Usually nothing happens straight away. Company size for R&D purposes changes only once the thresholds have been crossed in two consecutive years, so the first year of exceeding them leaves your existing status intact. The rule works in both directions: a company that shrinks back below the limits also stays large for a year before returning to SME status.
The test, and who gets counted
The SME definition is fewer than 500 staff, together with either turnover of €100m or less or a balance sheet total of €86m or less. “Or less” is precise: a company sitting at exactly €100m of turnover still qualifies. Only one of the two financial limits needs to be met, but the headcount is mandatory — 500 staff or more takes a company out of the definition whatever its balance sheet looks like.
The figures are not the company’s own. Linked enterprises, broadly where one holds more than 50% of the voting rights in the other, are added in full. Partner enterprises, holdings of 25% to 50%, are added in proportion to the stake. A company that looks comfortably small on its own accounts can sit well over the limits once a parent’s or an investor’s figures come in, which is why the test is worth running at group level rather than assumed from the statutory accounts.
The two-year rule, and the exception that overrides it
The two-year rule is a smoothing device. One year over the limits does not change status, and neither does one year back under, so a single strong year or a one-off headcount spike is absorbed rather than acted on.
What it does not absorb is a change in ownership. Where the breach comes from a partner or linked enterprise that, on its own figures, already exceeded the headcount limit or both financial limits, the transition period is disapplied and SME status ends for that period with no grace year. This is broader than being bought by a large group: a 25% stake taken by an enterprise that is already over the limits can be enough, because a partner’s figures count proportionately and the enterprise itself is large. Companies raising from corporate investors should check the point before the round completes, not after.
Two statutory reliefs pull the other way. Where a related enterprise was a partner or linked enterprise throughout the period and only became large during it, both companies keep SME status for that period; and a company outside the definition solely because of a related large enterprise is treated as an SME for the period in which an acquirer that is itself an SME takes control. Nor does every investor trigger the aggregation in the first place: venture capital companies, business angels below €1.25m in aggregate, universities, institutional investors and regional development funds can hold 25% or more without creating a partner enterprise, provided they stay at or below 50% and are not otherwise linked.
What losing SME status actually changes
Less than it once did. The merged scheme applies at every size, so a company that grows out of the SME definition claims on the same terms as before.
Where size still decides the outcome is ERIS, which only loss-making, R&D-intensive SMEs can claim (with a one-year grace for a company that met the intensity test and claimed the year before). Lose SME status and ERIS goes with it, along with the difference between 26.97p and 16.2p per £1 of qualifying spend. A company sitting near the size thresholds and near the 30% intensity condition at the same time needs both tests modelled together, because they can fail independently. For accounting periods beginning before 1 April 2024 and still open to claim, size determined which of the old schemes applied: see which scheme applies.
Where to go next
If a funding round, an acquisition or an unusually strong year has moved you near the thresholds, work the position out before the year end, while decisions can still be taken with the answer in view. Where an outside investor is taking a stake, check the ownership exception rather than assuming the two-year rule will protect the period.
Written by Matthew Jones ACA CTA. Last reviewed July 2026.
Sources
- Section 1120, Corporation Tax Act 2009 — the staff, turnover and balance sheet thresholds for the R&D SME definition.
- CIRD92000: change of status to and from SME — HMRC’s manual on moving between SME and large company status.
This page describes the rules as they stood at the review date above, as general information rather than advice on your circumstances. For how that distinction works, see our terms; for an answer on your own facts, talk to us.