Certain companies in groups with FCA regulated entities are not eligible for the small companies audit exemption in the UK. This may include the corporate member of an FCA regulated LLP – so what are the rules?

Can the corporate member claim the small companies audit exemption?

The most common audit exemption is the small companies audit exemption (s477 exemption). This is available if the company is in a 'small' group, or is 'small' and is not in a group. Certain groups are 'ineligible' to be small, including any group containing a MiFID investment firm or an e-money issuer.

Is the corporate member in a group?

A company is in a group if it is a parent or a subsidiary (or both).

The Companies Act 2006 states that an undertaking is a parent undertaking in relation to another undertaking, a subsidiary undertaking, if:

(a) It holds a majority of the voting rights in the undertaking, or

(b) It is a member of the undertaking and has the right to appoint or remove a majority of its board of directors, or

(c) It has the right to exercise a dominant influence over the undertaking

(i) By virtue of provisions contained in the undertaking's articles, or

(ii) By virtue of a control contract, or

(d) It is a member of the undertaking and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in the undertaking.

For an LLP, the voting rights are usually set out in the LLP’s members' agreement – so if the corporate member has more than 50% of the voting rights in the LLP, it controls the LLP and is the parent company of the LLP.

If the corporate member is not in a group:

If the LLP’s corporate member is not part of a group, then the company may be eligible for audit exemption if it is 'small' (see 'net' limits below) (s477 exemption) or dormant (s480 exemption).

If the corporate member is in a group:

If the corporate member is in a group, that group is ineligible to be 'small' if any entity in the group is:

• A MiFID investment firm

• A UCITS management company;

• Authorised under the Banking Consolidation Directive or the Insurance Directives;

• An e-money issuer; or

• Listed in an EEA state such as listed on the London Stock Exchange.

UK companies that are members of 'ineligible groups' are not able to take advantage of the 'small' company audit exemption.

If the corporate member is in a group, but it is not an ineligible group:

Companies that are members of small groups may be eligible for the small companies audit exemption.

To qualify as a small group, the whole worldwide group must meet two out of the three following criteria for two years in a row:

*The new thresholds apply to financial years beginning on or after 6 April 2025.

In the first year that two of the three size criteria are exceeded, the group will remain 'small'. If, in the following year, the size criteria are exceeded again, the group will no longer be classified as small. If there is no previous year (e.g. the parent of the group is newly incorporated), the group will be small provided it meets the size criteria in the current year.

Are there any other exemptions?

If your corporate member is a subsidiary of a UK parent company, and that UK parent company prepares consolidated audited accounts that include the corporate member company, then there is an exemption available if the parent guarantees the liabilities of the UK subsidiary company (s479A exemption). There is no concept of an 'ineligible group' and no limit on the size of a company for the purposes of this exemption.

Dormant companies are also exempt from audit (s480 exemption). If the corporate member has any transactions at all such as investing in the LLP or a profit share from the LLP, then the company is not dormant.