What is an SME for R&D purposes?

An SME is a Small and medium-sized enterprise. This term is often used generally to describe small independent businesses; however, there are specific criteria that a company must meet in order to be officially classified as an SME by the UK Government. These criteria are turnover, balance sheet, and the number of employees.

The Government’s SME definition

In the UK, there are two different SME definitions, which depend upon the purpose of that definition. For normal EU reporting, an SME is a company with fewer than 250 employees and either a turnover of less than €50 million or a balance sheet of less than €43 million.

For the purposes of R&D, however, the criteria are different. An SME for R&D purposes is a company with fewer than 500 employees or a turnover of less than €100 million and a balance sheet of less than €86 million.

The different definitions of SME can be compared below:

SME classification

There are also three SME classifications, which is also dependent on a combination of turnover and balance sheet totals, with the total number of employees.

While these distinctions exist, they are not relevant to a company’s R&D eligibility - each of the below will be treated as an SME for R&D purposes.

For normal EU reporting, the numbers listed in the above table are halved.

Why the SME definition matters for R&D Tax Reliefs

There are currently two separate R&D Tax Relief schemes in the UK. These are SME and RDEC. While each of these schemes provides companies with a generous incentive to invest in innovative projects, there are notable differences between the two.

When submitting an R&D Tax Relief claim, it is very important that you understand which of these schemes you qualify for, because the nature and amount of benefit will vary.

• The SME scheme is worth around 21.5% of qualifying R&D costs*
• The RDEC scheme is slightly less generous and is worth around 20% of qualifying costs**

*For periods up to 31 March 2023 the R&D SME relief is increased to the previous 25% of qualifying R&D costs.

**For periods up to 31 March 2023 RDEC is decreased to 13% (net 10.7%).

Understand your eligibility

Innovative SMEs can benefit enormously from R&D Tax Reliefs and, with several movements from within Whitehall in recent months, this generous relief may not be around forever in the same capacity. The first step is understanding your company’s eligibility. Our free R&D Tax Reliefs Eligibility Checklist is a great starting point. For more tailored advice, please feel free to contact our team.

R&D Tax Reliefs more broadly are set to change. Alterations to the scheme were proposed in December 2022 and, following a period of consultation, the first proposed changes will begin as soon as April 2023.

Read our guide: What is changing in R&D? R&D Draft Guidance from HMRC (Dec 2022)