Some small businesses can be classified as micro-entity accounts, which could save you time and money when it comes to filing your annual reports with Companies House if you hit the classification.
We know that saving time and money is a hit for any business, so making sure that you come to grips with this business account type is time well spent for your business.
In this micro-entity accounts explained guide, we’ll take you through what a micro entity is, if you qualify as one, and what that means for your annual returns. Let’s get started.
What is a micro-entity account?
A micro-entity is essentially a very small business. Because of its size, they are allowed to file smaller accounts with Companies House in order to save them both time and money.
The theory behind this is that smaller businesses don’t have the same resources as larger ones, so it’s unfair to ask them to file reports to the same standard that they do.
When micro-entities were approved, the Department for Business, Innovation & Skills issued the following statement about them:
“Micro-entities are, in many instances, effectively owner-managed. Statutory financial statements of micro-entities, therefore, may not need to facilitate communication between shareholders and management in relation to the company’s performance. For the smallest of companies, the burdens associated with comprehensive financial reporting requirements may be disproportionate when compared with other small companies.”
In simple terms, micro entities are usually run by the owner, which means there’s less need to share shareholder information about the company’s performance. In addition, they will have far less complex financials to deal with than larger companies. Thus, smaller, simplified accounts.
Micro-entities aren’t just about simplifying the amount they need to submit to Companies House, but also the level of accounting that is required. This should mean less accounting knowledge and expertise is needed when submitting the accounts.
The result will make the bookkeeping more sustainable for micro-entities to submit these accounts themselves or even lower the cost of accounting if they’re having these accounts submitted for them.
Do I qualify as a micro-entity?
In order to be classified as a micro-entity, your limited company must have any of the following 2 conditions:
- Your turnover is less than £632,000;
- You have £316,000 or less on your balance sheet;
- You have 10 employees or less.
However, there are some caveats to this. Even if you meet the above, you cannot be classed as a micro-entity if you are:
- A not-for-profit organisation;
- A limited liability partnership;
- A public limited company;
- A financial institution like a lender or bank;
- Owned by a parent company that prepares group accounts.
In short, most limited companies that meet at least two of the 3 qualifying metrics can be classed as micro-entities if you so choose. We’ll cover more of that later, as we go into the pros and cons of this classification.
If you’re a sole trader, this guide isn’t for you as you’re not required to submit annual statements to Companies House. Instead, you just need to worry about filling in your self-assessment tax form each year, which you can find more information on this here.
If you’re currently a sole trader and are considering changing to a limited company, you might want to check out this resource on finding the right time to change from a sole trader to a limited company.
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What are the benefits of filing micro-entity accounts?
Now you know if you qualify for micro-entity accounts, it’s time to work out if you want to use them for submitting your accounts to Companies House. To do that, we need to look at the pros and cons of filing micro-entity accounts to give you a clear picture of how they work and if they’re right for you.
Starting with the benefits, the biggest advantages of filing micro-entity accounts are:
1. Save time and stress
Being able to save time and stress by filing simpler company accounts rather than the full documentation.
Instead, you will choose from two different formats for the balance sheet and be given only one format for the profit and loss account to make quick work out of your filing. In addition, you won’t have to fill out a director’s report or provide detailed notes on any of the accounts required.
2. Reduce error
By having simpler processes and financial calculations to work out when submitting your accounts, you will reduce the margin of error.
3. Save money
Simpler accounts and less paperwork mean that the accounts are much easier to achieve by yourself without an accountant if you want to keep everything within your business. And if you’re keen on doing this yourself, you might want to check out our guide to bookkeeping for beginners for some tips and advice on how to keep your accounts in the best order.
If bookkeeping isn’t your strong suit, the reduced workload should also help save you money on your accountant’s bill as well, which means more money for you. Isn’t that lovely?
And speaking of accountants, did you know our top-rated accountancy software, FreeAgent, can produce and submit Micro Entity accounts for you to make the whole process easier than ever? You can find out more about this service here.
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4. Protect information from public view
When you submit your accounts, you can choose to ‘fillet’ your accounts. This is where you can hide profit and loss information from the public record. This can be useful for those that want to protect certain information from others, like your competitors.
Do you have to file as a micro entity account if you qualify?
No, you do not have to file your accounts as a micro-entity, even if your business qualifies as such. There’s nothing stopping you from submitting full accounts the same way that other, larger businesses do, so this is fully your choice.
If you’re currently in the process of looking for funding for your business, filing micro-entity accounts may become a setback. This is because by filing less information with the Companies House, less information will be publicly available about your business. If you’re looking for angel investment or venture capital funding, the more private nature of micro-entities might slow this process down.
In addition, having simpler formats will also reduce the choice and flexibility of your accounts. For micro-entity accounts, you are limited to only one format of profit and loss account and a choice of two balance sheets.
Both of these are highly summarised – making them easier to fill in. But, this level of simplicity does mean that you won’t be able to analyse deeper levels of your business, such as intangible assets, fixed assets, and investment property.
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In addition, having simple accounts might not provide a true positioning of your company. It’s a simple view and could present a misleading picture of looking smaller than you actually are.
For some people, having micro-entity accounts might make your business feel smaller, so filing full accounts could provide a sense of prestige or status.
What’s more, if you’re planning on growing your business and it’s likely that you will not qualify for micro-entity accounts in the next year or two, it could be good practice to just fill out accounts as normal, as you grow.
How to prepare micro-entity accounts
So we’ve mentioned a few times in this article that as a micro-entity, you’ll be able to submit a simplified version of accounts to Companies House. So what is it that you’ll actually be submitting?
Let’s explore this in further detail. As part of your micro-entity accounts, you will need to submit:
- A balance sheet. This is in a simpler format than normal, so you won’t have to include any information on creditors and debtors inside of it. However, one thing you do have to include is a footnote and a sign-off from the director, with a statement that it has been prepared in line with micro-entity provisions as a confirmation.
- A profit and loss account. Again, this is in a simpler format and starts from your gross profit rather than your annual turnover.
Other documents are then optional for micro-entities. For example, micro-entities don’t need to submit a director’s report if they don’t want to. Micro-entities also don’t need to submit an auditors report, as most of them are exempt from auditing. Again, this is optional, and one can be submitted anyway if you wish.
If you want to make this even simpler, you can also choose to fillet your accounts and hide some information from public records. In this case, you only need to supply a balance sheet with footnotes and a statement explaining that a profit and loss account hasn’t been submitted according to these rules.
What companies benefit the most from micro-entity accounts?
We’ve looked at the pros and cons of micro-entity accounts, so now let’s explore a little further on if this process is right for your business.
Generally speaking, the companies that will benefit the most from micro-entity accounts are companies that are planning to stay at the micro-entity level. This means that the business plans to remain small and not grow beyond the qualifying requirements of micro-entity accounts. This normally happens if you are near retirement and plan on winding down the business, or if you’re thinking of moving on and starting fresh.
In addition, companies that aren’t looking for funding will also benefit from micro-entity accounts. This is because micro-entity accounts don’t provide creditors with a lot of information on your business, making it harder to secure funding or purchase new assets. If this isn’t in your plan, then micro-entity accounts could be right for you.
If you’re unsure if micro-entity accounts are right for you, it might be best to file the full paperwork to the Companies House, or speak to an accountant for more information. Alternatively, you could file reports by taking advantage of the small companies act, which we’ll cover below.
What is the small companies’ act?
The small companies act is another way of sending simpler accounts to Companies House, but with fewer savings than the micro-entity accounts. In order to qualify as a small company, you will need to meet 2 of the following conditions:
- Your turnover is £10.2 million or less;
- You have £5.1 million or less on your balance sheet;
- You have 50 or less employees.
As you can see, these conditions are more generous than the micro-entity accounts, so even if you meet micro-entity conditions now, you might want to file using this act instead while you expand your business.
Qualifying as a small business means that you:
- Can use an exemption, so your accounts do not need to be audited, and thus you do not need to submit an auditors report.
- Can choose whether you send a directors report or not.
- Can choose to fillet your accounts, meaning you don’t have to send a profit and loss account to companies house.
However, you can only send abridged (simpler) versions of accounts if all your company members agree to it. If they don’t, you will have to file full accounts like normal. If it’s just you running the show, then this will remain entirely under your control.
If your company members agree to it, you can submit a simpler balance sheet – as long as it includes the name and signature of the director and a confirmation statement.
Micro-entity accounts explained
And there you have it. Micro-entity accounts are a way for small businesses to submit simpler accounts to Companies House, helping save them time and money.
If this sounds like something your business will benefit from, our top-rated accountancy software, FreeAgent, can make submitting your accounts a breeze with a specifically generated service to produce and submit micro-entity accounts. Get all the information you need and more here.
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