility for the subsidiary’s liabilities at the balance sheet date, which may have implications for group risk management. In addition, loan covenants may need consideration, as many lenders require audited accounts of subsidiaries to be submitted to them.
- Regulatory Awareness: While auditors are generally familiar with this exemption, awareness among company directors and finance teams remains limited.
Is it right for you?
For groups with multiple subsidiaries, particularly those acquired through consolidation, this exemption can offer a pragmatic way to reduce audit burden without compromising financial oversight. However, it’s essential to assess eligibility carefully and consider the broader implications of providing a parent guarantee.
At Hazlewoods, we work closely with clients to evaluate the suitability of audit exemptions and ensure all statutory requirements are met. If you think your group could benefit from this approach, we’d be happy to explore the options with you.
Head over to our Audits & Assurance page to see how else we can support you and your business.