Short answer
You are an SME if you have fewer than 500 staff, and either turnover of €100 million or less or a balance sheet total of €86 million or less. Those limits are specific to R&D relief and are roughly double the company law ones. The difficulty is not the figures but what you measure: the test is applied to your company aggregated with the whole of every enterprise linked to it and a proportionate share of every partner enterprise, not to your company on its own.
Applies to
- Schemes
- Merged scheme · ERIS · Legacy SME · Legacy RDEC
- Periods
- 1 August 2008 onwards
- Claimants
- SME · Group company
Why it matters now that size no longer selects the scheme
For accounting periods beginning before 1 April 2024, the SME test decided which scheme you claimed under, and so it decided the value of the claim. For periods beginning on or after that date it does not: everyone claims the merged R&D expenditure credit.
It still matters, in two places. Enhanced R&D intensive support is open only to SMEs, and it is worth materially more than the merged scheme to the companies that qualify. And every open pre-2024 year — amendments, enquiries and late claims — is still decided on the old basis. So the test is doing less work than it used to and is no less worth getting right.
The three checks
| Check | Limit |
|---|---|
| Staff headcount | Fewer than 500 |
| Annual turnover | €100 million or less |
| Balance sheet total | €86 million or less |
You are an SME if you are under the headcount limit and under either the turnover limit or the balance sheet limit. The headcount test is not optional — fail it and you are out however small the financial figures are. The two financial tests are alternatives: failing both takes you out, failing one does not.
These limits have applied to expenditure incurred on or after 1 August 2008. Before that the limits were those of the Commission Recommendation itself: fewer than 250 staff, turnover of €50 million or less, or a balance sheet total of €43 million or less. The rate and threshold timeline carries both sets, together with the related percentages used below.
The financial limits are set in euros, so a company reporting in sterling has to convert. Record the rate you used and the date you used it, because this is asked for in enquiries.
Note that the R&D limits are roughly double the ones used for the general company law definition of a small or medium-sized company. A company that is medium-sized or even large for accounts purposes can still be an SME for R&D. Do not take the answer from the accounts disclosure.
Whose figures go into the test
This is where the difficulty is, and it is where most of the errors are.
Your own enterprise. Start with your own headcount, turnover and balance sheet total, from the accounts for the period.
Linked enterprises: add 100%. Two enterprises are linked where one controls the other, or has the capacity to control it — more than half the voting rights, the right to appoint or remove most of the board, a contractual right of dominant influence, or control of a voting majority under a shareholders’ agreement. Add the whole of a linked enterprise’s figures. Where consolidated accounts exist, they are normally the right source.
Individuals can create a link too. Where the same person or group of people controls two enterprises, those enterprises are linked — but only if they operate in the same market or in adjacent markets, meaning markets directly upstream or downstream of each other. A founder who controls an unrelated business in a different sector does not link the two.
Partner enterprises: add a share. An enterprise that is not linked to you but holds 25% or more of your capital or voting rights, or in which you hold 25% or more, is a partner enterprise. You bring in its figures in proportion to the holding — the greater of the capital and voting rights percentage. If the partner enterprise has linked enterprises of its own, consolidate those into its figures first, then apply the percentage.
The investor exceptions. Certain investors can hold 25% or more without becoming partner enterprises, provided they hold under 50% and are not otherwise linked to you: public investment corporations and venture capital companies, business angels below a stated aggregate investment limit, universities and non-profit research centres, institutional investors including regional development funds, and small autonomous local authorities. This is why a venture-backed company with a large institutional holder is often still an SME. It is also why the identity of every shareholder above 25% has to be established rather than assumed.
The two-year rule, and when it does not apply
Crossing a limit does not change your status straight away. You have to be over for two consecutive years before you cease to be an SME, and the same smoothing works in the other direction for a large company coming down.
The exception matters more than the rule. Where you exceed the limits only because of the figures brought in from a partner or linked enterprise — most obviously where you have been acquired — the two-year smoothing does not apply and status changes immediately. A company bought by a large group is out of the SME definition from the acquisition, not two years later.
Two reliefs from the cliff edge, for periods from 1 April 2023
For accounting periods beginning on or after 1 April 2023 there are two provisions that keep a company inside the SME definition where the ordinary aggregation would push it out:
- A related enterprise grows. If you and a related enterprise both started the period as SMEs, and the only reason you are not an SME at the end of it is that the related enterprise grew past a limit during the period, both of you are treated as SMEs for that period.
- You are bought by an SME. If you were outside the SME definition only because a partner or linked enterprise exceeded a limit, and during the period an SME acquires control of you, you are treated as an SME for that period.
Both are period-by-period reliefs, not permanent status.
Worked example
Illustrative. A UK development company with 300 staff and no subsidiaries. Two shareholdings matter: a trading group holds 40% of its shares, and a venture capital fund holds 30%.
| Step | Effect on the headcount figure |
|---|---|
| Own staff | 300 |
| Trading group at 40% — a partner enterprise, 900 staff across its own consolidated group | - 360 |
| VC fund at 30% — within the investor exception, under 50%, not otherwise linked | - 0 |
| Total for the test | 660 |
The company employs 300 people and would describe itself as an SME without hesitation. On the test it is at 660, which is over the 500 limit, and it therefore fails on headcount alone however small its turnover and balance sheet are. It is not an SME for R&D, so ERIS is closed to it — and for any open pre-2024 year it was an RDEC claimant, not an SME claimant.
Change one fact. If the trading group’s holding were 20% rather than 40%, it would be neither linked nor a partner, nothing would be added, and the company would be an SME on 300 staff.
Where claims go wrong
- Testing the claimant company alone. This is the most expensive structural error in the market. It is not caught by anything in the return, so it surfaces two years later as an assessment on a claim that has already been paid and spent.
- Reading SME status off the statutory accounts. The R&D limits are about double the company law ones, and the accounts disclosure answers a different question. A company disclosed as medium-sized under the Companies Act can be well inside the 500 and €100 million limits.
- Counting a venture capital holding as a partner enterprise. It usually is not, and treating it as one wrongly disqualifies companies that could have claimed ERIS.
- Applying the two-year rule after an acquisition. The smoothing does not apply where the breach comes from aggregation. A company acquired mid-year by a large group is out from that point.
- Testing once and carrying it forward. Status is tested for each accounting period. Funding rounds, secondary sales and reorganisations all move it, and the ERIS decision depends on it every year.
- Failing both financial limits and passing on headcount. You need the headcount limit and one financial limit. Passing headcount alone is not enough.
John Mapother
Founder & Director
Last reviewed 30 August 2026