What’s an SME for R&D Tax Credits?

A lot of people wonder what the definition of SME, for the purpose of R&D Tax Credits, as well as what defines a large company and how being part of a group structure can change your company’s status.

If you are unsure about any of the above, then read on!

R&D Tax Credit SMEs and large companies

HMRC’s criteria for an SME for the purposes of R&D Tax Credits are:

• less than 500 employees, as well as either:

• an annual turnover under €100 million, or

• a balance sheet under €86 million

So if your company falls under any of these criteria, then you will be considered an SME for R&D Tax Credit and if not, you will fall under the large company scheme and claim under RDEC.

Please note:

“This definition of a SME for R&D Relief purposes is not necessarily the same as that used by HMRC in relation to other areas of Corporation Tax or other tax areas such as PAYE, or by other government agencies.

Transitioning from an SME to large company (and vice versa)

But what if your company exceeds one of these SME thresholds during a financial year? There are a couple of different situations where this could happen, and they have different rules.

1) Your company is acquired by another company that is large, or that is part of a group that, when considered together (as in consolidated accounts) is large by HMRC’s definition. This article explains more about linked and partner enterprises so you can determine how these affect your group status.
2) You organically grow to exceed the threshold

For more information about changing your status and when exactly you change from an SME to large company, click here.

How being linked to another company can affect your size classification

One additional 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 as they are linked).

Of course, there’s no exception to the different rule without an exception to the exception to the different rule, 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. If you are still stuck, get in touch and we would be happy to help you work out your company structure.