Dormant subsidiary companies

A closer look at the accounting and audit requirements

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Section 394A of Companies Act 2006 permits a dormant subsidiary an exemption from the requirement to prepare and file financial statements with the Registrar if it fulfils a number of following stringent conditions: 

a) all members of the company unanimously agree to the exemption in respect of the financial year in question

b) its parent undertaking is established under the law of any part of the UK

c) the parent gives a statutory guarantee of all the outstanding liabilities which the subsidiary is subject to under section 394C

d) the company is included in the consolidated financial statements drawn up for that year, or to an earlier date in that year, by the parent undertaking, which must be prepared in accordance with the Companies Act, or UK-adopted International Accounting Standards

e) the parent undertaking discloses in the notes to the consolidated accounts that the company is exempt from the requirement to prepare individual accounts by virtue of this section

f) the following documents must be filed by the directors of the subsidiary at Companies House on or before the date that they were due to file the subsidiary’s financial statements:

a. written notice of the agreement in (a)

b. a statement by the parent that it guarantees the subsidiary company under the particular section of the Act

c. a copy of the consolidated annual report and financial statements referred to in (d) and the auditor’s report on those financial statements

g) the company is not traded (on a UK regulated market) as defined in CA 2006, s474

h) it is not an authorised insurance company, a banking company, an e-money issuer, a MiFID investment firm or a UCITS management company, or carries on insurance market activity

i) it is not a trade union or an employer’s association.

After Brexit, the above exemption is not available for dormant subsidiary companies with non-UK parents. Dormant companies and LLPs that do not qualify as small under Companies Act 2006 – perhaps because they are a public company or are part of an ineligible group – will still be able to avail from the exemptions if the conditions are met. 

If a dormant company is not entitled to the exemption from preparing and delivering its financial statements, then it may prepare its accounts under any of the available accounting frameworks (IFRS, FRS 101, FRS 102 with or without section 1A or FRS 105), provided it meets any relevant size criteria.

In practice most dormant companies will meet the criteria to qualify as small companies or micro-entities and are therefore likely to apply either FRS 102 (with section 1A) or FRS 105, and could opt for abridged financial statements, if they qualify as small.

Dormant companies that qualify as small or micro are able to take advantage of the option to file ‘filleted’ accounts, omitting the directors’ report and/or profit and loss account.

Dormant companies – audit exemptions

Section 480 of Companies Act sets out the conditions for a dormant company’s audit exemption. A company is exempt from the audit requirements in respect of a financial year if:

  • it has been dormant since its formation, or
  • it has been dormant since the end of the previous financial year and the following conditions are met.

The conditions are that the company:

  •  as regards its individual accounts for the financial year in question:

– is entitled to prepare accounts in accordance with the small companies’ regime (see sections 381 to 384)

– would be so entitled but for having been a public company or a member of an ineligible group

  • is not required to prepare group accounts for that year.

The audit exemption is subject to the directors including the statement in the balance sheet as per section 475 and members have not requested audit under s476. Additionally dormant companies are not able to take the audit exemption if it was at any time within the financial year in question a company that:

  • is a traded company as defined in s474(1)
  • is an authorised insurance company, a banking company, an e-money issuer, a MiFID investment firm or a UCITS management company
  • carries on insurance market activity.

ACCA has published Companies House guidance on filing accounts for a dormant company which explains all the processes and requirements.