What is an SME?

As a provider of company formation services to startups we take an interest in how government views and defines small businesses.

Articles have been written denouncing the SME term and claiming that large corporations don’t understand how to talk to small businesses. Meanwhile the UK’s small business sector has been compared unfavourably with Germany’s Mittelstand sector which is at the centre of their thriving manufacturing and export driven economy.

While the UK government has been very focussed on start-ups they have also recently begun to focus more on SMEs. The Business Secretary has announced plans to accelerate the growth of SMEs and has launched a showcase of British manufacturing to coincide with the Olympics.

While there is growing focus on the importance of the SME sector there is one very large fundamental problem with it. That problem is that even with the UK government there is not a single definition of what a small or medium enterprise is. For the purpose of Research and Development Tax Relief HMRC define an SME as a business with not more than 500 employees and an annual turnover not exceeding £100 million. However the rest of the UK government does not use this definition. For the purposes of collecting statistics the Department for Business defines SMEs as companies with less than 250 employees. For accounting purposes Companies House defines a small business as employing less than 50 people and a turnover under £6.5 million and a medium business as less than 250 employees and a turnover under £25.9 million.

To further complicate things other parts of the UK government use the EU definition of an SME which goes:

• Micro Business = less than 10 employees & turnover under £2 million
• Small Business = less than 50 employees & turnover under £10 million
• Medium Business = Less than 250 employees & turnover under £50 million

So depending on which definition you use an SME could have anywhere between 50 and 500 employees and have a turnover between £6.5 million and £50 million. One thing that virtually everyone agrees with is that SMEs account for more than 99% of all UK business and that they employ over 12 million people. This is a vital part of the UK economy and a vital part of growing the economy. One way to get a handle on how to encourage SMEs may be coming up with an accurate definition of what they are.

You can get your business off the right start with our Free Company Formations and Start-up Accountancy Services.

Updated: 9th February 2018