What’s an SME for tax credits and grants?

A lot of people wonder what the definition of SME, for the purpose of R&D Tax Credits, as well as other purposes. What’s a “Medium Enterprise” for the purpose of TSB grants? Small versus Medium makes a difference in terms of what percentage of expenses you can claim in the Development of Prototype grant.

EU SMEs

So what’s the answer? Well, the TSB Guidance does provide a link (which is broken, but can be fixed) to the EU guidance on company size, which essentially states that:

• Micro companies have under 10 staff, and either under €2m (under £1.75m) of turnover, or under €2m of balance sheet total
• Small companies: under 50 staff, and either under €10m turnover (under £8.78m) or under €10m of balance sheet total
• Medium-sized companies: under 250 staff, under €50m turnover (€43.9m) or under €50m of balance sheet total

Interestingly, another related page on the EC site states the following interesting facts about SMEs:

• More than 99% of all European businesses are SMEs
• Nine out of ten SMEs are micro enterprises
• Hence, “the mainstay of Europe’s economy are micro firms, each providing work for two persons, on average.

R&D Tax Credit SMEs

Shockingly, this is one area where all the different parts of government seem to be in agreement. So in fact, the R&D Tax Credit scheme also uses the same definitions for SMEs. One extra hitch is that HMRC also considers aggregation a factor.

What this means is that an investor who is not an SME owns 25% or more of a company, then the company will probably not be considered an SME (instead, the whole “group” will be considered in aggregate.

Of course, there’s no exception without an exception to the exception, and there are in fact circumstances where a company can be considered to be an SME even though 25% or more of it is owned by a larger company. The question rests on whether the company can be considered “autonomous”. It is considered autonomous and (potentially) an SME in the following circumstances:

• The investor(s) that own 25% or more are public investment corporations or VCs
• The investors are business angels and have not invested more than €1.25m
• The investors are university or non-profit research centres
• The investors are institutional investors, including regional development funds
• The investors are autonomous local authorities with annual budgets of less than €10m and fewer than 5,000 inhabitants

The rules about this thorny topic can be found here. Our advice? If in doubt, ring up an HMRC agent and ask them.