New UK legislation aimed at exempting more companies and limited liability partnerships (‘LLPs’) from the audit requirement is now in effect. One aspect of the legislation is to exempt certain subsidiary entities from the audit requirement and this provides an opportunity to review group structures administered in Jersey, and potentially reduce the number of entities subject to audit in a group.
The Companies and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regulations (the ‘Regulations’) were published on 11 September 2012 and came into force on 1 October 2012.
The Regulations create a number of new exemptions and widen certain existing exemptions in relation to the requirements for companies to prepare, file and audit annual accounts under Part 15 of the Companies Act 2006.
For small UK businesses, this means that they will not need to subject their accounts to an audit if they meet two out of three qualifying criteria for small company accounts, which are as follows:
· If the company has fewer than 50 employees
· If the company’s balance sheet total is no more than £3.26m
· If the company has a turnover below £6.5m
Additionally, subsidiary companies will be allowed to dispense with an audit where they meet all of the following conditions:
· The company must be unlisted
· The company is not an insurance company or banking company
· The parent group is based in a member country of the European Economic Area (EEA)
· Shareholders unanimously agree to the exemption
· The parent company gives a statutory guarantee of all the subsidiary’s outstanding liabilities at the financial year end
· The subsidiary company’s accounts are included in the consolidated accounts drawn up by the parent undertaking, which must be prepared in accordance with Directive 83/349/EEC (the Seventh Company Law Directive)
· The exemption by the subsidiary is disclosed in the parent company’s consolidated accounts
· Documents attesting that these conditions have been met are filed with Companies House on or before the date that they file the subsidiary’s accounts
Dormant subsidiaries will also be exempt from an audit if they receive a guarantee from the parent company.
The exemption only applies to UK subsidiaries, however, other European countries may have similar exceptions. In order to take advantage of the exemption, the parent group must be based in a member country of the EEA. Jersey is not part of the EEA and therefore UK subsidiaries of a Jersey group will not be able to use the exemption. On the other hand, if the Jersey group is part of a larger group based in the EEA, then the subsidiaries will be able to take advantage of the exemption. The parent company must give a written statutory guarantee of all the subsidiaries’ outstanding liabilities at the financial year end.
The following are not entitled to the exemption: Quoted companies, insurance firms, eMoney issuers, trade unions, employers’ associations, MiFID investment firms and pan-European unit trust management companies.
The Regulations effect accounting years ending on or after 1 October 2012.
Where structures with UK subsidiary companies or LLPs are being administered in Jersey, then there is scope for the directors to consider whether to take advantage of the new exemption. The key points to take into consideration are as follows:
· Is there an EEA parent group that is preparing consolidated financial statements?
· Does the requirement to give a guarantee present a problem for the parent company (for example, if the subsidiary is a property owning company with a mortgage then it may not be sensible for the parent to enter into a guarantee as this could override the purpose of the structure)?
· Is there likely to be any negative reaction to the parent disclosing that a subsidiary has not been audited?
· How will this impact on audit fees at the higher level when the consolidated financial statements are prepared?
· Removing the audit requirement for subsidiaries will inevitably present more work for the audit of the consolidated figures, but is there still a cost advantage?
For further information, please contact:
Phillip Callow, Partner
Audit and Assurance
+44 (0)1534 880088