A subsidiary company is a company that is controlled by another company, known as the parent company (or holding company). Control is usually established through owning more than 50% of the voting shares, but it can also arise through other means of dominant influence.
Definition Under the Companies Act 2006
Section 1159 of the Companies Act 2006 defines a subsidiary. Company A is a subsidiary of Company B if Company B:
- Holds a majority of the voting rights in Company A, or
- Is a member of Company A and has the right to appoint or remove a majority of its board of directors, or
- Is a member of Company A and controls alone, pursuant to an agreement with other members, a majority of the voting rights
A wholly-owned subsidiary is one where 100% of the shares are held by the parent company (or by another wholly-owned subsidiary of the parent).
Types of Control
| Level of Ownership | Relationship |
|---|---|
| Over 50% of voting shares | Subsidiary |
| 100% of shares | Wholly-owned subsidiary |
| 20%–50% of voting shares | Associate (significant influence, not control) |
| Under 20% | Simple investment (usually) |
Why Companies Use Subsidiaries
| Reason | Detail |
|---|---|
| Limited liability | Each subsidiary is a separate legal entity with its own liabilities |
| Risk isolation | A subsidiary’s debts do not automatically fall on the parent |
| Operational separation | Different business activities can be run independently |
| Tax planning | Group relief allows losses in one company to offset profits in another |
| Regulatory compliance | Some activities require a separate legal entity (e.g. regulated financial services) |
| Joint ventures | A subsidiary can be partly owned with a third-party partner |
| Acquisitions | Buying a company creates a parent-subsidiary relationship automatically |
Setting Up a Subsidiary
A parent company can create a subsidiary by:
- Incorporating a new company at Companies House with the parent as the sole shareholder
- Acquiring a majority stake in an existing company through a share purchase
Registration Requirements
The subsidiary is a separate company and must:
- Have its own registered office
- Have its own directors (who may also be directors of the parent)
- File its own confirmation statement and accounts
- Maintain its own statutory books
- Register for its own taxes (corporation tax, VAT, PAYE if it has employees)
Consolidated (Group) Accounts
A parent company that has subsidiaries must generally prepare consolidated financial statements that combine the financial results of the parent and all its subsidiaries as if they were a single entity.
Exemptions from Consolidation
Small groups are exempt from preparing consolidated accounts if the group meets at least two of the following conditions (on a net or gross basis). These are the thresholds for financial years beginning on or after 6 April 2025:
| Condition | Net Threshold | Gross Threshold |
|---|---|---|
| Turnover | £15 million | £18 million |
| Balance sheet total | £7.5 million | £9 million |
| Employees | 50 | 50 |
A parent company also does not need to prepare group accounts if it is itself a subsidiary of a larger group that prepares consolidated accounts (intermediate parent exemption).
What Consolidated Accounts Show
| Component | Detail |
|---|---|
| Group turnover | Combined revenue (eliminating inter-company sales) |
| Group profit | Combined profit (eliminating inter-company transactions) |
| Group assets | Combined assets (eliminating inter-company balances) |
| Goodwill | The premium paid for subsidiaries above their net asset value |
| Non-controlling interest | The minority shareholders’ portion of partly-owned subsidiaries |
Tax Grouping
Subsidiaries within a group can benefit from several UK tax provisions:
Group Relief
Companies in a 75% group (parent holds at least 75% of the subsidiary’s ordinary share capital) can transfer trading losses between group members. A loss-making subsidiary can surrender its losses to a profitable parent (or sibling), reducing the group’s overall corporation tax bill.
Capital Gains Group
Companies in a 75% group (with additional conditions) can transfer assets between group members without triggering a capital gains tax charge. The receiving company takes over the transferring company’s base cost.
VAT Grouping
Companies under common control can register as a VAT group, meaning:
- Inter-company supplies within the group are disregarded for VAT purposes
- One VAT return is filed for the entire group
- Each member is jointly and severally liable for the group’s VAT obligations
Parent Company Obligations
The parent company must:
- Disclose the existence of subsidiaries in its own accounts
- Prepare consolidated accounts (unless exempt)
- Record its investment in subsidiaries at cost or fair value in the parent’s individual accounts
- Declare People with Significant Control relationships where applicable
Subsidiary Directors and Governance
A subsidiary has its own board of directors, but in practice:
- The parent often appoints the subsidiary’s directors
- The parent may set the subsidiary’s strategy and budget
- Directors of the subsidiary still owe their statutory duties to the subsidiary (not the parent)
- A director must act in the subsidiary’s best interests, which may occasionally conflict with the parent’s wishes
Accounting for the Investment
In the parent company’s individual accounts:
| Transaction | Debit | Credit |
|---|---|---|
| Acquiring a subsidiary | Investment in subsidiary (balance sheet) | Bank / consideration |
| Receiving dividends from subsidiary | Bank | Dividend income (P&L) |
| Impairment of investment | Impairment loss (P&L) | Investment in subsidiary |
In the consolidated accounts, the investment is replaced by the subsidiary’s individual assets and liabilities.
Subsidiary vs Branch
| Feature | Subsidiary | Branch |
|---|---|---|
| Legal status | Separate legal entity | Part of the parent company |
| Liability | Limited to the subsidiary | Parent bears full liability |
| Taxation | Separate CT return | Included in parent’s CT return |
| Filing | Separate accounts at Companies House | No separate filing |
| Formation | Incorporation or acquisition | Opening a new location |