A small company that is part of a group can still claim the section 477 audit exemption, but only if the group as a whole qualifies as a small group under section 383 and was not an ineligible group at any time in the year (section 479 of the Companies Act 2006). The group test aggregates the figures of every associated undertaking, and a single traded or regulated member can make the whole group ineligible. The two main ways round it are the dormant subsidiary carve out and the separate parent guarantee exemption in section 479A.
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When is a company treated as a group company?
Section 479(1) applies to a financial year during any part of which the company was a group company. Section 479(4)(a) defines a group company as a company that is a parent company or a subsidiary undertaking. A company bought or sold halfway through the year is therefore caught for that whole financial year.
Section 479(4)(b) then defines “the group” widely. It is the company together with all its associated undertakings, and undertakings are associated if one is a subsidiary undertaking of the other, or both are subsidiary undertakings of a third undertaking. That brings in the parent and every sister company, not only the company’s own subsidiaries.
- Overseas members count. Section 479(6) applies the size and ineligibility rules as if all the bodies corporate in the group were companies, so a foreign parent or a fellow subsidiary abroad is included in the aggregation.
- Individuals do not. Section 1161 defines an undertaking as a body corporate, a partnership or an unincorporated association carrying on a trade or business. Because an individual is not an undertaking, two companies owned directly by the same person are not associated undertakings under section 479(4)(b). Each is tested on its own figures under section 382, which is covered in our main guide to audit exemption for small companies.
How is the small group test applied?
Section 479(5)(a) says whether a group qualifies as small is decided under section 383. Section 383(4) requires the group to satisfy two or more of these conditions. The figures below apply to financial years beginning on or after 6 April 2025, under regulation 2(2) of the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024.
| Test | Net | Gross |
|---|---|---|
| Aggregate turnover | Not more than £15 million | Not more than £18 million |
| Aggregate balance sheet total | Not more than £7.5 million | Not more than £9 million |
| Aggregate number of employees | Not more than 50 | |
The mechanics are set out in section 383(5) to (7):
- Aggregation. The figures for each member of the group are worked out under the normal section 382 rules (turnover, gross assets and average monthly employees) and added together.
- Net or gross. “Net” means after the set offs and other adjustments made to eliminate group transactions; “gross” means without them. Section 383(6) lets the company satisfy any requirement on either basis, so it can use gross turnover for one test and net assets for another.
- Which accounts to use. Each subsidiary’s figures come from its individual accounts for the financial year ending with the parent’s year, or if the year ends differ, its year ending last before the parent’s year end. If those figures cannot be obtained without disproportionate expense or undue delay, the latest available figures are used.
- Timing. Under section 383(2) and (3) the group qualifies in the parent’s first financial year if the conditions are met that year. After that, meeting or ceasing to meet the conditions only changes the group’s status if it happens in two consecutive financial years.
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What makes a group ineligible?
Even a group that passes the size test is shut out if it was an ineligible group at any time in the year (section 479(1)(a)(ii)). Section 384(2) says a group is ineligible if any of its members is:
- a traded company, meaning a company any of whose transferable securities are admitted to trading on a UK regulated market (section 474(1));
- a body corporate other than a company whose shares are admitted to trading on a UK regulated market;
- a person, other than a small company, with permission under Part 4A of the Financial Services and Markets Act 2000 to carry on a regulated activity;
- an e money issuer;
- a small company that is an authorised insurance company, a banking company, a MiFID investment firm or a UCITS management company;
- a person who carries on insurance market activity; or
- a scheme funder of a Master Trust pension scheme.
Two details catch people out. First, the FCA limb only bites on a member that is not itself small; section 384(3) treats a company as small for this purpose if it qualified as small for its last financial year ending on or before the end of the year being tested. Second, “regulated activity” has a narrowed meaning in section 474(1): it excludes, for example, arranging and advising on regulated mortgage contracts and assisting in the administration and performance of a contract of insurance. Read that definition before concluding that a group with an FCA authorised member is ineligible.
Separately, the company itself must not be in a category excluded by section 478, such as a public company or an authorised insurance company.
Is a dormant subsidiary treated differently?
Yes. Section 479(3) says a company is not excluded by the group rule if, throughout the whole of the period or periods in the year when it was a group company, it was both a subsidiary undertaking and dormant. A dormant parent gets no such relief, and a subsidiary that traded for even part of its time in the group falls outside the carve out.
A dormant subsidiary can also use the dormant company exemption in section 480. Under section 480(2) that is available where the company is entitled to the small companies regime, or would be but for having been a public company or a member of an ineligible group, and is not required to prepare group accounts. Section 481 removes the exemption for traded companies, authorised insurers, banking companies, e money issuers, MiFID investment firms, UCITS management companies and companies carrying on insurance market activity. See dormant company accounts.
What are the options if the group is too big or ineligible?
A trading subsidiary in a group that fails section 479 has three realistic routes:
- Parent guarantee exemption. Section 479A exempts a subsidiary whose parent undertaking is established under the law of any part of the UK, provided all its members agree for the year, the parent gives a section 479C guarantee, the subsidiary is included in the parent’s consolidated accounts, the parent discloses the exemption, and the directors deliver the required documents to Companies House on or before filing the accounts. It does not depend on group size. See subsidiary audit exemption with a parent guarantee.
- Dormancy, as above.
- An audit. For many groups with an overseas parent, this is the only option, because section 479A requires a UK parent.
The parent is tested in the same way. Section 383(1) says a parent company qualifies as small only if the group headed by it qualifies as a small group, which also feeds into the exemptions from preparing group accounts covered in group accounts exemptions.
How does this work in practice?
Illustration only. HoldCo Ltd owns all the shares in A Ltd and B Ltd. All three have 31 March year ends, so the year to 31 March 2027 began after 6 April 2025 and the current thresholds apply.
| Company | Turnover | Gross assets | Average employees |
|---|---|---|---|
| HoldCo Ltd | £0 | £4 million | 2 |
| A Ltd | £6 million | £3 million | 20 |
| B Ltd | £11 million | £5 million | 25 |
| Aggregate gross | £17 million | £12 million | 47 |
A sells £1 million of goods to B, so net turnover is £16 million. HoldCo’s £4 million of assets is its investment in the subsidiaries and loans to them, so net assets are £8 million. Turnover passes on the gross figure (£17 million is within £18 million) even though it fails on the net figure. Assets fail on both bases. Employees pass. Two of three conditions are met, so the group is small, and if no member is in the section 384(2) list, A and B can each claim the section 477 exemption provided each is small on its own figures.
Now suppose that in the following year B’s turnover rises to £14 million, so gross turnover is £20 million and net £19 million. The group meets only the employee test. Under section 383(3) a single year’s failure does not change its status; a second consecutive failing year does. Separately, if HoldCo acquires an FCA authorised firm that is not small and that carries on a regulated activity within section 474(1), the group is ineligible for that whole financial year, even if the acquisition happens on the last day.
What mistakes come up most often?
- Testing the subsidiary alone and ignoring the parent, sister companies or overseas members.
- Assuming a company that joined or left the group partway through the year is outside the rule; any part of the year counts.
- Treating any FCA authorisation in the group as fatal, or missing a member that genuinely makes the group ineligible.
- Relying on the dormant carve out for a subsidiary that traded briefly while in the group.
- Forgetting that members holding 10% can still demand an audit under section 476; see can shareholders demand an audit.
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Related Accountapedia entries
- Which companies cannot use the micro entity regime
- Can an LLP claim audit exemption
- Company size thresholds: micro, small, medium and large
- Climate related financial disclosures for companies
- LLP accounts: what must be filed
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Sources
- legislation.gov.uk: Act 2006 c. 46, section 479
- legislation.gov.uk: Act 2006 c. 46, section 383
- legislation.gov.uk: SI 2024/1303, regulation 2
- legislation.gov.uk: Act 2006 c. 46, section 384
- legislation.gov.uk: Act 2006 c. 46, section 474
- legislation.gov.uk: Act 2006 c. 46, section 1161
- legislation.gov.uk: Act 2006 c. 46, section 382
- legislation.gov.uk: Act 2006 c. 46, section 480
- legislation.gov.uk: Act 2006 c. 46, section 481
- legislation.gov.uk: Act 2006 c. 46, section 479A
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.