What does section 1120A of the Corporation Tax Act 2009 do?

Section 1120A protects an enterprise from losing its SME status solely because a related partner or linked enterprise grows beyond the SME size thresholds during an accounting period. Where the conditions are met, both enterprises are treated as SMEs for the entire accounting period, preserving eligibility for SME-related tax reliefs under United Kingdom law.

What three conditions must be met for section 1120A protection to apply?

First, the enterprise must be related to the other enterprise as a partner or linked enterprise throughout the entire accounting period. Second, both enterprises must qualify as SMEs at the start of the period. Third, the enterprise must lose SME status solely because the related enterprise exceeded the employee limit or a financial limit during the period.

What is the practical effect of section 1120A on SME tax reliefs?

When all conditions are satisfied, both the enterprise and its related enterprise are treated as SMEs for the whole accounting period. This ensures that tax reliefs dependent on SME status, such as the enhanced research and development expenditure credit regime, remain available. The protection applies period by period and must be reassessed at the next accounting period's start.

Can section 1120A apply where an enterprise loses SME status for reasons other than a related enterprise's growth?

No. Section 1120A only applies where the sole reason the enterprise ceases to qualify as an SME is that the related partner or linked enterprise exceeded the employee limit or one of the financial limits during the period. If there is any other reason for the loss of SME classification, the protection under this section does not apply.

Corporation Tax Act 2009 section 1120A

Enterprise treated as an SME where related enterprise becomes large

Section 1120A provides protection for an enterprise that would lose its small or medium-sized enterprise (SME) status solely because a related enterprise grows beyond the SME size thresholds during an accounting period.

Both the enterprise and its related partner or linked enterprise must qualify as SMEs at the start of the accounting period.
The two enterprises must be related to each other (as partner or linked enterprises) throughout the entire accounting period.
The enterprise loses SME status by the end of the period only because the related enterprise has exceeded the employee limit or either of the financial limits during that period.
In these circumstances, both enterprises are treated as SMEs for the whole of that accounting period, preserving their eligibility for SME-related tax reliefs.

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