Micro-Entity Accounts (FRS 105): Simplified Reporting for Small Companies

Most very small UK limited companies have the option of reporting under FRS 105, the micro-entity standard, rather than FRS 102 Section 1A or the full FRS 102 framework. FRS 105 is the lightest reporting regime in the UK suite. It removes most of the discretionary measurement areas, drops the cash flow statement, narrows the disclosure requirements to a short list and allows a heavily abridged set of accounts to be filed at Companies House. For owner-managed companies that meet the size criteria and do not need detailed accounts for an external audience, the savings in time and accountancy fees are material.

This article sits within the corporation tax and year-end accounts hub. It pairs with the director's loan account and section 455 spoke, because the DLA is still disclosable under FRS 105, and with the loss carry-forward and carry-back spoke, because FRS 105 removes the deferred-tax accounting that affects how losses appear on the balance sheet. Read this one for whether FRS 105 fits, what it changes, and where it is a poor choice even where it is allowed.

The micro-entity size tests

A company can choose FRS 105 if it meets at least two of three size limits for two consecutive financial years. The limits are turnover not more than £1,000,000, balance sheet total not more than £500,000, and average number of employees not more than ten. The two-year rule means a company that crosses one limit once can usually stay in FRS 105, but a company that crosses two limits for two years must move up to FRS 102 Section 1A or full FRS 102.

Some entities are excluded from FRS 105 regardless of size. These include public companies, financial institutions, insurance undertakings, charities and any company that is part of a group required to prepare consolidated accounts. A parent that does not have to consolidate, and is otherwise within the size limits, can use FRS 105 for its own individual accounts.

Format of FRS 105 accounts

FRS 105 accounts have a heavily simplified format. The profit and loss account is reduced to a short list of statutory line items rather than the more detailed format of FRS 102. The balance sheet is similarly compressed. There is no statement of cash flows, no statement of changes in equity beyond the basic reconciliation built into the balance sheet, and no separate notes covering most of the discretionary disclosure topics that apply under FRS 102. The whole document, including directors' report where required and accounting policies, is often a small handful of pages.

• Statutory profit and loss in a prescribed short format.
• Balance sheet in a prescribed short format.
• A brief note disclosing advances and credits to directors, including section 455 territory.
• A short statement of accounting policies, where these differ from the defaults set by the standard.
• A directors' report only where the company is required to prepare one.

No fair-value option for investment property

One of the most significant simplifications in FRS 105 is the removal of the fair-value option. Under FRS 102, investment property is generally measured at fair value with gains and losses recognised through profit and loss. Under FRS 105, investment property is measured at cost less depreciation and impairment, in the same way as any other tangible fixed asset. For a property-owning company this can be a major change in the balance sheet picture and in the reported profit each year. Companies with significant investment property holdings often prefer FRS 102 Section 1A so they can keep the fair-value model and show the market value in the accounts.

No deferred tax

FRS 105 does not require deferred tax accounting. Under FRS 102, timing differences between the accounting and tax treatment of items, such as accelerated capital allowances on plant and machinery, are recognised as a deferred tax balance on the balance sheet. Under FRS 105, only current tax is recognised. The simplification removes a working that often takes more time than it adds value for a very small company, but it also means the accounts do not flag up future tax cash flows that an analyst would otherwise see.

For a company with trading losses carried forward, the absence of deferred tax matters in practice. Under FRS 102 the company can recognise a deferred tax asset for the future tax saving from those losses, where their use is probable. Under FRS 105 no such asset is shown, and the losses sit only in the tax computation. The detailed mechanics of the underlying loss reliefs are covered in the loss carry-forward and carry-back spoke; FRS 105 simply hides the resulting deferred tax balance from the balance sheet.

Filing the abridged accounts at Companies House

Micro-entity accounts filed at Companies House can be even shorter than the full set prepared for the members. The filed version can omit the profit and loss account entirely, leaving only the balance sheet and a small number of notes on the public record. The directors' report is also typically omitted on filing. For an owner-managed company that prefers to keep turnover and profit confidential from competitors and casual searchers, FRS 105 plus the abridged filing option is the smallest public footprint available.

What still has to be disclosed publicly

Even on the abridged Companies House filing, the balance sheet has to show the statutory subtotals, advances and credits to directors have to be disclosed, and any guarantees and other financial commitments have to appear. The director's loan account therefore shows up on the filed accounts even if everything else has been removed. Owners sometimes assume FRS 105 hides the DLA from view; it does not.

When FRS 105 is not the right choice

FRS 105 is allowed by size but it is not always the best framework. Companies seeking external investment, applying for finance with a high street bank, or preparing for sale typically benefit from the richer disclosure of FRS 102 Section 1A or full FRS 102. The lack of fair-value accounting for investment property, the absence of deferred tax and the abridged disclosure can leave a reader struggling to form a view of the business. Some lenders explicitly ask for accounts under a richer standard before underwriting a facility, regardless of the company's size.

• Companies with significant investment property who want to show market value rather than cost.
• Companies expecting to seek external investment within the next two to three years.
• Companies whose principal lender requires FRS 102 disclosure as a condition of borrowing.
• Companies with material trading losses where a deferred tax asset would be useful to recognise.
• Companies with complex group structures where consolidated reporting is in prospect.

Switching between FRS 105 and FRS 102

A company can move up from FRS 105 to FRS 102 Section 1A at any time. It must do so when it no longer meets the micro-entity criteria for two consecutive years. Moving down from FRS 102 to FRS 105 is also possible where the size criteria are met. Either move requires a transition exercise covering the prior year comparatives, restating the opening balance sheet, and explaining the change. The transition is a routine piece of work for an accountant but it adds cost in the first year of the new framework, so the choice should be made deliberately rather than drifted into.

Tax treatment is unchanged

A frequent misunderstanding is that switching to FRS 105 changes the tax position. It does not. The CT600 corporation tax return is built from the tax-adjusted profit, which starts with accounting profit and then applies the corporation tax rules: disallowed items added back, capital allowances substituted for depreciation, marginal relief calculated where profits fall in the band. Whether the accounting profit was produced under FRS 105, FRS 102 Section 1A or full FRS 102, the underlying corporation tax bill follows the same tax rules. The framework choice changes the picture in the accounts; it does not change the tax payable.

Practical implications for the owner

1. Review the size tests at the start of each year and confirm continued eligibility.
2. Decide whether the savings in disclosure justify the loss of the fair-value option and the deferred tax recognition.
3. If keeping turnover off the public record matters, use the abridged Companies House filing option.
4. Continue to keep full underlying records, including DLA detail and capital allowance schedules.
5. Plan any move up to FRS 102 Section 1A at least one year ahead, so prior-year comparatives can be prepared cleanly.

Common errors with FRS 105

• Adopting FRS 105 in a year where the size criteria are no longer met for two consecutive years.
• Continuing to report investment property at fair value, which is not allowed under FRS 105.
• Forgetting to disclose advances and credits to directors, including a section 455-relevant DLA balance.
• Filing abridged accounts without preparing the full set for the members.
• Assuming FRS 105 changes the corporation tax bill, when it only changes the accounts framework.

Frequently asked questions

Does FRS 105 reduce my tax bill?

No. FRS 105 changes how the accounts are prepared and presented; it does not change the corporation tax payable. The CT600 starts from the accounting profit, applies the corporation tax rules and produces the same tax figure regardless of framework, provided the underlying transactions are recognised consistently.

Can a property company use FRS 105?

A property company can use FRS 105 if it meets the size tests, but it cannot then carry investment property at fair value. Many property companies prefer FRS 102 Section 1A so that the balance sheet reflects market value, which is often the most relevant figure for lenders and investors.

Can I file FRS 105 accounts without a profit and loss?

Yes. Micro-entity accounts filed at Companies House can omit the profit and loss account entirely. The full set, including the profit and loss, must still be prepared for the members, but the public filing can be limited to the balance sheet and a small number of notes.