What is FRS 105 and How Does it Affect Micro Entities?

FRS 105 is the Financial Reporting Standard that applies to the smallest UK companies, those qualifying as micro entities. If your business has a turnover under £1 million, assets under £500,000, and 10 or fewer employees, FRS 105 allows you to prepare simplified accounts that are easier to manage and less time-consuming. Instead of producing detailed financial statements, you only need a basic balance sheet and profit and loss account. This means less paperwork, lower accounting costs, and fewer headaches when it comes to your year-end filing. For business owners who aren't accountants, understanding FRS 105 can feel overwhelming. But once you know the basics, it becomes clear that this accounting standard was designed with small business owners in mind, to make compliance simpler, not harder.

What is FRS 105?

FRS 105 stands for Financial Reporting Standard 105, and it's the official accounting standard that micro entities can use when preparing their annual accounts. It was introduced by the Financial Reporting Council (FRC) to give the smallest companies a simplified reporting framework. Think of it this way: larger companies need detailed financial reports because they have investors, shareholders, and complex operations. But if you're running a small limited company, maybe it's just you and a colleague, or a side business, you don't need all that detail. FRS 105 recognises this and strips away the unnecessary requirements. The standard is based on FRS 102 (the broader UK accounting standard), but it's been simplified. You won't need to deal with complicated accounting concepts like deferred tax or fair value measurements. Instead, you keep things straightforward, recording your assets at cost and preparing minimal notes for your accounts.

What is a micro-entity for FRS 105?

To use FRS 105, your company must qualify as a micro entity. The Companies Act 2006 sets out specific criteria, and your business needs to meet at least two of the following three conditions:

1. Annual turnover of £1 million or less

This is your total revenue for the year. If you're earning more than £1 million, you've outgrown the micro entity category.

2. Balance sheet total of £500,000 or less

This refers to the total assets shown on your balance sheet. It includes everything your company owns, such as cash, equipment, property, and other assets.

3. 10 or fewer employees on average

This is calculated as an average over the financial year. If you have occasional spikes above 10 employees but average below that number, you may still qualify. Important to note: these thresholds increased in April 2025. Previously, the limits were £632,000 for turnover and £316,000 for assets. The new, higher thresholds mean more businesses can now benefit from FRS 105. After your first financial year, you need to meet the qualifying conditions for two consecutive years to be classified as a micro entity. Similarly, if you exceed the thresholds, you must exceed them for two consecutive years before you stop being a micro entity.

Who can't use FRS 105?

Not every small company can use FRS 105, even if it meets the size criteria. Your company is excluded if it:

• Is a public limited company (PLC)
• Is a financial services company (like insurance or banking)
• Prepares group accounts (if it's a parent company)
• Is part of a group that prepares consolidated accounts

If any of these apply to you, you'll need to use FRS 102 instead, even if your company is small.

What is the financial reporting standard applicable to the micro-entities regime?

The financial reporting standard applicable to the micro-entities regime is FRS 105. However, it's important to understand that using FRS 105 is optional, not mandatory. If you qualify as a micro entity, you have two choices:

1. Use FRS 105 and prepare simplified micro entity accounts

This gives you the simplest possible reporting format. You'll prepare a basic balance sheet and profit and loss account with minimal notes. It's ideal if you want to save time and reduce costs.

2. Use FRS 102 Section 1A and prepare small company accounts

This is more detailed than FRS 105 but still simpler than full accounts. You might choose this if you want to provide more information to lenders, investors, or other stakeholders. Most micro entities choose FRS 105 because it's the easiest option. But if your company is growing quickly or you need more detailed financial information for business reasons, FRS 102 Section 1A might be a better fit.

How does FRS 105 affect your accounts?

Using FRS 105 significantly simplifies your year-end accounts. Here's what you need to prepare: Balance Sheet This shows your company's assets, liabilities, and equity at the end of the financial year. Under FRS 105, the balance sheet format is simplified, and you only need to include basic information. Profit and Loss Account This summarises your income and expenses for the year. FRS 105 allows you to present this in a simplified format without extensive breakdowns. Minimal Notes You only need to disclose certain minimum accounting items, such as details about directors' transactions. Unlike larger companies, you don't need to prepare detailed accounting policies or extensive explanatory notes. What you don't need to prepare:

• A directors' report (this requirement was removed for micro entities)
• A cash flow statement
• Detailed accounting policy notes
• Extensive disclosures about financial instruments or deferred tax

This stripped-down approach saves considerable time and makes it easier for non-accountants to understand what's required.

What you file at Companies House

When filing your accounts at Companies House, you have the option to file just your balance sheet and the footnotes (without the profit and loss account). This means your profit figures remain private and aren't available on the public record. However, you still need to file your full accounts (including the profit and loss) with HMRC as part of your Corporation Tax return. Note: The government had proposed requiring micro entities to file profit and loss accounts publicly, but this proposal was dropped in 2025 to reduce regulatory burdens on small businesses. For now, you can still keep your profit figures private if you choose.

Do micro accounts need an accountant's report?

No, micro entity accounts prepared under FRS 105 do not require an accountant's report or an audit. This is one of the key benefits of the micro entity regime. Micro entities automatically qualify for audit exemption, provided they meet the qualifying criteria. This means:

• You don't need to hire an auditor to review your accounts
• Your directors simply sign the balance sheet to confirm the accounts are correct
• No formal accountant's report is required for filing purposes

That said, while an accountant's report isn't legally required, many business owners still choose to work with an accountant to prepare their FRS 105 accounts. Why? Because even simplified accounts need to be accurate and compliant with Companies House and HMRC requirements. An experienced accountant can:

• Ensure your accounts are prepared correctly under FRS 105
• File your accounts on time to avoid penalties
• Prepare your Corporation Tax return (CT600)
• Advise on tax planning and business strategy

So while you're not legally required to have an accountant, most micro entities find it worthwhile to get professional help, especially if you're not confident handling accounting yourself.

What are the benefits of FRS105?

FRS 105 offers several practical benefits for small business owners, especially those who aren't accounting experts. Here's why so many micro entities choose this standard:

1. Simplified Reporting

You only need to prepare a basic balance sheet and profit and loss account. No cash flow statements, no directors' reports, and minimal notes. This makes the whole process much less daunting.

2. Lower Accounting Costs

Because the accounts are simpler, they take less time to prepare. This usually means lower accountancy fees. If you're on a tight budget, this can make a real difference.

3. No Audit Required

Micro entities are exempt from statutory audits. This saves you money and removes a significant compliance burden.

4. Privacy

You can choose not to file your profit and loss account at Companies House, keeping your profit figures private. Only your balance sheet will be on the public record.

5. Less Complex Accounting

FRS 105 removes complicated accounting treatments. For example, you don't need to calculate deferred tax or use fair value measurements. Assets are simply recorded at cost less depreciation.

6. Easier to Understand

If you're not an accountant, FRS 105 accounts are much easier to read and understand. You can see your company's financial position without wading through pages of technical jargon.

7. Time Savings

Preparing FRS 105 accounts takes less time than full accounts. This means you can focus on running your business rather than worrying about complex accounting requirements.

Are there any downsides?

While FRS 105 works well for most micro entities, there are a few situations where it might not be the best choice:

• If you're seeking investment or bank loans, lenders may want more detailed financial information than FRS 105 provides
• If your company is growing rapidly, you might outgrow FRS 105 quickly and need to switch to FRS 102
• Some accounting options aren't available under FRS 105 (like revaluing assets)

In these cases, you might be better off using FRS 102 Section 1A (small company accounts) from the start, even if you qualify as a micro entity.

Do you need to file CT600 with FRS 105 accounts?

Yes. Regardless of whether you use FRS 105 or not, every UK limited company must file a Corporation Tax return (CT600) with HMRC. This is separate from your Companies House filing. Your CT600 includes:

• Your full statutory accounts (including the profit and loss account)
• Corporation Tax computations
• Details of any adjustments to your profit for tax purposes

Even though your Companies House filing might be simplified, HMRC still needs to see your complete financial picture to calculate your Corporation Tax liability. Filing deadlines:

• Companies House: 9 months after your accounting period ends (21 months for your first accounts)
• HMRC: 12 months after your accounting period ends

Your Corporation Tax payment is due 9 months and 1 day after your accounting period ends, so most accountants will prepare and file everything before this deadline.

Should you switch from FRS 105 to FRS 102?

If your business is growing, you might be wondering whether to stick with FRS 105 or switch to FRS 102. Here are some situations where switching makes sense:

• You're seeking bank funding or investment, and lenders want more detailed accounts
• You're approaching the micro entity thresholds and expect to exceed them soon
• You need to use specific accounting treatments that aren't allowed under FRS 105 (like asset revaluations)
• You want your accounts to provide more information for management purposes

If you're happy with simple accounts and don't need the extra detail, there's no reason to switch. Many micro entities stay with FRS 105 for years without any issues.

Common mistakes to avoid with FRS 105

Even though FRS 105 is simpler than other accounting standards, there are still some common pitfalls to watch out for:

1. Not checking if you qualify

Make sure your company actually meets the micro entity criteria. If you're close to the thresholds or your business is growing, double-check that you still qualify.

2. Missing the balance sheet statement

All FRS 105 accounts must include a statement on the balance sheet confirming that the accounts have been prepared under the provisions available to micro entities. Don't forget this requirement.

3. Not filing on time

Late filing penalties can add up quickly. Make sure you know your deadlines and file your accounts with both Companies House and HMRC on time.

4. Trying to use accounting treatments not allowed under FRS 105

Remember, FRS 105 doesn't allow fair value accounting or asset revaluations. Everything must be recorded at historical cost.

5. Not keeping proper records

Even with simplified accounts, you still need to maintain proper bookkeeping records throughout the year. Your accounts should be based on accurate, up-to-date financial information.

How can we help with your FRS 105 accounts

At Micro Entity Accounts, we specialise in preparing and filing FRS 105 accounts for small UK businesses. We understand that most business owners don't have an accounting background, so we make the whole process as straightforward as possible. Our service includes:

• Preparation of your FRS 105 accounts
• Filing with Companies House
• Corporation Tax return (CT600) preparation and HMRC submission
• Clear explanations of your accounts
• Deadline monitoring so you never miss a filing date

We offer transparent, fixed-fee pricing with no hidden costs. Whether you're a startup, a side hustle, or an established micro entity, we're here to take the stress out of your year-end accounts.

Final thoughts

FRS 105 exists to make life easier for the smallest UK companies. If your business qualifies as a micro entity, it offers a straightforward, cost-effective way to meet your statutory accounting requirements without unnecessary complexity. The key is to make sure you understand the qualifying criteria, know what's required, and file your accounts on time. And if accounting isn't your strong suit, working with a specialist accountant can save you time, money, and peace of mind. Whether you're just starting out or you've been trading for years, FRS 105 gives you the flexibility to focus on growing your business, not getting lost in accounting paperwork.