What is a micro-entity for accounting purposes?
A micro-entity is a very small company that can file simplified accounts. It must meet 2 of 3 criteria: turnover under £632,000, assets under £316,000, and 10 or fewer employees.
Detailed Explanation
Micro-entity classification
Must meet at least 2 of these 3 criteria for 2 consecutive years: - Turnover: £632,000 or less - Balance sheet total: £316,000 or less - Average employees: 10 or fewer
Benefits of micro-entity accounts
Simpler filing with Companies House
- No Profit & Loss account required - Highly abbreviated Balance Sheet - No directors' report required - Limited notes to accounts - No auditor's report
What you still need to provide
- Abbreviated Balance Sheet - A few specific notes - Statement that accounts prepared under micro-entity provisions
Who can't use micro-entity exemptions
- Public limited companies - Companies in groups containing a PLC - Investment undertakings - Financial institutions - Parent or subsidiary companies in some cases
Small company threshold (for comparison): Meet 2 of 3: - Turnover: £10.2 million or less - Assets: £5.1 million or less - Employees: 50 or fewer
Practical considerations
- Micro accounts give competitors and customers less information - Some clients/suppliers may request full accounts anyway - Banks often request full accounts for loans - Investors will need more detail for due diligence
Filing with HMRC
- Full accounts still required for Corporation Tax return - Only Companies House accepts abbreviated versions
Source: Companies House Accounts Guidance
Real-World Examples
New Startup Business
A web design company, 'Design Solutions Ltd', has a turnover of £450,000, total assets of £200,000, and employs 8 people in its second year of trading. Because it meets two of the three micro-entity criteria for two consecutive years, it can file micro-entity accounts.
Growing Consultancy
A management consultancy, 'Strategic Growth Ltd', initially met the micro-entity criteria. In its third year, its turnover increased to £700,000, exceeding the threshold. Therefore, it must now file small company accounts, even if its assets and employee numbers remain below the micro-entity limits.
Dormant Company
A dormant company, 'Inactive Co Ltd', has no turnover, minimal assets (under £316,000), and no employees. While technically meeting the criteria, it would typically file dormant company accounts, a simpler process than micro-entity accounts.
Common Mistakes to Avoid
- Assuming you're a micro-entity just because your turnover is low, without checking the balance sheet total and employee count.
- Failing to meet the criteria for two consecutive years before filing micro-entity accounts, as the rules require sustained qualification.
- Thinking that because you can file micro-entity accounts, you don't need to keep accurate records - you must still maintain complete and proper accounting records.
- Not disclosing related party transactions, even when filing simplified micro-entity accounts, as this is still a legal requirement.
Frequently Asked Questions
Can I choose *not* to file micro-entity accounts if I qualify?
Yes, you can choose to file as a small company instead. Some directors prefer the increased transparency of small company accounts, even if they qualify for micro-entity status.
What happens if I no longer meet the micro-entity criteria in a future year?
If you exceed the thresholds for two consecutive years, you will need to file small company accounts from the following financial year onwards. You must reassess your eligibility annually.
Do I need to submit a full Profit and Loss account to HMRC if I file micro-entity accounts with Companies House?
While you don't file a Profit and Loss account with Companies House as part of your statutory accounts, you *must* still calculate your profit or loss for Corporation Tax purposes and submit this information to HMRC separately.
Are there any types of companies that cannot file micro-entity accounts, even if they meet the size criteria?
Yes. Public limited companies (PLCs), companies carrying out certain regulated activities (e.g., insurance companies or banks), and charities cannot file micro-entity accounts, regardless of their size.
Practical Tips
- Use accounting software that automatically tracks your turnover, balance sheet total, and employee numbers to easily determine your eligibility for micro-entity status.
- Create a checklist of the micro-entity criteria and review it at the end of each financial year to ensure you still qualify.
- If you're close to exceeding any of the thresholds, consider projecting your financials for the upcoming year to plan for the potential transition to small company accounts.
- When preparing your abbreviated balance sheet, ensure you include all required notes to the accounts, even if they are limited, to comply with Companies Act regulations.
Related Questions
What is a Confirmation Statement?
A Confirmation Statement (formerly Annual Return) confirms your company's details are correct with Companies House. It's due at least once every 12 months and costs £34 to file online.
When are annual accounts due?
Annual accounts must be filed with Companies House within 9 months of your accounting period end. For HMRC, you have 12 months to file your Corporation Tax return including the accounts.
What is Making Tax Digital (MTD)?
Making Tax Digital is HMRC's initiative requiring businesses to keep digital records and submit returns using compatible software. VAT is already under MTD; Income Tax follows in April 2026.
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