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HMRC internal manual

International Manual

Transfer pricing: legislation: rules: exemptions: SME definition

The definition of small and medium enterprises

The European Commission published a revised recommendation on 6 May 2003 concerning the definition of micro, small and medium sized enterprises (2003/361/EC). This and a related User Guide are available (as at November 2016) on the EU website

The definition applies to any entity engaged in an economic activity, irrespective of its legal form and includes entities subject to income tax as well as corporation tax.

An entity qualifies as either small or medium if it meets the staff headcount ceiling for that class and one (or both) of the financial limits as set out in the following table (referred to as the qualification data in these notes). Where the entity is a member of a group, or has an associated entity, these limits apply to the whole group and not the specific entity.

  Maximum number of staff And less than one of the following limits: Annual turnover Balance sheet total
Small Enterprise 50 €10 million €10 million
Medium Enterprise 250 €50 million €43 million


Staff includes employees, persons seconded to work for a business, owner managers and partners. Where staff do not work full time during the year they should be counted as an appropriate fraction.


The measures of turnover and balance sheet total are net of VAT and otherwise have their ordinary meaning for accounting purposes. In particular, balance sheet total means total assets (for example, as defined by CA85/S247) and should not be taken as net of any liabilities. The recitals to the EU recommendation make it clear that the use of a balance sheet threshold is required to identify the economic position of an enterprise using a measure for its relative size or wealth.

Conversion to sterling should be made at the average exchange rate for the period of account whose profit is being computed, or the exchange rate on the date the account was drawn up if this produces a fairer result. As with any of the thresholds, businesses close to the limit should not rely on changes to the exchange rate but should plan in advance to meet the requirements (if any) which changing designation requires.

The Commission recommendation recognises that in two situations the staff and financial data of associated enterprises must be included with that of the enterprise seeking exemption. It refers to these as:

  • linked enterprises


  • partnership enterprises.

There is more detail about these situations at INTM412100.

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There are modifications of the EU recommendation:

  • Rights of a liquidator or administrator (acting in that capacity) are left out of account in determining whether the enterprise, or any other enterprise meets the numerical tests.
  • Whether the person is an SME will be determined solely by reference to the period for which a return is being made.
  • The declaration as an autonomous enterprise in paragraph 5 of Article 3 is omitted.
  • The numerical tests are by reference to annualised figures for the chargeable period.
  • The genuine estimate for a newly established enterprise is omitted.