The SME Test

SMEs are the backbone of the EU economy, creating more than 85% of new jobs in Europe. Due to their size and limited resources, SMEs can be affected by the costs of regulation proportionately more than their bigger competitors. At the same time, the benefits of regulations tend to be more evenly distributed over companies of different sizes. SMEs may have limited scope to benefit from economies of scale. At the same time SMEs find it more difficult to access capital and their cost of capital is often higher than for larger businesses.
Businesses can be characterised as Small and Medium Enterprises (SMEs) by looking at the number of employees: micro companies have 0-9 employees, small companies have 10-49 employees, medium-sized companies have 50-249 employees while large companies have 250 or more employees.
The Commission has adopted the ‘Small Business Act’. It aims to improve the overall approach to entrepreneurship, permanently anchor the ‘Think Small First’ principle in policy making and to promote SMEs’ growth by helping them tackle the remaining problems which hamper their development. Legislation, administrative rules and procedures should be simple, easy to understand and to apply. SMEs’ interests should be taken into account at the very early stages of policy making in order to make legislation more SME friendly.
How to identify impacts on SMEs
In addition, it is Commission policy159 to exempt micro-enterprises from EU legislation wherever possible or introduce special regimes so as to minimise the regulatory burden on them. The results of the analysis of the impacts on SMEs must be presented in the Commission’s reports given the important role of SMEs in the economy.
Any backward or forward looking assessment should analyse whether SMEs are disproportionately affected or disadvantaged compared to large companies. If so, alternative mechanisms or flexibilities in approach that might help SMEs to comply should be considered when reviewing the policy initiative. SMEs need to be taken into consideration in each of the analytical steps of better policy making.
An ‘SME test’ has been developed and comprises four steps:
(1) Consultation of SME stakeholders;
(2) Identification of affected businesses;
(3) Measurement of the impact on SMEs;
(4) Assessment of alternative mechanisms and mitigating measures.
Step (1) Consultation that captures the SMEs angle
The SME dimension should be a central element of the consultation strategy (for which separate guidance exists160) and, in addition to an open public consultation, may involve specific consultation actions such as round table discussions, focus group meetings, hearings targeting SME representatives, SME Panels – questionnaire surveys carried out with the assistance of the Enterprise Europe Network aimed at providing inputs into the SME Test section of the Impact Assessment, etc.161
Step (2) Identification of affected businesses
During this stage, you should establish whether and which SMEs (e.g. micros) are among the affected population. In some cases, this will be clear. In others, you will need to identify the characteristics of the affected businesses / sector(s), such as the distribution of businesses per size-class (micro, small, medium or large enterprises). Relevant sources of information162 should be explored. These could also include information available from organisations representing SMEs’ interests. Examples of elements to consider include:
  • Proportion of the employment concerned in the different categories of enterprises affected;
  • Weight of the different kinds of SMEs in the sector(s) (micro, small and medium ones);
  • Links with other sectors and possible effect on subcontracting; for instance, there may be may have an impact not only on the targeted sector but also on its suppliers or customers; such indirect impacts should be taken into account.
If the preliminary assessment leads to the conclusion that one or more class of SME is affected, further analysis should be carried out.
How to measure impacts on SMEs
Step (3) Measurement of the impact on SMEs
The distribution of the costs and benefits of the proposals with respect to the business size (differentiating between micro, small, medium and large enterprises) should be analysed qualitatively and, if possible and proportionate, quantitatively163. A “one-size fits all” approach for all SMEs has so far not proved effective or efficient as the impact on micro companies is likely to differ substantially from the impact on medium sized ones. Therefore, where relevant and feasible, costs and benefits accruing to each size-class of SMEs should be presented and analysed separately. It is equally important to assess the impacts of SME specific or mitigating measures, where they already exist.
As part of the overall assessment of competitiveness, it is important to establish the extent to which the proposal affects SMEs’ competitiveness or the business environment in which they operate compared to larger organisations164.
It is likely that an EU measure would have direct and indirect impacts on SMEs – both positive and negative. The direct benefits such as improved working conditions, increased competition etc. should (at some stage) be reflected in reduced costs to SMEs. Yet, these benefits may be offset by various regulatory costs164 some of which may be disproportionately felt by SMEs, notably:
  • Compliance costs (created by the obligation to pay fees or duties; and costs created by the obligation to adapt the nature of the product/service and/or production/service delivery process to meet economic, social or environmental standards (e.g. the purchase of new equipment, training of staff, additional investments to be made));
  • Administrative costs – created by the obligation to provide information on the activities or products of the company including one-off and recurring administrative costs (e.g. resources to acquire or provide information).
Cost and impacts identified for SMEs should be compared with those of large enterprises. For this purpose, you can for instancecompare the overall costs identified to the number of persons employed to obtain the average cost per employee165. You could alsocompare the costs identified to the total overhead or turnover of the company166.
In addition, consider the following elements:
  • Possible impacts on barriers to entry, competition in the market and market structure, for example in terms of possibilities for SMEs to enter markets;167
  • Possible impact on innovation.168
Step (4) Assessment of alternative options and mitigating measures
4. How to minimize any negative impacts on SMEs
The abovementioned analysis may show that micro, small and/or medium sized enterprises are facing a relatively higher burden than large companies and that specific measures, where they already exist, have not proven to sufficiently or adequately address the SME needs. In such case, one might consider the use or the revision of specific measures in order to ensure a level playing field and the respect of the proportionality principle.
The choice of specific measures will be made on a case by case basis, including an assessment whether they should apply to all SMEs or, for example, to the micro-enterprises only. However, if there is clear evidence that excluding micro-enterprises would mean that the initiative would not be able to achieve its goals or would undermine other Treaty-based goals or fundamental rights, they should be covered but the possibility to apply adapted solutions should be assessed.
A non-exhaustive list of mitigating measures to be considered includes:
  • Complete or partial size-related exemptions (Example: businesses below certain thresholds do not have to comply with certain specific obligations when this does not invalidate the original purpose of the legislation);
  • Temporary reduction or exemptions (Example: transition periods during which SMEs are exempted or longer intervals for certain obligations);
  • Tax reductions or direct financial aid to compensate costs incurred provided this is compatible with existing legislation on competition or international trade;
  • Reduced fees (Example: when these fees are particularly high and/or represent a fixed cost that would be felt disproportionately by SMEs);
  • Simplified reporting obligations (Example: in the area of statistics, explore possible synergies with already existing reporting obligations);
  • Specific information campaigns or user guides, training and dedicated helpdesks/ offices (Example: specific help-desks providing tailored information for small businesses);
  • Systematically consider general simplification initiatives which can particularly benefit SMEs (Example: possibility to use on-line facilities, simplified inspections).
When assessing possible mitigating measures, it is important that the costs this could produce are also fully considered and included in the final impact (cost-benefit) assessment. This includes the impacts on larger businesses of any SME specific measures or exemptions.

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