Very small Limited companies have an option to file micro entity accounts. Initially these may look like a cheaper option. So who can file micro entity accounts? What are they? And are there any potential pitfalls to avoid?
When preparing accounts companies are classified as either small, medium or large.
Within the small company classification is a subset which allows companies to file micro entity accounts. Accountants know this option as filing under FRS105.
The format of the accounts, the requirements and the disclosures all change depending on the company classification.
Only very small companies can file micro entity accounts.
The company must satisfy 2 of the following conditions:
– Turnover not more than £632,000
– Balance sheet not more than £316,000
– Average number of employees not more than 10
The turnover limit is time apportioned if the trading period is shorter or longer than 12 months. Turnover is net of VAT.
Balance sheet explained:
This is the total of fixed assets plus current assets. It does not include current liabilities or long term liabilities.
Employee average explained:
Each month you must add up the number of employees which are under contracts of service. This includes all starters and leavers. Take the cumulative total for each month and divide by 12. This is your average.
If you pay your staff weekly you can’t do the same as above and divide by 52. You must work out the total on a monthly basis.
Even if the conditions above are satisfied. There are some companies who are excluded from being able to file micro accounts.
The main exemptions are charities, some financial and insurance institutions, overseas companies, subsidiaries and unregistered companies.
In a subsequent year should the company no longer satisfy 2 out of 3 conditions. It may still file micro entity accounts.
A micro entity company would therefore only need to change to the small company regime if it did not qualify for 2 years in a row.
The information contained in micro entity accounts is a lot less than what is required for small companies.
Micro entity accounts filed with Companies House contain very little information. They include the company information (i.e Directors, company number, registered office). Also included is the basic balance sheet with a couple of notes.
Some of the more complex issues of accounting are avoided such as fair value of assets, revaluations, goodwill and deferred tax.
As these accounts are much simpler the accountancy fees are likely to be lower.
Micro entity accounts contain so little information that it could deter lenders and credit agencies. To approve any debt finance they require a minimum amount of information. This may or may not be available.
This could even apply to trade credit. Will your credit rating decline if you file less company information under the micro regime?
Although revaluations is mentioned as an advantage for it’s simplicity it may be beneficial for the company to want to revalue. E.g An investment property company would want to show the capital growth within its portfolio.
All accountants have to do a certain amount of input work before they can produce a set of accounts.
The amount of input isn’t going to reduce significantly if you choose to prepare micro company accounts. The exact same amount of numbers has to be entered into the accounting software. They all have to be checked and verified no matter what regime you choose.
What will be lighter is the output. Micro entity accounts have much simpler presentation with very few notes. This is only a small part of the accounting process.
A profit and loss account as well as a Directors report still need to be prepared. They aren’t required for filing with Companies House. But these more detailed accounts are required for the members and HMRC.
In summary yes the accountancy fee would be lower. But not as low as you may expect. And considering the other negatives attached with micro entity accounts the saving may be at a cost.
Yes. As long as you qualify as a micro entity you can choose to file either micro entity accounts or accounts under the small companies regime.
Our opinion on Micro Entity Accounts
Our default position is to file accounts under the small companies act. Under this regime you can choose to abridge the balance sheet and fillet the profit and loss account. This significantly reduces the disclosures to Companies House. Not to the extent of micro entity accounts but it is still a substantial disclosure reduction.
Companies which we would potentially consider preparing micro entity accounts include:
- Companies that will always qualify as a micro entity. So they have been very small for a number of years or they are close to retirement and are downscaling activities.
- They have no need for future debt. So either a cash rich company or a company with no need to purchase new assets.
- A company with very few trade creditors. Service companies tend to fall into this category.
- And finally a company without property or significant assets. Not being able to revalue the assets is too restrictive and could show the balance sheet in a weaker position.
See the HMRC website for more information on Small and Micro Accounts
DISCLAIMER – Please note that the content contained in this article is for general information only and is not a substitute for professional advice – read our full disclaimer