EU gives green light to micro-business exemption from accounting regulations

European Union authorities have agreed a new directive that allows member states to exempt very small companies from mainstream accounting and financial reporting obligations.

The reforms, confirmed by the EU's financial and economic affairs council on Tuesday, are part of Europe-wide efforts to cut the administrative burdens on the smallest companies. They enshrine a new category of "micro company" and enact proposals put forward in March to allow them to file accounts based on simplified profit and loss accounts and balance sheets. The UK government enthusiastically embraced the European proposals as part of its deregulation drive for small business.

A recent Department for Business, Innovation and Skills (BIS) consultation document on company law reforms said the UK will look to implement the changes "as soon as possible" following detailed consultation. That makes it an odds-on cert to feature in announcements around the Budget on 21 March, potentially alongside further reform proposals to increase the audit thresholds for mid-size companies and other ideas put forward via the Red Tape Challenge focus on company law.

If and when the EU directive is enacted in the UK, companies will be allowed to apply the simplified reporting regime if they stay below two of the following thresholds:

• balance sheet total of €350 000
• Net turnover of €700 000; and
• average of 10 employees during the financial year.

The BIS 'Simpler Reporting for the Smallest Businesses' document suggested that the new look reporting package for these firms would include:

• A simplified, cash-based trading statement to replace the profit and loss account
• A statement of position
• A simplified annual return.

Taking account of the latest EU thresholds (50% higher than when the proposals were aired last year), the BIS estimates that around 1.5m micro-enterprises will be excused the need to publish full annual accounts when the reforms are enacted.

Dr Nigel Sleigh-Johnson, head of the ICAEW's Financial Reporting Faculty gave the new directive a cautious welcome. "The majority of  micro-entities do not trade across national borders, so it makes sense to allow individual member states to decide how they report, allowing them to closer align accounting rules with national laws and tax systems," he said.

"Reducing the regulatory burden on these businesses where possible is something we strongly support.

"It is, however, paramount that any potential changes to the UK reporting requirements for our smallest businesses do not reduce access to reliable financial information or send misleading signals about the importance of sound financial management."