They were introduced in 2013; inspired queries on the ContractorUK forum in 2015, and are still clearly used this year — sometimes without choice.

Micro entity accounts are therefore clearly worth an overview, including how to file them with HMRC, writes Christian Hickmott, managing director of Integrated Accounting.

Micro entity accounts: how we got here

To fully appreciate the importance of micro entity accounts, it is worth taking a quick look at the evolving reporting landscape in the UK. limited company.

If we go back in time to the end of the 1980s, every limited company was required by law to have its accounts audited.

In 1993, after several previous attempts, the legislation was finally changed to allow small businesses to benefit from an audit exemption – allowing them to file their accounts with Companies House and HMRC, without the need to do so. audit.

Reporting rules for public limited companies: a potted history (continued)

Yet the threshold for “small business” was only “small” compared to very large businesses! This therefore paved the way for the use of a limited company as an affordable accounting model for owner-managed businesses.

That said, even with an exemption from verification, the accounting rules and regulations that a small business had to satisfy were still expensive.

And hallelujah! On 6 April 2013, the UK saw the introduction of micro entity accounts to attempt to ease this reporting burden for smaller incorporated businesses.

What are the criteria for micro entity accounts?

Micro entity accounts are an attempt by HMRC to simplify reporting for the smallest of small businesses.

For any entrepreneur, consultant or freelancer, the eligibility criteria are generous and are as follows:

• A turnover of £632,000 or less – so this is the amount excluding VAT that your company will bill in a year;
• £316,000 or less on its balance sheet – so this is the total of everything the company owns; the amounts owed to it by another party and the amount of profits which may have accumulated from year to year but which have not been distributed as dividends to shareholders.
• 10 employees or less.

What do I get with micro entity accounts?

If you meet the eligibility criteria for micro entity accounts, the simplified reporting regime will include:

• The same exemptions as those available to small businesses;
• A simpler format for your statutory accounts;
• Sending only one balance sheet with fewer details at Companies House.

How are micro-entity accounts filed?

In the UK, statutory accounts are filed with both Companies House and HMRC; and the same goes for micro entity accounts.

HMRC needs the accounts to be lodged with them, alongside your company’s corporation tax return, so that they can manage the tax side of your limited company.

Companies House requires accounts to be filed so that they are available on the public register to all interested stakeholders and third parties.

Companies House has a page dedicated to the different methods of depositing accounts, where you can find the conditions for depositing accounts of micro-entities.

You can hire an accountant to do this for you; but there are also free software tools available on the Companies House platform that will allow you to file your business accounts yourself, both with Companies House and HMRC.

Alternatively, you can pay for third-party software that is compatible with filing statutory accounts and tax returns.

So far, so good. Is there a downside to micro entity accounts?

The concept of significantly simpler reporting requirements as well as the ability for directors to file their own accounts with Business House and HMRC is noble and deserves to be praised.

Unfortunately, the reality is not quite the same. Micro entity accounts have two significant drawbacks that derail the reform they promise.

These are :

• Obtain financing – either for the business or personally for the directors and shareholders.
• Unknowns and unknowns – do you know whether you should disclose something or not, and if so, how would you do it?

Let’s look at these two areas in more detail:

Loan decisions and micro entity accounts

Often, accounts prepared under the micro entity rules do not include enough information for lenders to make a financing decision.

This may lead to additional information being requested and sometimes having to re-prepare accounts for multiple accounting periods, using standard reporting requirements for small businesses.

This can lead to additional costs and slow down decision-making, which is not necessarily what entrepreneurs want when trying to secure a mortgage for that dream family home you want to make an offer on!

The unknown unknowns

The biggest danger with micro entity accounts is that an administrator is sure they understand what they need to include in their accounts, but overlooks something important that they might be missing.

The financial and emotional burden of an error and a challenge many years later by HMRC should not be underestimated.

Accountants are contacted more often than you might think to work on several years of accounts and restate them properly for Companies House and HMRC – a service they naturally cannot offer for free, no matter how empathetic they are for your situation.

Should entrepreneurs use micro entity reporting?

Micro entity accounts can be useful in a very limited but robust set of circumstances:

• you have a very simple set of accounts;
• the only assets of your business are the basic computer equipment and the amounts owed by your customers;
• your funds are held in a basic business checking and savings account;
• you are unlikely to want to raise funds for your business or yourself;
• you are unlikely to sell your limited liability company.

Complexity and micro-entity accounts: the two don’t mix…

If your business has additional complexities beyond those mentioned above, it’s probably best to stick with the standard small business reporting framework. Do you still have any doubts? Discuss “micro entity accounts” with your accountant or tax advisor.