I don't think there are limitations when it comes to applying PRINCE2 on small projects - I think the problem lies in the overhead PRINCE2 represents. This overhead consists of several "overheads":
- Communication overheads (too many documents and too many approvals)
- Time overhead (too much time taken to produce these documents)
- Cost overhead (a dedicated project manager must handle the project)
- Structure overhead (no real freedom on this small project)
The problem with applying PRINCE2 on a small project is that this small project will no longer be small!