A micro-entity is a very small company that satisfies at least two of the following criteria for the current and preceding financial year:
- Its net worth does not exceed £316,000
- Its turnover does not exceed £632,000
- The average number of employees does not exceed 10
Historical Context
The concept of a micro-entity was introduced under EU regulations adopted into UK law in November 2013. The aim was to ease the regulatory burden on the smallest companies, allowing them to focus resources on growth and operations rather than complex financial reporting.
Key Events:
- 2013: Introduction of micro-entity regulations into UK law.
- 2014: The EU Accounting Directive sets out the special rules applying to micro-entities.
- January 2016: FRS 105: The Financial Reporting Standard applicable to the Micro-entities Regime, comes into force.
Criteria for Micro-Entity Classification
A company must meet at least two of the following criteria:
- Net worth ≤ £316,000
- Turnover ≤ £632,000
- Average number of employees ≤ 10
Entities ineligible for this classification include those that are part of a group containing a public company, parent companies preparing consolidated financial statements, and subsidiaries included in group accounts by full consolidation.
Regulatory Framework
EU Accounting Directive (2014)
The directive outlines simplified reporting requirements and exemptions for micro-entities, including the presentation of a simplified balance sheet and profit-and-loss account.
FRS 105
This standard provides specific guidance on the financial reporting requirements for micro-entities, prohibiting the application of fair value accounting methods and the alternative accounting rules.
Importance and Applicability
Micro-entities benefit from:
- Reduced complexity in financial reporting
- Lower compliance costs
- Simplified annual accounts, enhancing focus on core business activities
Examples and Considerations
Example of a Micro-Entity
A small IT consultancy with:
- A net worth of £250,000
- Annual turnover of £500,000
- 5 employees
This company meets all three criteria, classifying it as a micro-entity.
Considerations:
- Ineligibility: Companies ineligible for the small companies accounting regime cannot qualify, regardless of their size.
- Filing Requirements: Micro-entities file a simplified balance sheet and profit-and-loss account, with only the balance sheet needing to be filed at Companies House.
Related Terms
- Small Entity: A larger classification than micro-entities, with higher thresholds for net worth, turnover, and employees.
- FRS 102: The Financial Reporting Standard applicable to the financial statements of small and medium-sized entities in the UK and Republic of Ireland.
Interesting Facts
- The introduction of micro-entity regulations has significantly reduced the administrative burden on thousands of small businesses in the UK.
Inspirational Stories
Many micro-entities have leveraged the reduced compliance costs to reinvest savings into business growth, innovation, and employee development.
Famous Quotes
“Small opportunities are often the beginning of great enterprises.” — Demosthenes
Proverbs and Clichés
- “Small but mighty.”
- “Good things come in small packages.”
Jargon and Slang
- Balance Sheet Lite: A colloquial term for the simplified balance sheet format used by micro-entities.
- FRS 105: Shorthand reference to the financial reporting standard for micro-entities.
FAQs
What is a micro-entity?
Are micro-entities required to file full financial statements?
Can a parent company be a micro-entity?
References
- EU Accounting Directive (2014)
- FRS 105: The Financial Reporting Standard applicable to the Micro-entities Regime
- Companies Act 2006 (as amended)
Summary
The micro-entity classification provides substantial relief for the smallest companies in terms of financial reporting. By meeting specific size criteria, these businesses can utilize simplified accounting methods, allowing for greater focus on growth and operations while remaining compliant with legal requirements.
