What is an SME for R&D tax purposes?

Why SME status still matters

For accounting periods beginning on or after 1 April 2024, the old SME and RDEC schemes were replaced by the merged R&D tax relief scheme, with Enhanced R&D Intensive Support (ERIS) available for some R&D-intensive loss-making SMEs. This means SME status is no longer used to decide between “SME scheme” and “RDEC” for new periods, but it remains relevant because you must meet the SME definition to be eligible for ERIS.

The SME definition

HMRC’s SME definition for R&D purposes is based on the EU SME recommendation framework. In simple terms, you need:

• Fewer than 500 staff, and
• Either turnover not more than €100 million or gross assets not more than €86 million
  

If you have fewer than 500 staff but exceed both financial thresholds, you are treated as large for these purposes.  

The thresholds are in euros because the underlying definition originated from EU rules, so UK companies typically convert their figures to euros using a reasonable approach and apply it consistently.  

How to count “500 staff” in practice

Headcount is measured on a full time equivalent basis. That means part-time staff are pro-rated based on their working time. Directors on payroll are included. Subcontractors do not count as employees for the headcount test, but you should be careful with secondees or deemed employees where the reality is that they are effectively part of your workforce.  

HMRC’s manual also notes that certain categories can be excluded from the headcount in specific circumstances, such as some apprentices and students on vocational training.  

Which financial figures to use

Turnover and gross assets are usually taken from your annual accounts for the relevant period, with sensible adjustments where accounts cover a period shorter than 12 months. The important point is to use figures that match the period you are testing and apply the same basis consistently.  

Partner and linked enterprises

Your SME status is not always determined by your company alone. HMRC requires you to consider “partner” and “linked” enterprises and, where relevant, aggregate figures.

Partner enterprises

A partner enterprise relationship generally arises where one enterprise holds 25% or more (but not more than 50%) of the capital or voting rights in another, without being “linked”. In these cases, you include a proportionate share of the partner’s staff, turnover and assets in your SME tests, based on the ownership percentage.  

Linked enterprises

Linked enterprises are closer to full control. HMRC’s manual describes links such as holding a majority of voting rights, the right to appoint or remove a majority of the board, or the ability to exert dominant influence. Where enterprises are linked, you generally aggregate the figures on a full basis before testing the thresholds.  

Specified investment enterprises

Certain investors can be ignored for the 25% partner test in some situations, provided their holding is not more than 50%. HMRC discusses this under “specified investment enterprises”, which can include certain venture capital companies, universities, non-profit research centres, and institutional investors, subject to conditions.  

How this links to ERIS eligibility

If you are exploring ERIS, you need to show you meet the SME definition, plus the ERIS conditions on R&D intensity and loss-making status. ERIS is designed as a more limited continuation of the old SME route, with modifications, so getting the SME test right remains a key early step.