Quantitative test

If the company has fewer than 250 employees, and has either an annual turnover not exceeding EUR 40 million, or an annual Balance Sheet total not exceeding EUR 27 million it will be considered a SME. An entity which directly or indirectly controls through possession of 25% or more of the capital or of the voting rights of other entities must aggregate all the other entity figures when applying these tests.

The number of persons employed corresponds to the number of annual working units (AWU), that is to say, the number of full-time workers employed during one year with part-time and seasonal workers being fractions of AWU. The reference year to be considered is that of the last approved accounting period.

The turnover and balance sheet total thresholds are those of the last approved 12- month accounting period. In the case of newly established enterprises whose accounts have not yet been approved, the thresholds to apply shall be derived from a reliable estimate made in the course of the financial year.

In the Inland Revenue CIRD Manual various terms are discussed. These include:

• The amount selected for turnover is calculated excluding value-added tax (VAT) and other indirect taxes.
• The staff headcount represents the number of full-time person-years attributable to people who have worked within or for the enterprise during the year under consideration. So the contributions of part-time workers, or those who work on a seasonal or temporary basis count as appropriate fractions of a full-time person-year.
• Staff in the description above includes employees, persons working for the enterprise being subordinated to it and deemed to be employees under national law, owner-managers, partners engaging in a regular activity in the enterprise and benefiting from financial advantages from the enterprise. Apprentices or students engaged in vocational training with an apprenticeship or vocational training contract are not included as staff. The duration of maternity or parental leaves is not counted.
• Where accounts have not been drawn up in Euros it is necessary to convert the figures of turnover and balance sheet totals for the purposes of the tests. Normally the end of year or balance sheet figures should be taken.

Where, at the final balance sheet date, an enterprise exceeds or falls below the employee thresholds or financial ceilings, this is to result in its acquiring or losing the status of SME, only if the phenomenon is repeated over two consecutive financial years. This is known as the year of grace rule.

Inland Revenue have also commented that normally, as a matter of practice, a company can be accepted as a SME under the 1996 recommendation for an accounting period during which it was a SME while it was engaged in R&D. This practice only applies where the change of status is not manipulated artificially, and does not cover periods as a SME when the R&D is not being carried out. It also only applies to the claimant company.

Independence Test

A company must conform to the criteria of independence to be considered to be a SME. An independent enterprise is one that is not owned as to 25% or more of the capital or voting rights by one enterprise or jointly by several enterprises, falling outside the definition of a SME.

This threshold can be exceeded where the ownership is by venture capital companies, institutional investors and public investment corporations so long as they singly or jointly exercise no control over the affairs of the company. It can also be exceeded where the capital is spread in such a way that it is not possible to determine by whom it is held and if the enterprise declares that it can legitimately presume that it is not owned as to 25% or more by one enterprise, or jointly be several enterprises falling outside the definition of SME.

An enterprise only has to be independent at a point in time during the accounting period to meet the independence test and to not be blocked from claiming SME status.

Under the 1996 recommendation where a company changes its SME, or non-SME, status as a result of a change in its independence it does not enjoy a year of grace as in the quantitative test.

Quantitative Test Revisions

The fewer than 250 employee limit was left in when revising the recommendation, but the turnover limit was increased to not exceeding EUR 50 million (from EUR 40 million) and the annual Balance Sheet total was increased to not exceeding EUR 43 million (from EUR 27 million).

The data to apply to the headcount of staff and the financial amounts are those relating to the latest approved accounting period and calculated on an annual basis. They are taken into account from the date of closure of the accounts. The amount selected for the turnover is calculated excluding value-added tax (VAT) and other indirect taxes.

Where, at the date of closure of the accounts, an enterprise finds that, on an annual basis, it has exceeded or fallen below the headcount or financial ceilings, this will not result in the loss or acquisition of the SME status unless those ceilings are exceeded over two consecutive accounting periods.

In the case of newly established enterprises whose accounts have not yet been approved, the data to apply is to be derived from a bona fide estimate made in the course of the financial year.

The headcount corresponds to the number of annual work units (AWU), that is the number of persons who worked full-time within the enterprise in question or on its behalf during the entire reference year under consideration, the work of persons who have not worked the full year, the work of those who have worked part-time, regardless of duration, and the work of seasonal workers are counted as fractions of AWU. Staff consists of employees, persons working for the enterprise being subordinated to it and deemed to be employees under national law, owner-managers, partners engaging in a regular activity in the enterprise and benefiting from financial advantages from the enterprise. Apprentices or students engaged in vocational training with an apprenticeship or vocational training contract are not included as staff. The duration of maternity or parental leaves is not counted.

Independence Test

The independence test was dropped in favour of three ceiling tests.

The different ceiling tests are applied to enterprises according to their group structure. The enterprise is either autonomous, a partner enterprise or a linked enterprise.

Autonomous enterprises

The ceiling tests are applied solely by reference to the accounts of the enterprise itself. An autonomous enterprise is defined in the EC definition (2003/361/EC) as any enterprise which is not classified as a partner or linked enterprise discussed below.

Partner enterprises

Partner enterprises are all enterprises which are not classified as linked enterprises (as defined below) and between which there is the following relationship: an upstream enterprise holds, either solely or jointly with one or more linked enterprises (as defined below), 25% or more of the capital or voting rights of another enterprise (downstream enterprise).

Where an enterprise is a partner enterprise the ceiling tests are applied to figures based on the accounts of the enterprise after inclusion of a proportion of the figures from the accounts of any partner enterprise.

Inland Revenue describes partner enterprises as those that are not linked (as defined below), but where one of them holds (either on its own or in combination with other enterprises with which it is linked) 25% or more of the capital or voting rights in the other.

An enterprise may be autonomous even if this 25% threshold is reached or exceeded only by the following investors, provided that those investors are not linked (as defined below) either individually or jointly to the enterprise in question:

• Public investment corporations, venture capital companies and business angels provided the total investment of those business angels in the same enterprise is less than EUR 1 250 000
• Universities or non-profit research centres
• Institutional investors, including regional development funds;
• Autonomous local authorities with an annual budget of less than EUR 10 million and fewer than 5 000 inhabitants.

Inland Revenue has termed these enterprises as Specified Investment Enterprises.

Linked enterprises

The EC definition (2003/361/EC) describes Linked Enterprises as having the following types of relationships with each other:

• an enterprise that has a majority of the shareholders’ or members’ voting rights in another enterprise;
• an enterprise that has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another enterprise;
• an enterprise that has the right to exercise a dominant influence over another enterprise pursuant to a contract entered into with that enterprise or to a provision in its memorandum or articles of association;
• an enterprise, which is a shareholder in or member of another enterprise, controls alone, pursuant to an agreement with other shareholders in or members of that enterprise, a majority of shareholders or members’ voting rights in that enterprise.

Where an enterprise is a linked enterprise the ceiling tests are applied to the aggregates of the figures in its own accounts and those from the accounts of all other enterprises to which it is linked.

Inland Revenue describes Linked enterprises as those in which one enterprise is able to exercise control, either directly or indirectly, over the affairs of the other.

Specified Investment enterprises

Inland Revenue discusses the application of the SME test in regards to Specified Investment Enterprises. Where investors in an enterprise include specified types of investor the usual rules for determining whether an enterprise is a linked enterprise are relaxed. The rules for partner enterprises are also relaxed.

Change from 1996/280/EC to 2003/361/EC

Where a company qualifies as a SME under 2003/361/EC for its first year ending on or after 1 January 2005, and it would have been a SME under 2003/361/EC in the previous accounting period, it will be regarded as a SME for the first accounting period notwithstanding that it may not have been a SME for the pervious accounting period under 1996/280/EC.

The Inland Revenue has published a flow chart summarizing the 2003/361/EC SME Test.

Inland Revenue have given their interpretation of some of the terms in the 1996/280/EC and 2003/361/EC definitions in the CIRD Manual.

Capital is defined as having a wider meaning than ordinary share capital. So it can include preference shares, or loan finance of a capital nature, particularly if that loan finance is convertible to equity at some point.

Voting Rights are evident through the possession of the ordinary share capital. Sometimes the share capital may be comprised of different classes, such as A shares and B shares, with different voting rights.

A Venture Capital Company is an institution providing, as its specialised business, finance to start-up or developing businesses, where a fairly high degree of risk is involved. The investment would be likely to be in the form of equity, but may it be supported by loans. One would expect a high return commensurate with the level of risk, and the company to be looking to realise its capital in successful investments as part of the overall business.

Institutional Investors are institutions whose purpose is to make a significant number of investments as the essential character of its business

Public Investment Corporations are entities that are publicly owned or publicly funded, and whose investments are made in a passive way (i.e. without active involvement in the conduct of the businesses in which the investment is made).

Control must be interpreted broadly to mean any arrangements whereby a party can secure that a company will operate in accordance with its wishes. So we would regard all the methods described in The Income and Corporation Taxes Act as being potentially applicable (ICTA88/S461 and ICTA88/S840).

Inland Revenue have also given their interpretation of control specific to Venture Capital Companies.

SME definition for expenditure incurred after 1 August 2008 (2003/361/EC).

Quantitative Test Revisions

From 1 August 2008 the employee limit for SMEs was increased from 250 staff to 500 staff, the turnover limit was increased to not exceeding EUR 100 million (from EUR 40 million) and the annual Balance Sheet total was increased to not exceeding EUR 86 million (from EUR 27 million).

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