For many suppliers, SME status seems straightforward. You look at the size of the business, the turnover, the team, and assume the answer is obvious. Under the Procurement Act 2023, it can be more involved than that. Ownership structure, voting rights and links to other enterprises can all affect the position. That matters in a market where departments are under pressure to increase spend with smaller suppliers.
This is the sort of issue that tends to surface when suppliers are reviewing bidding readiness. For some organisations, the answer will be clear. For others, especially those with investors, parent companies or a more layered group structure, it is worth checking the detail before being certain you can declare yourself an SME.
Why SME status matters more now
SME status is not just a label. It sits within a procurement system that is putting more emphasis on opening opportunities to smaller businesses, reducing avoidable barriers and improving visibility of upcoming contracts. Government departments are also under pressure to increase spend with smaller suppliers, with new SME spend targets bringing the issue into greater focus.
This also sits within broader changes in UK government procurement, where transparency, supplier registration and easier access to opportunities are all part of the picture. Suppliers are now expected to present their information more consistently, and that includes being clear about whether they qualify as an SME for procurement purposes.
That matters in practical terms. If a supplier is going to self-declare information that may be used across procurements, the classification needs to be based on more than a rough assumption. It should reflect the current structure of the business, the right financial figures and any relevant ownership links. That is already part of the impact of the Procurement Act: suppliers are being expected to approach bidding with greater consistency, transparency and preparation.
SME thresholds under the Procurement Act
The threshold test under the Procurement Act 2023 is reasonably clear at headline level. To qualify as an SME, an enterprise must have fewer than 250 staff and must also meet the financial threshold through either annual turnover of no more than £44 million or a balance sheet total of no more than £38 million. The calculation uses full-time equivalent staff rather than a simple headcount.
Suppliers need to look at whether those figures should be considered on the business alone or alongside connected entities. A supplier can appear to sit comfortably within those limits, but still need to revisit the answer once ownership and control are taken into account.
That is where many businesses find that the procurement-specific definition is narrower, or at least more structured, than they first expected. The procurement definition is also separate from the thresholds used by Companies House or HMRC for other purposes, so businesses cannot assume the same label carries neatly across.
The impact of ownership and control
The Procurement Act guidance does not stop at staff and financial thresholds. It also requires businesses to consider whether they are independent, linked to another enterprise, or substantially connected to one. Those relationships can change which staff and financial figures need to be counted.
In broad terms:
- an independent enterprise will usually be assessed on its own figures
- a linked enterprise may need to include a proportion of another enterprise’s figures
- a substantially connected enterprise may need to include all of the connected entity’s figures
As a result, a business that looks well within the SME thresholds on its own accounts may reach a different answer once shareholdings, voting rights or group relationships are taken into account. This is particularly relevant where a supplier is part of a wider group, has external investors, or has grown through acquisition or restructuring. In those circumstances, SME status cannot always be worked out by looking at one trading entity in isolation.
Investment can complicate the picture too. Some investor relationships are treated differently when SME status is assessed, so a minority stake does not always affect the result in the same way. Where external investment, public ownership or a wider group structure is involved, it is worth checking the detail rather than assuming the label still fits.
Where suppliers get this wrong
When it comes to SME status, most mistakes happen because the label feels familiar. A supplier may have described itself as an SME for years and never had cause to look closely at the procurement-specific definition. That is often where problems start. The business may still think of itself as owner-managed, growing or relatively small in market terms, while its legal structure tells a more complicated story.
Common issues include:
- using headcount instead of FTE
- focusing on turnover without checking the balance sheet test properly
- overlooking parent-company influence or minority investment
- missing the relevance of voting rights as well as shareholding
- failing to reassess status after restructuring, acquisition or external investment
Your status may also have shifted over time. A classification that made sense two years ago may not hold after growth, refinancing or a corporate reorganisation. The more moving parts there are in the structure, the less sensible it is to rely on habit or internal shorthand.
What to check before you self-declare as an SME
Before describing your organisation as an SME in any procurement context, it is worth stepping back and checking the basis for that conclusion.
Conduct a review that covers:
- the latest accounts
- current FTE employee numbers
- turnover and balance sheet figures
- ownership percentages and voting rights
- any linked or substantially connected enterprises
- whether an investor exception may be relevant
- whether the information being submitted is current and internally consistent
That last point matters because core supplier information on the central digital platform includes basic supplier details, financial information and connected-person information, and suppliers are expected to check and update that information before sharing it in a procurement.
For newer businesses, there is some flexibility in how the definition is applied, including where a business is new or has only recently crossed a threshold. Even so, that still calls for a considered assessment rather than a rough estimate pulled together at the last minute.
Check your position before you bid
SME status under the Procurement Act is not something suppliers should treat as a routine box-tick.
If your business has a simple structure and sits comfortably within the thresholds, the answer may be straightforward. If there are investors, group relationships, minority holdings or recent changes to the business, it is worth checking the position properly before self-declaring or relying on SME status in a live procurement.
If you want clarity on how your organisation should be classified, contact Thornton & Lowe. We can help you review the structure, sense-check the figures and make sure your position is sound before you register, bid or submit supplier information.
