What is an SME and What Does it Mean For Your Business?

In the UK, the term SME (or small and medium-sized enterprise) captures the vast majority of the nation’s business population. Yet in certain circumstances, what is defined as an SME has specific criteria that may affect how your business operates, or what support it is entitled to.

Connor Campbell Published on 23 December 2022.
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What is an SME and What Does it Mean For Your Business?

Small and medium-sized enterprises, or SMEs, are the lifeblood of the UK economy, making up 99.9% of the country’s business population in 2022.

But what exactly is an SME? And why does it matter if your business is classed as one? Below, we detail the various SME definitions in the UK and how it can affect your business.

What does SME stand for?

As mentioned, SME stands for small and medium-sized enterprises. It is a term that can capture a large number of different business types and sizes, from single-person operations to companies with hundreds of employees.

Sometimes the acronym SMB, small and medium-sized businesses, will be used in place of SME, though SME is more commonly used in the UK.

How is an SME defined in the UK?

Where things potentially get confusing for businesses in the UK is that SMEs are defined differently depending on the government body or scheme doing the defining.

The broadest definition of an SME is determined by the number of employees a business has. On 3 October 2022, new legislation came into force in the UK stating that an SME is any business with fewer than 500 employees.

Previously, the definition was capped at businesses with fewer than 250 employees.

UK/EU SME definition

Beyond the change to the headcount criteria, the UK government shares one definition of SMEs with the European Union. In that definition, SMEs are broken down into three categories: micro businesses, small businesses and medium businesses.

  • Micro business: 0 to nine employees, with turnover or a balance sheet less than or equal to €2 million.
  • Small business: 10 to 49 employees, with turnover or a balance sheet less than or equal to €10 million.
  • Medium business: 49 to 249 (in the EU) or 49 to 499 (in the UK) employees, with turnover of less than €50 million or a balance sheet less than €43 million.

It’s worth noting that, in this instance, the UK government still uses € to determine turnover, and not £.

Companies Act 2006 SME definition

That general government definition of an SME differs from the rules laid out in the Companies Act 2006. This is important, as your business definition defines how you have to file your accounts at Companies House.

The Companies Act 2006 breaks SMEs down into micro entities, small companies and medium-sized companies. To find your classification, you must meet two of the conditions in a certain band:

  • Micro entity: annual turnover of no more than £632,000, a balance sheet total of no more than £316,000, and no more than 10 employees.
  • Small company: annual turnover of no more than £6.5 million, a balance sheet total of no more than £3.26 million, and no more than 50 employees.
  • Medium-sized company: annual turnover of no more than £25.9 million, a balance sheet total of no more than £12.9 million, and no more than 250 employees.

Other SME definitions in the UK

There are further SME definitions that businesses may encounter:

R&D Tax Relief

If your business is applying for research and development (R&D) tax relief, then you will need to satisfy a different definition of SMEs, having:

  • fewer than 500 employees
  • a turnover of under €100 million, or a balance sheet total under €86 million

Business energy

When securing a business energy contract, you may be entitled to extra protections in England, Scotland and Wales if you are classed as a micro business.

The Office of Gas and Electricity Markets (Ofgem) states that an organisation is classed as a micro business if it:

  • employs fewer than 10 people and has a turnover or balance sheet no greater than €2 million
  • or, uses no more than 100,000 kilowatt hours (kWh) of electricity, or 293,000 kWh of gas, a year

» COMPARE: Business energy

Why does it matter if my business is an SME?

Whether your organisation is classed as an SME, and specifically if it is defined as a micro, small or medium business, may inform the following:

Having an idea of where your business sits within the various definitions of an SME can help you gauge what level of support you can apply for or are entitled to and what is expected of you as a business owner.

» MORE: How to grow your business

Image source: Getty Images

About the author:

Connor is a writer and spokesperson for NerdWallet. Previously at Spreadex, his market commentary has been quoted in the likes of the BBC, The Guardian, Evening Standard, Reuters and The Independent. Read more

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