Entitlement to the micro-entities regime

The Companies Act 2006 (CA 2006) sets out the criteria to determine whether an entity can take advantage of the Micro-entities Regime when preparing their annual reports and accounts. An entity excluded from the small companies regime cannot be treated as a micro-entity. In addition, certain entities may be excluded from the Micro-entities Regime because of their nature, size or group considerations.

A company that is entitled to and choosing to apply the Micro-entities Regime must apply FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime. As for a small company, a micro-entity will be eligible for a number of filing options.

• Find out more about FRS 105
• Find out more about micro entities filing options

Key steps to determine whether a company is entitled to the micro-entities regime

To be entitled to the micro-entities regime, the company must first be entitled to the small companies regime.

• Entitlement to the small companies regime

The additional steps to determine entitlement to the micro-entities regime are as follows:

Determine eligibility by reference to qualitative criteria;

• Is the company excluded from the micro-entities regime due to the nature of its business?

Determine qualification by reference to size thresholds;

• If the micro-entity is a parent company, does the group headed by it qualify as small?
• Does the company qualify as a micro-entity by application of the size limits?

Is the company excluded from the micro-entities regime?

In addition to exclusions from the small companies regime, there are further exclusions from the micro-entities regime.

A company will be excluded from the micro-entities regime if at any time during the financial year to which the accounts relate it was:

• an investment undertaking
• a credit institution
• a financial holding undertaking
• an insurance undertaking
• a charity

A company that is not a parent but whose accounts are included in consolidated group accounts is not entitled to apply the micro-entities regime in it is individual accounts.

If the micro-entity is a parent company, does the group headed by it qualify as small?

A parent company can only qualify as a micro-entity for the purposes of the individual accounts if it qualifies as a micro-entity individually and the group headed by it qualifies as small. Also a parent company that prepares group accounts cannot qualify as a micro-entity.

Only the group headed by the parent company seeking to take advantage of the micro-entities regime needs to be considered (ie, if the parent is itself a subsidiary, it is not necessary to consider any larger group of which it is part).

In its first financial year a group qualifies as a small group if it meets the size limits in that financial year.

In any subsequent financial year, it will qualify on what is sometimes called the two-year rolling basis. This requires the group to meet the size limits for two consecutive years to qualify as small.

Small groups – size criteria

The size limits are met for a financial year if two out of the three of the following limits are met (aggregating the relevant figures for each member of the group) (CA 2006 s383).

Gross means before any consolidation adjustments and set-offs; net means after such adjustments. An entity is permitted to assess one of the limits on a gross basis and another on a net basis.

The turnover limit is adjusted proportionately if the financial year is longer or shorter than twelve months.

Balance sheet total means the aggregate of the amounts shown as assets in the company's balance sheet.

Does the company qualify as a micro-entity by application of the size limits?

The method to determine whether the company qualifies as a micro-entity by reference to the size limits is the same as that set out above but with different thresholds.

In its first financial year a company qualifies as a micro-entity if it meets the size limits in that financial year.

In any subsequent year, it will qualify on what is sometimes called the two-year rolling basis. This requires the company to meet the size limits for two consecutive years to qualify as a micro-entity. If the company fails to meet the size limits for two consecutive years, it will not qualify as a micro-entity in the second year.

Individual company – size criteria

The size limits are met for a financial year if two out of the three of the following limits are met (CA 2006 s384A):

The turnover limit is adjusted proportionately if the financial year is longer or shorter than twelve months.

Balance sheet total means the aggregate of the amounts shown as assets in the company's balance sheet.