Micro-entity accounts: Overview, and how to file with HMRC

They were introduced back in 2013; inspired queries on ContractorUK’s Forum in 2015, and are still clearly being used this year --  sometimes without choice.

So micro-entity accounts clearly warrant an overview including how to file them with HMRC, writes Christian Hickmott, managing director of Integro Accounting.

Micro-entity accounts: how we got here

To fully appreciate the significance of micro-entity accounts, it is worth taking a quick look at how the reporting landscape has changed for the UK limited company.

If we go on an amble down memory lane to the late eighties, every limited company was required by law to have an audit of its accounts.

By 1993, after several previous attempts, the legislation was finally changed to allow small companies to make use of an audit exemption – allowing them to file their accounts with Companies House and HMRC, without the need to have them audited.

Limited company reporting rules: a potted history (cont.)

Yet the threshold for “small company” was only “small” when compared to the very large corporates! And so this subsequently paved the way for a limited company to be used as an affordable accounting model for owner-managed businesses.

That said, even with an audit exemption, the accounting rules and regulations that a small business needed to meet were still onerous.

And hallelujah! On April 6th 2013, the UK saw the introduction of micro-entity accounts to try and mitigate this reporting burden on the smallest of incorporated businesses.

What are the criteria for micro-entity accounts?

Micro-entity accounts are HMRC’s attempt to simplify reporting for the smallest of small businesses.

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

• A turnover of £632,000 or less – so that’s the amount excluding VAT that your company invoices in a year;
• £316,000 or less on its balance sheet– so this is the total of all the things the business owns; the amounts owed to it by another party, and the amount of profit that may have built up year on year but hasn’t been distributed in dividends to the shareholders.
• 10 employees or less.

What do I get with micro-entity accounts?

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

• The same exemptions that are available for small companies;
• A simpler format for your statutory accounts;
• Sending only a balance sheet with less detail to Companies House.

How are micro-entity accounts filed?

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

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

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

Companies House has a page dedicated to the different ways in which accounts can be filed, where you can find the filing requirements for micro-entity accounts.

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

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

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

The concept of significantly simpler reporting requirements alongside the ability for directors to file their own accounts with Companies House and HMRC is a noble one and to be lauded.

Sadly, the reality isn’t quite the same. There are two significant downsides to micro-entity accounts that derail the reform that they promise.

These are:

• Obtaining finance – either for the business or personally for the directors and shareholders.
• Unknown unknowns – do you know whether you should be making a disclosure about something or not, and if so, how you would go about doing that?

Let’s look at these two areas in a little further detail:

Lending decisions and micro-entity accounts

Often accounts prepared using the micro-entity rules do not include enough information for lenders to be able to make a financing decision.

This can lead to extra information being requested and sometimes accounts having to effectively be prepared again for several accounting periods, using the standard reporting requirements for small businesses.

This can lead to extra costs and can slow down decision-making, which is not necessarily what contractors 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 a director is confident that they understand what to include in their accounts but are unaware of something significant that they may be missing.

The financial and emotional burden of getting this wrong and being challenged several years down the line by HMRC is not to be underestimated.

Accountants are approached more often than you might think to work through several years of accounts and restate them correctly for Companies House and HMRC -- a service which they naturally cannot offer for free, no matter how much empathy they have for your situation.

Should contractors use micro-entity reporting?

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

• you have a very straightforward set of accounts;
• your only company assets are basic computer equipment and monies owed by your clients;
• your funds are kept in a basic company current account and savings account;
• you are not likely to want to raise finance for your business or yourself personally;
• you’re not likely to be selling your limited company business.

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

If your business has any added complexities over and above those mentioned above, then it is likely to be best to stick with the standard reporting framework for small businesses. Still in doubt? Talk ‘micro-entity accounts’ with your accountant or tax adviser.