With the Brexit transition period for the UK having ended on 31 December 2020, there has understandably been a focus on VAT and direct taxation implications for businesses. However, there have also been impacts on audit exemption for entities with cross-border relationships within their group.
These impacts have arisen due to amendments in certain aspects of Company Law, particularly those referring to companies whose parent undertaking is established under the law of an EEA State. This article summarises some of these key updates to audit exemption, whilst also highlighting certain changes to group reporting.
Audit exemption reminder
Under section 475 of The Companies Act 2006 (CA 2006) a company’s annual accounts are required to be audited unless the company is exempt based on any of the following criteria:
- The standalone company is small (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)
Small companies and groups
The size criteria for small companies and groups has not been impacted by Brexit, however there have been revisions to section 384 CA 2006 regarding exclusions from the small companies’ regime.
As a reminder, a company is excluded from the small companies’ regime at any time during the financial year it was:
- a public company;
- a banking or insurance company and certain other financial services authorised companies; or
- a member of an ineligible group.
A group is ineligible, and as a result cannot qualify as small, if at any time within the financial year any of its members include:
- a traded company;
- a body corporate (other than a company) whose shares are admitted to trading on a regulated market in an EEA State;
- a person (other than a small company) who has permission under the Financial Services and Markets Act 2000, Pt. 4 to carry out a regulated activity;
- an e-money issuer; or
- a banking or insurance company and certain other financial services authorised companies.
For accounting periods commencing on or after 31 December 2020, references to ‘regulated market in an EEA State’ has changed to refer to ‘UK regulated market’.
As a result, any small companies included as part of a larger group which includes an entity listed on a regulated market in an EEA state are no longer excluded from the small company regime for the purposes of their UK reporting solely on this basis, and can now qualify as small.
Audit exemption by way of parent company guarantee
Section 479A CA 2006 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.
For accounting periods commencing on or after 31 December 2020, the audit exemption under S479A can only be taken if it is a UK parent preparing the consolidated, audited accounts and providing the guarantee.
Exemption from preparing group accounts
The Companies Act provides the following exemptions for parent companies to not prepare consolidated accounts if:
the parent company is small, and the group which it heads is also small
- the company is an intermediate parent company and is included in consolidated accounts for a larger group (sections 400/401 CA2006)
There are no practical Brexit implications on the exemption to prepare group accounts. The terms “EEA” and “non-EEA” in Sections 400 and 401 have been updated to “UK” and “non-UK” respectively.
Only those companies with a UK parent can now take an exemption from preparing consolidated accounts under section 400 for accounting periods commencing on or after 31 December 2020. Those previously exempt under section 400 by virtue of an EEA parent should now be exempt from preparing consolidated accounts under section 401 instead.
Exemption from preparing dormant subsidiary accounts
A dormant subsidiary company will only be exempt from preparing and filing accounts for accounting periods commencing on or after 31 December 2020 if they have a guarantee from a UK parent entity (rather than in an EEA state) and satisfy the other criteria under section 394A.
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