1. Defining company size for tax purposes

Before delving into the implications, it’s important to understand how HMRC classifies company size. Unfortunately, as with all things tax related, context is everything, and multiple definitions apply to different circumstances.  These include:

• Level of profit
• The Companies Act limits
• The European Commission definition of a Small and Medium Enterprise (SME)
• Gross Asset test limits access to a number of tax reliefs to smaller companies
• Turnover and asset-based thresholds for additional compliance burdens that apply to large corporates

 

2. Corporation tax rates and payments

Company size affects how and when tax is paid. The UK reintroduced a tiered corporation tax system in April 2023, with small companies – those with taxable profits of less £50,000 continuing to pay corporation tax at 19% while the main rate increased to 25% for those with taxable profits in excess of £250,000. Marginal relief applies to steadily increase the effective rate for companies with profits between these two thresholds.

After determining the amount of corporation tax that a company must pay, the chief concern of most clients will be when the liability is due for payment. Small companies can pay their corporation tax in a single lump sum nine months and one day after their accounting period end, while large companies must pay their tax in up to four equal quarterly instalment payments, starting from the 7^th month of the accounting period.

A large company is one with taxable profits in excess of £1.5m. However, it does not have to pay corporation tax by quarterly instalments in the first period that they become large, unless the ‘exceptional’ profit limit of £10 million is exceeded. This ‘year of grace’ allows companies to note their change of status and arrange their cash flow accordingly. Furthermore, if a company has a tax liability of less than £10,000 it is not caught by the quarterly payment regime, reducing the compliance burden on companies with limited profits.

Very large companies, with profits exceeding £20 million, also pay in quarterly instalments, but there is no ‘year of grace’ and the payments are accelerated, beginning in the third month of the year, meaning that the entire liability must be estimated and paid within the accounting period.

In addition, the above profit thresholds for accessing lower tax rates and corporation tax instalments are divided by one plus the number of associated companies that a company has (in essence active companies under common control) and are proportionately reduced for short accounting periods.

Unfortunately, this can mean that property investors or new subsidiaries of a large group can rapidly find themselves paying tax at the higher rate or even being treated as a very large company for the purposes of QIPs.

This can have substantial cash flow implications, particularly for businesses hovering near the large-company threshold.

 

3. Companies House Act and enquiry windows

 An important size benchmark is found in the Companies Act 2006, as the company (or group) size determines the level of accounts disclosure and whether an audit is required. A small group must satisfy at least 2 of the following: turnover under £15m, a balance sheet total under £7.5m, or fewer than 50 employees (prior to 6 April 2025, the financial limits were £10.2m and £5.1m respectively).

In tax, this threshold has gradually been replaced by limits specific to the particular provision or relief. One area where it is still used however is in establishing the length of an enquiry window on submission of a tax return.

For a member of a group that is not ‘small’ where a return is received on or before the filing date, the time limit is 12 months from the statutory filing date. This period can be up to three months longer if the return is delivered late.

For other companies, where a return is received on or before the filing date, the time limit is 12 months from the date of receipt of the return. Thus, smaller companies can benefit from a shorter enquiry window, and so greater certainty over their corporation tax position, by submitting their tax return at an earlier date.

 

 4. The significance of European size limits

European Commission Recommendation 2003/361/EC provides a definition of a Small and Medium Enterprise that has been widely adopted into UK law. While many aspects of EU law have been replaced from UK law, the level of integration means that this definition is likely to remain in place for some time.

Under this definition, an enterprise (broadly similar to a group but extends further in certain circumstances) is considered to be small or medium if it meets the following size criteria:

Small: Less than 50 employees; and either less than €10m turnover or €10m balance sheet total.

Medium: Less than 250 employees; and either less than €50m turnover or €43m balance sheet total.

An enterprise that exceeds these thresholds is considered ‘large’.

Transfer Pricing

Once a company crosses the “large” threshold, HMRC expects it to comply with transfer pricing rules, which require businesses to price transactions with associated enterprises as if they were made on an arm’s-length basis and make appropriate adjustments in their corporation tax returns if they have not. The rules also require that appropriate documentary evidence is maintained to ensure compliance with the regime – the level of which increases depending on the business size.

There is currently an exemption from these rules for SMEs, provided the connected business is in a territory with which the UK has a double taxation treaty containing a non-discrimination provision, however the government is currently consulting on whether this should be removed for medium sized businesses (those with less than 50 employees and either less than €10m turnover or €10m balance sheet total).

This would bring a considerable number of smaller businesses into the scape of these rules for the first time and so it is important to be aware of the rules as mispriced cross-border arrangements might trigger adjustments, leading to interest and potential penalties.

Dividend Exemption

Dividends and non-capital distributions received by companies will be chargeable to corporation tax, unless a specific exemption applies. However, these exemptions are different for small and ‘non-small’ companies, based on the EC definition, above.

For a small company, distributions are exempt from corporation tax provided that:

• The payer is resident in the UK or a territory with which the UK has a double taxation treaty, containing a non-discrimination provision
• The distribution must not be an amount, typically of interest, that is deemed by to be a distribution for tax purposes
• No tax deduction is allowed to a resident of any territory outside the UK in respect of the distribution
• They must also not be part of any tax scheme!

This seems simpler to apply, but there are numerous pitfalls that can prevent companies from receiving exemption.

Dividends received by larger companies will be exempt from corporation tax if they meet one of the specific exemptions. However, these are widely drawn and generally easier to meet than the small company exemptions so, in practice, will exempt the majority of dividends from corporation tax.

 

5. Access to tax reliefs and incentives

Smaller companies also benefit from a suite of targeted reliefs that encourage growth and innovation.

One notable example is Research and Development (R&D) tax credits. Until recently, SMEs (defined differently here as companies with fewer than 500 employees and either turnover under €100 million or balance sheet total under €86 million) could claim enhanced deductions for qualifying R&D expenditure, which can significantly reduce their corporation tax bill or even generate a repayable tax credit. Larger companies must use the R&D Expenditure Credit scheme instead, offering a slightly less generous benefit.

For periods starting on or after 1 April 2024, the enhanced scheme has been restricted to R&D intensive, loss-making SMEs, but the R&D tax credit rate has been increased. This creates a natural incentive for early-stage growth businesses to engage in innovation while they’re still within SME thresholds.

Other incentives skewed toward smaller companies include:

• The Seed Enterprise Investment Scheme (SEIS) provides income tax and capital gains tax benefits to encourage investment in early stage trading companies with up to £350k in gross assets
• The Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) reliefs provide income tax and capital gains tax benefits to encourage investment in startup and growth phase trading companies with up to £15m in gross assets pre investment, and £16m afterwards
• The Enterprise Management Incentive (EMI) scheme enables companies with gross assets of up to £30m to offer tax advantaged share options to incentivise and retain key staff

Other conditions apply to all reliefs so please speak to us if you are interested in the reliefs identified.

 

6. Base Erosion and Profit Shifting (BEPS)

 The OECD’s BEPS Project, designed to address tax planning strategies that allow multinational companies to shift profits to low or no-tax jurisdictions, thereby eroding the tax base of higher-tax countries, has resulted in a range of measures designed to ensure that profits are taxed in the correct jurisdiction.

Corporate Interest Restriction

These rules limit the group’s deductions for UK corporation tax for interest and financing costs at the higher of the £2m de minimis and an ‘interest capacity’ amount. This amount is broadly a percentage of the UK tax-EBITDA of the group, subject to a debt cap that restricts net interest deductions to the net external finance expense recognised in the accounts of the worldwide group.

No return is required until net UK interest deductions exceed £2m, however it is possible to roll forward unused interest capacity and so it may be advisable to file an abbreviated return as the group approaches the £2m threshold. Unlike most areas of tax, a CIR return is filed on a groupwide basis. This, and the technical nature of the rules makes it a specialised area and so we would advise you to speak to our specialist corporation tax team if this impacts your business.

Diverted Profits Tax

The Diverted Profits Tax (DPT) is a separate tax aimed at large groups (typically multinational enterprises) that use arrangements lacking economic substance to circumvent rules on permanent establishment and transfer pricing. DPT does not apply to SMEs (under the EC definition).

In January 2024, the government announced its intention to reform DPT and remove DPT’s status as a separate tax by bringing it within the charge to UK corporation tax. This aims to clarify the relationship between the taxation of diverted profits and transfer pricing, provide access to treaty benefits yet maintain the key aims of the original DPT regime.

Digital Services Tax

The UK’s digital service tax (DST) aims to match the amount of tax paid in the UK by digital businesses to the value derived from UK users. To achieve this, it imposes a 2% tax on the turnover of large multinationals running search engines, social media platforms and online marketplaces to the extent their revenues are linked to the participation of UK users.

DST is targeted at businesses with more than £500 million in global digital services revenues and £25m in UK digital services revenues. Only in-scope income exceeding £25m and derived from UK users are subject to DST.

Pillar 2

The Pillar 2 framework aims to ensure multinationals with annual consolidated revenues of more than €750 million in at least two out of the previous four accounting periods pay a minimum effective tax rate of 15% on income within each jurisdiction in which they operate.

Groups that have entities located in the UK and other jurisdictions must register to report for both a Domestic Top-up Tax and Multinational Top-up Tax. Groups that only have entities located in the UK must register to report for Domestic Top-up Tax. Importantly, registration is required even if no Top-up taxes are due.

Pillar 2 applies from accounting periods starting on or after 31 December 2023 and operates at a group level, so one member of the group must be responsible for registering and complying with both taxes. By default, this ‘filing member’ would be the group’s ultimate parent entity but it is possible to nominate a different UK or non-UK member to be responsible for this. This must be done in writing and HMRC notified within 6 months of the end of the accounting period that the group becomes a qualifying group.

 

 7. Administrative and compliance burdens

Larger companies inevitably face more complex compliance requirements. Broadly, there are two key thresholds that apply to groups as they become larger:

Once the aggregate turnover of the group’s UK companies exceeds £200m or their balance sheet total exceeds £2bn:

• Senior Accounting Officer (SAO) certification requirements require large companies/groups to appoint a senior person to take responsibility for ensuring the company’s accounting systems are adequate for calculating the tax position
• HMRC must be notified concerning the adoption of any uncertain tax treatments in the company’s tax affairs
• UK only groups have to report on their tax strategy on their website

For multinational groups with consolidated global turnover over €750 million:

• Country-by-Country Reporting (CbCR) obligations kick in
• MNE groups with UK companies have to report their tax strategy on their website

These rules carry not just higher administrative costs, but also reputational risks if breaches occur. By contrast, smaller companies can typically operate with simpler governance structures and lower regulatory overhead.

 

Conclusion

In the UK tax system, size matters—and not just to the bottom line. It governs everything from access to incentives to compliance expectations, influencing how a company can plan, invest, and grow. For those navigating corporate structuring, merger decisions, or scale-up strategies, recognising the tax thresholds that come with size is crucial.

If any of the tax thresholds flagged in this article have raised concerns that you would like to discuss further, please do feel free to get in touch with your usual Shaw Gibbs contact or arrange a call to discuss.