Business, Business Expenses, The CFO Playbook

The UK government has redefined the term ‘SME’

18 October 2022   |   13 Minute Read
SME team meeting to discuss reporting
SME team meeting to discuss reporting

It was the new (and now former) Chancellor’s ill-fated mini-budget that got all the attention. Behind the headlines, however, another announcement slipped by generally unnoticed: a redefinition of SME.

The government announced that small business exemptions will be extended to businesses with fewer than 500 employees. This move, the government claims, will slash red tape for 40,000 businesses.

In a statement, the prime minister’s office said: “By raising the definition of a small business, in terms of regulation, from 250 to 500 employees, we will be releasing 40,000 more businesses from future bureaucracy and the accompanying paperwork that is expensive and burdensome for all but the largest firms”.

The changed threshold came into effect on Monday, 3 October. And it applies to all new regulations under development as well as those under current and future review (including retained EU laws).

The government also announced plans to consult on potentially extending the threshold to businesses with 1,000 employees.

No specifics

The announcement offered scant details on which regulations, however. Whispers across the media sphere indicate that regulations like Corporate Sustainability Reporting Directive (CSRD), gender pay gap reporting and executive pay ratio reporting are likely targets.

But this is just conjecture. The main, substantive news is that, as a business in the 250 – 500 headcount range, you are now considered an SME. In other words, any regulatory or reporting exceptions afforded to smaller, sub-250 headcount businesses will be extended to you.

In a press release, the government noted, “Regulatory exemptions are often granted for SMEs, which the EU defines at below 250 employees. However, we are free to take our own approach and exempt more businesses to those with under 500 employees.”

According to the Institute of Chartered Accountants in England and Wales (ICAEW), the tax impact of the new measures is unknown. “Time will tell if reliefs become available to an expanded number of businesses as a result of the threshold adjustment or whether this is simply a measure designed to reduce paperwork.”

40,000 or 4,000?

The government’s figure of 40,000 is probably an overestimation. According to The Times, the actual number of businesses that will benefit is closer to 4,000. These are the businesses that have between 250 and 500 employees.

Sub-250 businesses are considered SMEs anyway. The 250 – 500 range is a somewhat more exclusive club. This is the 4,000 businesses referenced in The Times’ analysis.

It’s less a case of numbers than sectors. A sector like the care industry (which often employs 200 – 300 people) could see an outsized impact.

Internationally, the SME redefinition makes the UK an outlier. The EU, for example, refreshed its definition of what constitutes an SME, but stuck with less than 250 workers as the threshold.

Unique is not necessarily bad, of course. But it will make the macroeconomic outlook harder to benchmark with other countries.

You can find out more about the changes on .Gov. The changes to the SME definition has survived the U-turns of the new Chancellor, Jeremy Hunt. But that might well change in the near future, so keep an eye out.

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