Micro-entity accounts are a simplified form of financial statements available to the smallest UK companies. They require fewer disclosures, a simpler balance sheet format, and no profit and loss account to be filed at Companies House. The accounting framework for micro-entities is FRS 105 (The Financial Reporting Standard applicable to the Micro-entities Regime), which is considerably simpler than FRS 102.
The micro-entity regime was introduced to reduce the administrative burden on very small businesses, recognising that the detailed disclosures required for larger companies are disproportionate for the smallest firms.
Eligibility Criteria
A company qualifies as a micro-entity if it meets two of the three criteria in two consecutive financial years. These thresholds apply for financial years beginning on or after 6 April 2025:
| Criteria | Threshold |
|---|---|
| Turnover | Up to £1 million |
| Balance sheet total | Up to £500,000 |
| Average number of employees | Up to 10 |
Companies That Cannot Use the Micro-Entity Regime
Even if they meet the size thresholds, certain companies are excluded:
- Public companies
- Companies in the banking and insurance sectors
- Companies that are part of a group that is not small
- Charitable companies
- LLPs (though they have their own simplified regime)
FRS 105: The Micro-Entity Standard
FRS 105 is a standalone accounting standard that applies exclusively to qualifying micro-entities. It simplifies accounting in several significant ways:
| Area | FRS 105 Treatment | FRS 102 Treatment |
|---|---|---|
| Financial instruments | Measured at cost or amortised cost (no fair value) | Complex measurement including fair value |
| Revaluation of fixed assets | Not permitted | Permitted |
| Deferred tax | Not recognised | Recognised |
| Revenue recognition | Simplified | Detailed criteria |
| Leases | All operating leases | Finance/operating lease distinction |
| Share-based payments | Not recognised | Recognised |
| Hedge accounting | Not available | Available |
What Must Be Filed at Companies House?
Micro-entities can file the absolute minimum:
| Component | Required? |
|---|---|
| Abridged balance sheet | Yes |
| Notes to the accounts | Very limited (only accounting policies and a few specific items) |
| Profit and loss account | No (not filed) |
| Directors’ report | No |
| Cash flow statement | No |
| Audit report | No (micro-entities are audit exempt) |
The balance sheet filed at Companies House will show very little detail, which limits the information available to creditors, suppliers, and competitors.
Micro-Entity Balance Sheet Format
| Line | £ |
|---|---|
| Fixed assets | 85,000 |
| Current assets | 120,000 |
| Creditors: amounts falling due within one year | (65,000) |
| Net current assets | 55,000 |
| Total assets less current liabilities | 140,000 |
| Creditors: amounts falling due after more than one year | (20,000) |
| Net assets | 120,000 |
| Capital and reserves | |
| Called-up share capital | 1,000 |
| Profit and loss account (retained earnings) | 119,000 |
| Total equity | 120,000 |
This is substantially less detail than a full FRS 102 balance sheet.
Advantages of Micro-Entity Status
| Advantage | Detail |
|---|---|
| Reduced filing | No P&L at Companies House means competitors cannot see turnover or profit |
| Simpler accounting | FRS 105 removes complex areas like deferred tax and fair value |
| Lower accountancy fees | Simpler accounts require less preparation time |
| No audit | All micro-entities are exempt from statutory audit |
| Minimal notes | Only a handful of notes are required |
| Privacy | Financial performance is not publicly visible |
Limitations and Disadvantages
| Limitation | Impact |
|---|---|
| Limited information for stakeholders | Banks, suppliers, and potential investors may request full accounts separately |
| No revaluation of assets | Cannot reflect increased property values on the balance sheet |
| No deferred tax | May overstate or understate the true tax position |
| No fair value accounting | Investments and financial instruments only at cost |
| May not reflect economic reality | Simplifications can mask the company’s true financial position |
| Credit rating | Credit reference agencies have less information, which may affect the company’s credit score |
Micro-Entity Accounts Versus Small Company Accounts
| Feature | Micro-Entity (FRS 105) | Small Company (FRS 102 Section 1A) |
|---|---|---|
| Turnover threshold | £1 million | £15 million |
| Balance sheet total | £500,000 | £7.5 million |
| Employees | Up to 10 | Up to 50 |
| Accounting standard | FRS 105 | FRS 102 |
| P&L filed at Companies House | No | Optional (can file abridged) |
| Notes | Minimal | Reduced but more than micro |
| Revaluation | Not permitted | Permitted |
| Deferred tax | Not recognised | Recognised |
| Audit | Exempt | Exempt |
A company that exceeds the micro-entity thresholds but remains below the small company thresholds moves up to FRS 102 Section 1A (small companies).
Transitioning Out of Micro-Entity Status
If a company grows beyond the micro-entity thresholds in two consecutive years, it must:
- Move to FRS 102 (Section 1A for small companies, or full FRS 102 for medium/large)
- Restate the opening balance sheet under the new standard
- Apply the more complex recognition and measurement rules (including deferred tax, revaluation if elected, and additional disclosures)
- Prepare a more detailed set of financial statements
The transition can result in adjustments to retained earnings, particularly from recognising deferred tax for the first time.
Year-End Process for Micro-Entities
The year-end process is the same in principle as for larger companies but simpler in practice:
| Step | Activity |
|---|---|
| 1 | Record all transactions for the year |
| 2 | Complete bank reconciliation |
| 3 | Adjust for accruals, prepayments, and depreciation |
| 4 | Value stock at the lower of cost and estimated selling price |
| 5 | Prepare the trial balance |
| 6 | Draft the abridged balance sheet and notes |
| 7 | Director approves and signs the balance sheet |
| 8 | File at Companies House within 9 months |
| 9 | File CT600 with HMRC within 12 months |
Corporation Tax for Micro-Entities
Micro-entity status has no effect on corporation tax. The company pays tax on the same basis as any other limited company:
- The accounting profit is adjusted for tax purposes (depreciation replaced by capital allowances, disallowed expenses added back)
- Tax is charged at the applicable rate (19% small profits rate, 25% main rate, or marginal relief)
- A full corporation tax computation is required regardless of the company’s size
The CT600 return and tax computation are submitted to HMRC using the full accounts (not the abridged version filed at Companies House).
Practical Considerations
When to Use the Micro-Entity Regime
The regime is most beneficial for:
- Owner-managed companies with simple operations
- Companies that value privacy and do not want financial details public
- Companies where the FRS 105 simplifications do not materially affect the accuracy of the accounts
When to Opt Out
A micro-entity can voluntarily prepare accounts under FRS 102 if:
- The directors want more detailed financial information
- Lenders or investors require FRS 102 accounts
- The company plans to grow beyond the threshold and wants consistency
- The company owns property and wants to revalue it
Choosing the right framework depends on the company’s circumstances, stakeholder expectations, and growth plans. Discussing the options with the company’s accountant before the year end ensures the best approach is taken.
Filing at Companies House
Micro-entity accounts are filed at Companies House in iXBRL format (inline eXtensible Business Reporting Language) using approved filing software. Many accountants file on behalf of their clients using their practice software. Companies can also file directly using the Companies House online filing service.
The filing deadline is 9 months after the accounting reference date. Late filing penalties apply on the same scale as for other private companies (£150 to £1,500 depending on how late).