A Complete Guide to Exemptions for audit parental guarantees: Understanding the UK Audit Requirements

Parental Guarantees are important in supporting subsidiaries and businesses, providing investors and lenders with the necessary security.  However, when it comes to auditing these guarantees, the considerations that companies take help in reducing the audit burden. In this guide, we will break down audit parental guarantees, how exemptions work, and why they are relevant to your business.

At the end of this article, you will have a solid understanding of audit parental guarantee exemptions, what they are for, and how they benefit businesses and their parent entities. Besides, what matters to consider to ensure compliance while maximizing these exemptions?

Audit exemptions can be tricky, with various rules that may lead to confusion. In this guide, we will go step-by-step to explain everything that you need for your business to be compliant with the requirements of UK audit and operate successfully.

What is a Parental Guarantee?

Before we delve into the audit exemptions, let’s get a basic understanding of parental guarantees.

A parental guarantee is a type of liability or obligation that the parent company pledges to cover on behalf of its subsidiary if the latter fails to fulfill them. It is a commitment that ultimately the parent company will have to come in and fulfill any obligations or debts the subsidiary cannot handle on its own. We see this arrangement frequently in loan agreements, lease contracts, or business partnerships.

Parental guarantees are a fundamental part of securing financial support, attracting investors, and providing confidence to external parties. These guarantees are safeguard tools that typically protect creditors ensuring that if the subsidiary falls on hard times, the parent company will pay. 

Why Are Audits Required for Parental Guarantees?

Auditing is essential to achieve transparency in Financial Reporting. When it comes to parental guarantees, audits are typically required to verify that:

• The guarantee is valid and applicable to legal guidelines.
• There is sufficient financial backing from the parent company.
• The financial statements of both the parent and subsidiary adequately disclose the guarantee.
• The risks of the guarantee have been assessed and are acceptable.

Parent guarantee audits can be complicated to audit for companies, especially large multinational corporations with several subsidiary entities. This provides an additional attraction to the thought of audit exemptions which is due substantially to this complexity.

UK Audit Requirements Explained

With only a few exceptions, all UK-based companies require audits. (including subsidiaries of foreign groups located in the UK). It is not that directors intentionally breach these rules, but often it’s due to a lack of awareness on their part. The consequences of missing the deadlines or not having clarity on audit exemption could range from filing penalties to legal proceedings.

The world of audit regulations in the UK can be complicated. Balancing these with your day-to-day business operations may not always be a priority. Therefore, it is necessary to understand the audit process, and legislation so that you can confidently manage your business’s audit responsibilities.

Who Must Comply with UK Audit Requirements?

The need for an external audit arises if a company complies with two out of three of the following criteria:

• A turnover exceeding £10.2 million
•  Assets worth more than £5.1 million
• More than 50 employees

Size isn’t the only ingredient. Certain sectors, like finance or insurance (which are highly regulated), need an annual audit regardless of size. Businesses that are on the list must be reviewed and examples of those businesses that need to undertake audits include;

• Subsidiaries (unless exempt)
• Public companies (unless dormant)
• Insurance companies and players in the insurance market
• Banks and Financial Services
• Electronic money issuers
• MiFID investment firms
• UCITS management companies
• Special registered bodies
• Master Trust Pension Scheme Sponsors
• Pensions or labor relations bodies

Even if your company does not meet the audit thresholds, upon written request by shareholders holding in aggregate at least 10% of the shares. Directors may choose to conduct voluntary (or private comfort) audits, which can support the company’s creditworthiness when preparing for a sale.

When is a Company Exempt from an Audit?

Not all companies are eligible for an audit exemption. The exemption is based on four key scenarios.

1. Dormant Companies

Audit Exemption for Dormant Companies are those that did not have any accounting transactions. Other than specific transactions activities during the latest financial year also qualified for audit exemption.

2. Audit Exemption for Small Companies

Your company is a ‘qualifying’ or small standalone business, and exempt from audit requirements under the Companies Act 2006. If it does not exceed certain thresholds in turnover, assets, or number of employees.

3. Audit exemption for subsidiaries of small group members

A company that is part of a group can still be exempt if it and other companies in the group meet the “small” criteria. The group qualifies on the basis that its annual turnover is less than or equal to £10.2 million (net) and no more than £12.2 million between net and gross, it has assets under 5. However, the group must achieve these thresholds for two straight years to qualify.

4. Audit Exemption for Subsidiary Companies

Subsidiaries of a UK parent company will be exempt from an audit. If they satisfy certain requirements stated in the Companies Act 2006, such as providing a guarantee by their parent and being part of consolidated accounts.

Total Exemption Full Accounts: What Does It Mean?

Statutory accounts must be produced and submitted to Companies House by all companies. Which accounts you file will depend on the company size and type.

With total exemption full accounts, the company does not need an audit but still must submit a statutorily complete set of financial accounts with the director’s report. Total Exemption Small Accounts — this allows smaller companies to submit a shorter set of accounts.

Key Legislation: Sections 478a and 479a of the Companies Act 2006

Sections 478a and 479a — Audit exemptions. It restricts audit exemptions for public companies and financial services companies. Even if they are in scope as a small company, see section 478a.  Section 479a details the criteria subsidiaries must meet to qualify for an audit exemption. Following Brexit, these provisions were amended to differentiate between subsidiaries of UK and EEA parent companies.

Conclusion

The ability to audit parental guarantees – subject to exemptions — was seen as providing a host of benefits for some businesses ranging from saving costs and reducing public administration burdens. However, it’s essential to fully understand the criteria, benefits, and risks before pursuing an exemption.

As long as they give full disclosure, meet certain size rules, and comply with local laws, corporations may take advantage of these exemptions while still operating effectively in the open. As always, consulting with legal and financial professionals can help navigate this complex area and ensure that you make the best decision for your business.

Remember, audit exemptions are not a one-size-fits-all solution. Carefully weigh the pros and cons to determine if this route is right for your company and its subsidiaries.

How We Can Assist You

Not sure about your audit parental guarantees requirements? Reliable audit services supplied by Reflex Accounting assist you in complying with complicated UK requirements. If you need help in identifying your exemption status, or if you would like complete tax audit assistance. We see that your business is adhering to its financial reporting requirements.