Introduction
The Brexit transition period ended on 31 December 2020, and while most businesses are focused on potential changes in trade tariffs and import and export requirements, it is worth highlighting the subtle changes in exemption from audit for existing subsidiaries/controlled companies belonging to groups within the European Economic Area (EEA) and the definition of a group not eligible for exemption. This manual also serves as a timely reminder of the circumstances in which small businesses are not eligible for the audit exemption, particularly when they are part of a group.
Requirements for an audit
The provisions dictated by the Companies Act 2006 (CA 2006), according to which the annual financial statements of a company must be reviewed except for any exemptions, they have been changed since the advent of Brexit. Before the end of the transition period there were four possible scenarios under which companies could be exempted from the audit procedure:
- inactive/dormant company (Dormant company);
- small company (Small/Micro Company);
- international group of small companies;
- subsidiary of any size in a UK or EU group with the parent company acting as guarantor.
These conditions will remain as such with the exception, however, of the exemption for branches which will change in terms of requirements following Brexit.
These conditions and requirements for exemption from audit (Financial Statement Review) should be carefully considered to comply with statutory requirements.
It should be noted that members of a company can exercise the option, under Article 476 of the CA 2006, to require the company itself to have an audit when they hold at least 10% of the nominal value of the share capital (or at least 10% in number of members in which there is no share capital). Particular attention should then be paid to the company bylaws or other governing documents, which may contain specific provisions that require an audit.
Table 1: Limits for small companies/groups
From 1 October 2012 until 31 December 2020, where a company was itself a subsidiary and its parent company was established, in law, in a UK or EU state, it was possible to obtain exemption from audit via a guarantee from the shareholding (parent) company, the requirements of which are outlined in section 479A of CA 2006. There were a large number of requirements to be met to apply for this audit exemption, including the requirement to submit audited consolidated accounts of the parent company to Companies House.
Advent of Brexit: the changes
For accounting periods that began on the day of exit (defined as 11pm on 31 December 2020) or subsequently, the exemption relating to branches is available only for controlled companies (daughters) present in the territory of the United Kingdom where the parent (parent) company is also in the territory of the United Kingdom. Therefore, in the event that the parent company is established in the EEA, the branch established in the UK is no longer exempt from the audit procedure and may be required to undergo the audit.
Small company
Standalone companies (not connected to any other legal entity) that meet the small business parameters under the CA 2006 are usually exempt from the audit. A company is considered small if for the current financial year of activity as well as the previous year it has not achieved the requirements and has not satisfied two of the three criteria in Table 1 (net limits). This applies to the first financial year and it takes two years to change the company size.
A company is not entitled to this exemption if it meets the definition of companies excluded from the exemption set out in section 478 CA 2006. Clear examples refer to joint-stock companies, insurance institutions, banks and companies that issue and produce electronic money.
Small international groups
A small company, member of an international corporate group, will also need to consider the size of the entire group and whether at least one company in the group