When can’t property investors use Micro Entity Accounts? Reply

Most property investors love Micro Entity Accounts:

  1. No property revaluation – property is shown at historic cost (Mortgage lenders are not affected by this as they always require a property valuation for lending purposes)
  2. Minimal disclosure and no notes
  3. No deferred tax
  4. Most property investors fit within the size criteria
  5. No Directors Report

A company meets the qualifying conditions for a micro-entity if it meets at least two out of three of the following thresholds:

  • Turnover: Not more than £632,000
  • Balance sheet total: Not more than £316,000
  • Average number of employees: Not more than 10

The FRC (Financial Reporting Council) aren’t big fans of Micro Entity reporting due to concerns about the minimal accounts giving a ‘true and fair’ view but the whole reason for FRS105 and Micro Entity Accounts was to simplify reporting for SME’s and they definitely do that.

FRS105 allows Investment Property – see FRS105 Section 12

There are certain companies which can not qualify as micro entities regardless of their size

  • Members of a group preparing group accounts.
  • Investment undertakings
  • Financial holdings undertakings
  • Credit institutions
  • Insurance undertakings
  • Charities

Investment Undertakings

Article 2 of the Accounting Directive – 2013/34/EU as follows:

2(13) ‧associated undertaking‧ means an undertaking in which another undertaking has a participating interest, and over whose operating and financial policies that other undertaking exercises significant influence. An undertaking is presumed to exercise a significant influence over another undertaking where it has 20 % or more of the shareholders’ or members’ voting rights in that other undertaking;

2(14)‧investment undertakings‧ means: a)undertakings the sole object of which is to invest their funds in various securities, real property and other assets, with the sole aim of spreading investment risks and giving their shareholders the benefit of the results of the management of their assets, (b) undertakings associated with investment undertakings with fixed capital, if the sole object of those associated undertakings is to acquire fully paid shares issued by those investment undertakings without prejudice to point (h) of Article 22(1) of Directive 2012/30/EU;

2(15) ‧financial holding undertakings‧ means undertakings the sole object of which is to acquire holdings in other undertakings and to manage such holdings and turn them to profit, without involving themselves directly or indirectly in the management of those undertakings, without prejudice to their rights as shareholders

Is this a problem for Property Investment Companies?

No, most property investment companies are not Investment Undertakings!

I know that sounds odd as it is a property investment and the investment makes it sound like an Investment Undertaking so lets look at this in more detail

  1. Are there multiple shareholders? generally not its often owned by a husband and wife (or civil partners) – if you have lots of passive investors that could make it an Investment Undertaking, we would need to look at the primary purpose of why the passive investors invested
  2. Are there shareholders with no involvement in the operation or management of the business? if their primary purpose was investment then it could be an Investment Undertaking – generally that’s not the case because normally property is funded by loans not shares (if you do use external investors you could fall within FCA regulations)
  3. Are there multiple properties in the same company? This could be seen as spreading the risk which might be an Investment Undertaking but most portfolio investors are seen by HMRC and others as running a property business and they are active in running it, many new investors have multiple companies with a single property in each Company – its better for lenders (charge on property and debenture over company), its better when you sell GCT is based on the share value (net worth) and the purchaser gets very low SDLT 0.5% and may not need to refinance
  4. Is a small property portfolio a risk management strategy? No, the assets are all of the same class so how can it be a risk management strategy!
  5. What about a company with one property used by a related party or member of a group? there is no management or spreading of risk so its not an Investment Undertaking

steve@bicknells.net

The end of FRSSE here comes FRS102 and FRS105 Reply

junge frau lernt für eine prüfung

The Financial Reporting Council issued amendments (27th July 2015) to the UK accounting standards, ushering in a new financial reporting framework for small and micro-entities. The changes are mainly as a result of the new EU Accounting Directive.

The key changes are:

  • FRSSE has been withdrawn
  • FRS102 – A new section has been added to FRS102 with disclosure requirements for Small Companies
  • FRS105 will be the new reporting standard for Micro-Entities

The changes come into effect from 1st January 2016.

This is a big change, are you ready for it?

steve@bicknells.net

Why property investors like Micro Entity Accounts 7

Micro Entity

A company meets the qualifying conditions for a micro-entity if it meets at least two out of three of the following thresholds:

  • Turnover: Not more than £632,000
  • Balance sheet total: Not more than £316,000
  • Average number of employees: Not more than 10

There are approximately 1.56 million micro-entities in the UK, as compared with a total number of companies on the UK register of approximately 2.8 million.

Most property businesses will have less than 10 employees and less than £632,000 turnover.

If you are a property investor filing Abbreviated or Full Accounts you have to report property values at their fair value, which means you tell everyone what you think the property is worth. You may not want to do that, especially if you are planning to sell as it tells the potential buyer what you think its worth and that might be an issue in negotiations.

Under the Micro Entity regime you aren’t allowed to use fair value and have to use Historical Cost. Which most Property Investors will prefer.

No notes are required with Micro Entity Accounts and any advances or financial commitments are shown at the foot of the Balance Sheet, often this is simply the value of the Mortgage outstanding.

steve@bicknells.net

Micro Entity Accounts – who can file them? 1

Micro Entity

Micro-entity accounts are a new type of accounts that can be submitted to Companies House from 1 December 2013. They will provide the smallest companies with the opportunity to prepare and publish simplified financial statements (profit & loss account; and balance sheet) if they wish.

A micro-entity is defined as meeting two of the following criteria:

  • Balance sheet total: £316,000
  • Net turnover: £632,000
  • Average number of employees during the financial year: 10 (or fewer)

Micro Entities are exempt from filing their profit and loss with Companies House.

Business Minister Jo Swinson said:

“Thriving micro-businesses are a vital ingredient for a stronger economy. However, because of their size they don’t always have dedicated finance teams behind them. We therefore need to make sure that they can focus on growing their business – rather than completing unnecessarily detailed paperwork.”

There are approximately 1.56 million micro-entities in the UK, as compared with a total number of companies on the UK register of approximately 2.8 million.

I don’t think this is going to help much? Micro Businesses still need to file corporation tax returns, deal with PAYE, RTI, VAT, minimum wage, Auto Enrolment Pensions, and a wide range of other requirements

steve@bicknells.net