Corporation Tax Act 2009 section 1120

Qualifications to section 1119

Section 1120 modifies the standard EU definition of a small or medium-sized enterprise (SME) for the purposes of R&D tax relief, by raising the qualifying thresholds and removing a grace period that would otherwise apply when a company breaches those thresholds due to its relationship with partner or linked enterprises.

• The standard EU SME thresholds are doubled for R&D relief purposes: the employee limit rises from 250 to 500, the turnover limit from €50 million to €100 million, and the balance sheet limit from €43 million to €86 million.
• Under the EU definition, when a company must include figures from partner or linked enterprises (aggregation), there is normally a two-year grace period before it loses SME status — this grace period is removed for R&D relief purposes.
• The grace period is removed only where four conditions (A to D) are all met, broadly requiring that the company itself would qualify as an SME on a standalone basis but breaches the limits solely because of aggregation with a larger partner or linked enterprise.
• This section is subject to further rules in sections 1120A and 1120B, which deal with situations where a related enterprise becomes large or where an SME is acquired by another SME.