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HMRC internal manual

Corporate Finance Manual

Debt cap: groups affected: EU definitions

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Definition of micro, small and medium sized enterprises

An entity qualifies as either micro, small or medium if it meets the staff headcount ceiling for that class and one (or both) of the financial limits set out in the following table (referred to as the qualification data in these notes).

The Commission recommendation recognises that in two situations the staff and financial data of connected and associated enterprises must be included with that of the enterprise seeking exemption. It refers to these as:

  • linked enterprises, and
  • partnership enterprises.

If the entity is a member of a group then it is likely to have a number of linked enterprises and these limits apply to the whole group and not just the entity. If the entity has a partnership enterprise then a proportion of the headcount and turnover or balance sheet total of the partnership enterprise is added to those of the entity to determine if it is a SME. Detailed guidance on this is below.

  Maximum number of staff And less than one of the following limits:  
Annual turnover Balance sheet total    
Micro Enterprise 10 €2 million €2 million
Small Enterprise 50 €10 million €10 million
Medium Enterprise 250 €50 million €43 million



Staff includes employees, persons seconded to work for a business, owner managers and partners. Where staff do not work full time during the year they should be counted as an appropriate fraction.


The measures of turnover and balance sheet total are net of VAT and otherwise have their ordinary meaning for accounting purposes. In particular, balance sheet total means total assets (for example, as defined by section 247 Companies Act 1985) and should not be taken as net of any liabilities. The recitals to the EU recommendation make it clear that the use of a balance sheet threshold is required to identify the economic position of an enterprise using a measure for its relative size or wealth. It would make a nonsense of this approach to allow assets to be reduced by liabilities not available to all companies. Conversion to sterling should be made at the average exchange rate for the period of account whose profit is being computed or the exchange rate on the date the account was drawn up if this produces a fairer result. As with any of the thresholds, companies close to the limit should not rely on changes to the exchange rate but should plan in advance to meet the requirements (if any) which changing designation requires.

Linked Enterprises

A linked enterprise is an enterprise which has the right to control the affairs of the enterprise seeking exemption. This control can be either direct or indirect and take many forms including shareholding, voting rights and contractual rights. As with many control tests, it will be possible for more than one enterprise or group of enterprises to control another at any one time. ‘Linked enterprises’ are enterprises which have any of the following relationships with each other:

  • an enterprise has a majority of the shareholders’ or members’ voting rights in another enterprise;
  • an enterprise has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another enterprise;
  • an enterprise has the right to exercise a dominant influence over another enterprise pursuant to a contract entered into with that enterprise or to a provision in its memorandum or articles of association;
  • an enterprise, which is a shareholder in or member of another enterprise, controls alone, pursuant to an agreement with other shareholders in or members of that enterprise, a majority of shareholders’ or members’ voting rights in that enterprise.

For the purposes of calculating the data for an enterprise, all data for any second enterprise that is linked to an enterprise must be aggregated as well as all the data for any linked enterprises or partnership enterprises of that second enterprise. All the staff, turnover and balance sheet entries must be taken into account regardless of the extent to which control is effected: the aggregation will be the same under 51% control as it would be under 100% control. For groups of companies this will have the effect of aggregating all data.

However, where two corporate groups are owned by a transparent entity, such as an English limited partnership, and no single limited partner has more than a 50% interest in the partnership, the two groups will not be taken to be linked enterprises.

Partnership enterprises

Enterprises will be counted as partnership enterprises where one of them holds 25% or more of the capital or voting rights of the other but they are not linked enterprises. However where linked enterprises jointly hold rights these must be aggregated to see if the 25% threshold has been passed. This definition will include partnership enterprises in which an enterprise has invested as well as those which invest in it.

If an enterprise has partnership enterprises, a proportion of the data from those enterprises must be aggregated with those of the enterprise when considering the qualifying data. The data to be aggregated will be proportional to the percentage interest giving rise to the partnership relationship. However if those partnership enterprises have their own linked or partnership enterprises, the data from those enterprises must be aggregated first before applying the percentage holding.

However, where two corporate enterprises are owned by a transparent entity, such as an English limited partnership, and no single limited partner has more than a 25% interest in the partnership, the two enterprises will not be taken to be Partnership enterprises.