What Is An SME For Tax Purposes?

Share on facebook
Share on google
Share on twitter
Share on linkedin
Share on email

Spread the knowledge

It is important to recognise an SME for R&D tax purposes.

R&D tax relief is more generous for SMEs as they can get approximately 25% of their costs, whereas companies under the RDEC rules can only get funding of approximately 10.5% of qualifying costs. 

Just as important, by claiming under an incorrect scheme, HMRC can penalise you.

For most companies, it will be easy to recognise that they fall into the SME scheme.

On today’s show, I’ll give you an overview of what an SME is in the world of R&D tax.

Introduction 

It is important to recognise an SME for R&D tax purposes.

R&D tax relief is more generous for SMEs as they can get approximately 25% of their costs, whereas companies under the RDEC rules can only get funding of approximately 10.5% of qualifying costs. 

Just as important, by claiming under an incorrect scheme, HMRC can penalise you.

For most companies, it will be easy to recognise that they fall into the SME scheme.

On today’s show, I’ll give you an overview of what an SME is in the world of R&D tax.

SME Definition 

Now we have established why understanding the two schemes is important, let’s look into the definition of what qualifies as an SME. 

An SME has less than 500 employees with a turnover less than €100 million or a balance sheet (gross assets) less than €86 million. 

We will refer to the employee count, turnover and gross assets as the accounting data. 

What is excluded from that count is:

  • employees on apprenticeships or on some other vocational student contract. 
  • employees on maternity or paternity leave. 

The €100 million turnover does exclude VAT. 

The reason the turnover and gross assets is in the currency of the Euro is because the definition of an SME has originated from the European Commission. So when calculating the figures from the balance sheet you need to convert these values from GBP into Euros. 

Example

Company A is making a R&D tax claim. The company employees 450 members of staff and has a turnover of €90 million and a balance sheet of €120 million. 

Within this scenario, we have met the criteria of less than 500 employees with a turnover less than €100 million. Due to this, the company qualifies for an SME scheme. 

Enterprises

The relationship between enterprises may result in aggregating the accounting data between enterprises. This can obviously change a claimant from being treated under the SME scheme to the RDEC scheme.

There are three types of enterprises: autonomous, linked and partner enterprises and we will go through each one separately. 

Autonomous enterprises

An autonomous enterprise has less than 25% of the capital or voting rights (direct or indirect) in another enterprise. An autonomous enterprise only uses its own accounting data to determine whether it is an SME. 

As an example, Company A is the claimant company and it controls Company B by holding 20% of its shares. 

As Company A has less than 20% of control in Company B, only Company A’s accounting data is used to determine if it is an SME. 

Most companies will be an autonomous enterprise as stand alone companies. 

Partner enterprise

The next enterprise is a partner. 

This is when the claimant company, Company A has between 25% and 50% of control in Company B. Again, this can be the other way round and Company B may have control of Company A.

First, we must establish whether the claimant is an SME. 

Company A has 400 employees with a turnover of €70 million and a balance sheet of €50 million. 

Company B has 150 employees with a turnover of €20 million and a balance sheet of €10 million. 

Within this scenario, we aggregate the accounting data of both companies. 

In this example let’s say Company A owns 30% of company B. 

What we do here is aggregate all of Company A’s accounting data with 30% of Company B’s accounting data, to determine whether Company A qualifies as an SME. 

The accounting data totals 445 employees, €76 million turnover and €53 million of gross assets. 

As you can see, the employees still remain below 500 so it meets the employee criteria and the turnover criteria is below €100 million. Company A is therefore an SME. 

The final point to know regarding partner enterprises is that there are some excepted rules for certain organisations that have more than 25% but less than 50% control in or either controlled by the claimant company. 

These include:

  • Venture Capital Companies 
  • Public Investment Corporations
  • Institutional Investors 
  • Regional Development Funds 
  • Business Angels
  • Universities 
  • Not For Profit Research Centres 
  • Local Authorities 

Linked enterprise 

The final enterprise to cover is linked, which have more than 50% of direct or indirect control. 

Company A is the claimant company and it has more than 50% control than Company B, making them both linked enterprises. 

Let’s show you how this will affect the accounting data. 

Company A has 200 employees, turnover of €90 million and a balance sheet of €70 million. 

Company B has 150 employees, turnover of €15 million and a balance sheet of €10 million. 

With partner entities we took a proportion of the ownership of A and B. 

In this example, Company A owns 70% of Company B. When enterprises are linked, the total accounting data of each enterprise is aggregated. 

The aggregated accounting data will be:

  • number of employees 350
  • turnover €105 million
  • balance sheet €80 million

As the employee count is below 500 and the balance sheet is below €86 million, Company A will be an SME. 

Individuals 

An important issue is that the rules of enterprises extend to individuals.

Lets say Company Z is in a group with A and B and Z owns 100% of both A and B. These are clearly linked enterprises so all the accounting data must be aggregated. 

Under these rules, we also have to look through the ownership of Company Z. 

Let’s say Mr. Smith owns Company Z and Mr Smith outside of the company ownership structure owns a sole trader called Sole Trader T. 

If Sole Trader A is in an adjacent market with the claimant company ie Company A, then Sole Trader T’s accounting data must be aggregated  with the claimant companies. 

An example of an adjacent market is if Company Z created CRMs for accounting professionals and Sole Trader T developed CRMs for recruitment companies,  they are in adjacent markets. 

On the other hand, if Sole Trader T manufactured chemicals, the Company A and Sole Trader T are not in adjacent markets, so you would not include Sole Trader T’s accounting data with Company A’s. 

We hope that this was hopeful, we have covered the basics and we appreciate the questions about R&D tax relief. 

Share on facebook
Share on google
Share on twitter
Share on linkedin
Share on email

Spread the knowledge

Tehsin Khan

Tehsin Khan

Tehsin is an experienced tax professional with 12 years of experience helping companies and individuals save money. He has worked for the most reputable tax firms in the country before setting up GrowthPad. In his spare time, Tehsin contributes to national tax publications and plays the odd game of football.

Linkedin profile
Close Menu