The definition of an SME for R&D purposes is given by s1119 CTA 2009 which simply refers to the definition given in Commission Recommendation (EC) No. 2003/361 – subject to the exception in s1120 CTA 2009 referred to below.
Article 4 of the 2003 Recommendation gives SME’s a “grace period” whereby an SME that becomes large in an accounting period is only treated as becoming large in the second period that it breaches the SME test. Remember that the “employee test” in the Recommendation is the dominant test. If the company fails the employee test then is not an SME (but can utilise the grace period rule). If a company meets the employee test, it must then pass either the turnover or balance sheet test to be an SME. HMRC’s introduction to these principles is at CIRD91100.
The grace period mentioned above equally applies to large companies that become SME’s. Such companies remain large until they are SME’s in the second successive period that it becomes an SME. The tests are always carried out at the end of the accounting period as per the EC Recommendation.
The exception to the grace period is in s1120 CTA 2009 and states that if a company joins a large group, the grace period is ignored and the previous SME becomes a large company in the period in which it becomes a member of the group. In other words only organic growth of the company itself permits use of the grace period.
HMRC’s guidance on the above is at CIRD92000.
(At the time of writing, it is not known how Brexit will affect the above rules).
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