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As auditors, we often see UK subsidiaries of overseas companies face financial reporting and compliance challenges that require careful coordination.
04 June 2025
UK subsidiaries of overseas parent companies (inbound companies) face several challenges that can complicate financial reporting, compliance, and audit processes. As auditors, we regularly observe the following areas requiring heightened attention and careful coordination:
A common mistake is the belief an inbound company is audit exempt due to size. However, UK law refers to the size of the whole group. Small inbound companies will thus require an audit when they are part of a 'non-small' worldwide group unless there is a UK intermediate parent company within the group that is willing to provide a parental guarantee under Section 479A of the Companies Act 2006.
Often, UK regulatory audit requirements can be overridden by group consolidation requirements or the parent’s own expectations. Misunderstanding of UK thresholds and exemptions can leads to a last-minute rush, or late filing and associated penalties.
The Directors of the inbound company must assess whether exemptions apply and ensure directors are aware of filing and audit implications under Section 479 of the Companies Act 2006.
Small company size limits have increased for periods commencing on or after 6 April 2025 to:
• annual turnover of no more than £15 million,
• assets worth no more than £7.5 million, and
• 50 or fewer employees on average.
Subsidiaries are often funded through intercompany debt, or capital contributions.
It is important to ensure that such funding arrangements are appropriately documented, comply with UK tax rules (which are particularly complex), and are disclosed in line with applicable accounting standards.
Auditors must also assess whether the funding in place supports the entity’s ability to continue as a going concern.
Intra-group recharges (such as for shared services or management fees) are common but need to be supported by documentation that pricing is done on an arm’s length basis. Adjustments may be required in tax computations to reflect what arm’s length charges would have been. HMRC scrutiny of transfer pricing arrangements can be rigorous.
Auditors require sufficient evidence that charges are reasonable and consistently applied across group entities.
Employees of inbound companies often participate in global share option schemes. These must be assessed for compliance with UK reporting and taxation rules.
Where the parent company is not listed, management often encounter difficulties in calculating the fair value of the company issuing the share options, which is a key input when calculating the share based payment charge to be recognised in the inbound company’s financial statements. Early communication with your auditor is essential to ensure that issues and delays can be minimised.
Inbound companies often rely heavily on parental support for funding, but written confirmation of support may be unavailable or informal. Auditors require sufficient evidence that financial support will be available for at least 12 months from the date of approval of the financial statements, and evidence that the group has the financial strength to exercise the support given.
The finance and other functions are often situated outside of the UK, which means local oversight is limited, and potentially affecting the quality and timeliness of financial data required. This can present challenges for audit planning, walkthroughs, and system documentation. Coordination with overseas finance teams is essential for auditors to be able to obtain the required audit evidence.
Time zone differences, year-end reporting timelines, language differences, or different documentation standards can cause complications in the audit process. We may encounter delays in obtaining group instructions, intercompany confirmations, or responses to audit queries that require wider group input. Efficient communication with both local and group finance teams is vital to ensure a smooth audit process.
Our team audits many inbound companies and is well-versed in navigating the issues outlined about UK subsidiaries. If your group is considering expanding into the UK, or you are encountering issues with your current auditor, we would enjoy the opportunity to discuss how we can help.
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