I think there are several issues at play here and that makes it more complicated.
My understanding is that kids can sign a binding club contract from a very young age, maybe 9?, but that contract must be for no more than three years. That might be a legacy of the McLean years of exploiting kids by locking them in to excessive length of contract. However those youth contracts are not professional contracts which are only legal from age 17. So Kerr Smith could have had a legal non professional contract at Utd with various terms built in. Perhaps Utd wisely included a release figure way above the compensation rates as protection, but not really expecting that any Club would activate it given the amount.
Compensation/development fees still apply for cross border transfers but Clubs are free to negotiate transfer terms which may be more beneficial than the prescribed calculations. Add-ons such as a % of future transfer fees are often seen as potentially more profitable than accepting a flat basic fee. Like we reportedly negotiated for Campbell and the youngster that joined Leeds a few years ago. The "cross border rule" is also a good reason why Utd might have inserted the release fee. To stop Clubs like Celtic, Rangers or Aberdeen poaching him and insisting that a Tribunal determine the compensation. Looking to the future and as OTF explains. taking Brexit into account there is a danger that the OF plus a few others may try and hoover up even more Scottish talent given that access to EU youngsters could be limited.
In short I think Utd have been quite clever in legally protecting their investment in Smith.
The 3 year maximum length of those youth contracts is something that is currently under close examination. It was suggested to the SFA during an ongoing Scottish Parliament enquiry into youth football that 3 years was excessive and should be reduced. Again the danger of any reduction further enabling the richer clubs to gather up all the talent was highlighted and so far no changes have been proposed. How to balance the investment made by clubs with the best interest of young players?