A micro-entity (or micro company) is a name for a small, private limited company. Meanwhile, a micro-entity account is a simplified way of filing with Companies House. In this guide, we’ll explore what micro-entities are in more detail, when to use micro-entity accounts, the benefits and drawbacks, and how to file them.
What is a micro company?
A micro company is a type of very small business. In fact, micro companies are the smallest category of business under the Companies Act 2006. If you're a micro-entity, you’ll have the option to file micro-entity accounts - these are much simpler while still meeting statutory minimum requirements. This can help to simplify financial reporting for these very small entities.
How do you qualify as a micro entity?
To qualify as a micro entity, your company must meet at least two of the following three micro entity thresholds:
Turnover: No more than £632,000 per year.
Balance sheet total: £316,000 or less on your balance sheet.
Average number of employees: No more than 10 during the financial year.
These micro-entity thresholds apply to private limited companies, partnerships, and other small organisations. Your business needs to meet the criteria for two years to file micro-entity accounts with Companies House and HMRC. If your business exceeds the thresholds for two years, you will have to report to a small company or full statutory reporting.
What are micro-entity accounts?
So, what exactly are micro-entity accounts? In short, they’re just a simplified way for small businesses to file financial statements. They’re designed to help ease the burden for small businesses, making it easier and less complex. The accounts offer minimal financial detail while still compliant with UK law. Micro-entity accounts generally include:
A simplified profit and loss account
A balance sheet is signed by a director
Minimal notes to the accounts, as required by law
Unlike larger companies, micro companies are not required to file a director’s report. The micro accounts limited focus on the essentials, which is helpful for small businesses.
What are the benefits of micro-entity accounts?
There are several advantages to using micro-entity accounts if you’re eligible:
Reduced administrative burden
Micro-entity accounts are much simpler to prepare than full statutory accounts. Small business owners will save time, effort, and resources with these accounts. This is handy for those who haven’t got accounting experience.
Lower costs
By filing simpler accounts, you get lower accounting costs. Professional accountants will charge less in most cases than when they prepare full accounts.
Minimal disclosure
Micro-entity accounts need less financial detail. This helps to preserve your privacy from competitors or third parties reviewing the accounts. They will have a limited view of your company’s financial health.
Compliance with legal obligations
Micro-entity accounts meet the UK’s legal requirements for financial reporting. You can feel rest assured your business stays legally compliant.
Simplified financial statements
Micro companies are a lot easier with limited transactions and simple operations. They only need a basic profit and loss statement and a balance sheet.
What are the drawbacks of micro-entity accounts?
While micro-entity accounts offer benefits, they may not be suitable for every small business. Here are some potential drawbacks to consider:
Limited detail for stakeholders
Investors and lenders don’t always like the simple nature of these micro-entity accounts. They are likely to want a clearer picture of the company’s financial position, making it harder to secure funding.
Perception of the business
Filing micro-entity accounts might give the impression that the business is very small or less professional. We understand this is sometimes not how you will want to present to clients, suppliers, or partners.
Limited financial analysis
Management may struggle to conduct in-depth financial analysis using micro-entity accounts. With a lack of detail, it could affect strategic decision-making for the future.
Restrictions on accounting options
Micro companies using this simplified reporting option can not always apply for certain accounting policies. This can impact how financial performance is reported.
How do I file micro-entity accounts?
Filing micro-entity accounts is a straightforward process. Here’s a step-by-step guide to Companies House filing:
1. Prepare your financial records
You need to report all your financial transactions. These will include income, expenses, assets, and liabilities. You’ll need this data to create a profit and loss statement and balance sheet.
2. Draft your micro-entity accounts
Using accounting software or professional support, you can prepare your micro-entity accounts, including:
A basic profit and loss account.
A simplified balance sheet.
Any necessary notes to the accounts.
3. File accounts with Companies House
Submit your micro-entity accounts online through the Companies House portal. You can also file by post, but online filing is quicker.
4. File your company tax return with HMRC
Prepare your company tax return (form CT600) and submit it to HMRC. The deadline for filing is 12 months after the end of your accounting period.
5. Pay your corporation tax
If your company owes corporation tax, it must be within 9 months and 1 day after the end of your accounting period.
Will HMRC accept micro-entity company accounts?
HMRC accepts micro-entity accounts as part of your company tax return. You need to make sure they meet the relevant standards. Micro-entity accounts must comply with FRS 105, which is the Financial Reporting Standard.
HMRC requires the accounts to be consistent with the figures reported on your tax return. You need to make sure the information is accurate to avoid errors, penalties, or delays in processing your tax submission.
Do I need to use an accountant?
Using an accountant isn’t needed by law for filing micro-entity accounts, but it can be helpful. An accountant can help with things like:
Ensure your accounts meet legal requirements.
Help identify tax efficiencies and savings.
Avoid errors that might lead to penalties.
💡Editor's insight: “While an accountant is valuable for running your business, I find accounting software can be useful too. If you’re confident in preparing your own accounts, this can be a helpful tool for support. Make sure you keep your accounts up-to-date so no problems or irregularities occur.”
What do you need to set up a micro company?
Here are the steps for setting up a micro company
Choose a company name: You need to make sure it’s unique and compiles with Companies House regulations.
Appoint directors: You need at least one director to manage the company.
Decide on shareholders/guarantors: Identify who will own the company.
Prepare company documents: Draft your memorandum of association and articles of association.
Register with Companies House: File your company details online and pay the registration fee.
Set up a registered office: Provide an official address for correspondence.
Register for corporation tax: Notify HMRC that your company is active and liable for tax.
Once registered, your business can start operating as a micro company.
💡Editor's insight: “You might not know that these are the same steps as setting up a limited company in the UK. Useful if you want to set up one of these later down the line.”
Final thoughts
Micro-entity accounts are a solution for the UK’s smallest businesses. These accounts offer a simple and cost-effective way to meet legal reporting requirements. If your business qualifies as a micro company, this approach can reduce time, and admin and lower accounting costs.
You should weigh the pros and cons. You need to remember that these simplified accounts may not provide enough detail for investors or lenders. For micro-entity support, we’re here to help. Get in touch for a free quote and to see how our small business lawyers can help today.
References
Companies Act 2006 by legislation.gov.uk
FRS 105 overview- tax implications by gov.uk
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.