Guidance

Connected companies and Employment Allowance: further guidance for employers and their agents

Updated 15 February 2023

To claim the Employment Allowance, you (or your agent) will need to know whether you, as an employer, are or were a connected company at the start of that tax year.

If at the start of the tax year, 2 or more companies are connected, the companies will be treated as being connected for Employment Allowance purposes for the remainder of the tax year regardless of any later change of circumstance in that year.

The rules relating to connected companies do not apply to sole traders, partnerships or single companies. If your company has control of, or is under the control of, another company, or both companies are under the control of the same person or persons, for example, companies linked in a group - these companies are connected.

This guidance will help you decide which company is eligible to claim Employment Allowance.

1. Who is entitled to claim Employment Allowance

If, at the start of the tax year, 2 or more companies are connected with each other only one of those companies can qualify for the Employment Allowance for that tax year. It is up to the companies to decide which one of them will claim.

Where 2 companies are only connected with each other because of the attribution of rights between certain associated persons (such as relatives), the connected persons rule will only apply if the companies are substantially commercially interdependent - for example, when one company gives financial support to another, they have the same economic or commercial objectives and have common management, employees and premises.

2. Deciding if one company is connected to another

The basic rule for deciding if 2 companies are ‘connected’ with each other is that either:

• one of them has control of the other
• both are under the control of the same person or persons

In the case of a limited liability partnership, that control is where the other company possesses, or has the rights to get a share or more than half the assets or more than half the income of the limited liability partnership.

2.1 Features of control to be considered

Control can be shown through:

• greater part of the voting power
• greater part of the share capital
• greater part of the rights to income
• greater part of the rights to surplus assets on a winding up

Other features could include:

• fixed rate preference shares
• minimum controlling combination principle
• loan creditors
• trustees
• substantial commercial interdependence (when looking at the attribution of rights):
  • financially
  • economically
  • organisationally

If at the start of the tax year, you hold the majority (over 50 per cent) of the share capital or voting rights in more than one company then those companies are connected. You’ll have control and this means only one of the companies would be entitled to the Employment Allowance. You will have to decide who claims it.

3. Substantial commercial interdependence

Where companies are only connected once rights in those companies are attributed between connected persons, for example relatives, the companies will only be connected for Employment Allowance purposes if there is substantial commercial interdependence. Factors to be considered include whether the companies are financially, economically and organisationally interdependent.

3.1 Financial interdependence

Two companies are financially interdependent if either:

• one gives financial support (directly or indirectly) to the other
• each has a financial interest in the affairs of the same business

3.2 Economic interdependence

Two companies are economically interdependent if one of the following applies, the companies:

• look to realise the same economic goal
• activities benefit the other company
• have common customers

3.3 Organisational interdependence

Two companies are organisationally interdependent if they have or use common:

• management
• employees
• premises
• equipment

3.4 Groups and subsidiary companies

At 6 April where your parent company has a number of subsidiary companies you’ll need to identify which company will claim the Employment Allowance.

After 6 April if you acquire or create a new subsidiary company the new company will not be treated as having any connected companies for the remainder of the tax year and will be able to make a claim. The following tax year, the new company will be caught by the connected persons rule so it’ll only be entitled to claim the allowance if no other companies in the group claim.

4. Claiming the Employment Allowance across more than one PAYE scheme

You can only claim the Employment Allowance against one PAYE scheme you are responsible for. If you are responsible for more than one scheme, you must decide which scheme to set your Employment Allowance claim against.

Whether you can claim any unused allowance against another PAYE scheme you are responsible for depends on whether the separate businesses are incorporated (limited companies) or unincorporated (sole trader) businesses.

If your business is incorporated and you do not use up the full Employment Allowance against the PAYE scheme you have set the claim against, you cannot claim the remainder of the allowance against another PAYE scheme.

If your business is unincorporated and you do not use up the full Employment Allowance against the PAYE scheme you have set the claim against, you can request that the remainder of the allowance is set against another PAYE scheme you are responsible for after the end of the tax year.

5. Fixed rate preference shares and Employment Allowance

Certain financial institutions, for example, the venture capital funds that support smaller developing companies, may provide finance by taking up preference shares rather than by making loans.

In some cases the degree of share ownership is enough to give the investor company control.

To decide whether the investor and companies are associated, or companies under the common control of the investor company are associated with each other fixed rate preference shares are disregarded for the purpose of deciding control if the company holding them meets all the following conditions, it:

• is not a close company
• takes no part in the management or conduct of the issuing company or in the management or conduct of its business
• subscribed for the shares in the ordinary course of a business which includes the provision of finance

However certain types of fixed rate preference shares will count. These are shares which:

• were issued wholly for new consideration
• do not carry any right either to conversion into shares or securities of any other description or to the acquisition of any additional shares or securities

• do not carry any right to dividends other than dividends which:

  • are a fixed amount or at a fixed rate per cent of the nominal value of the shares
  • together with any sum paid on redemption, represent no more than a reasonable commercial return on the consideration for which the shares were issued

6. Minimum controlling combination principle

A minimum controlling combination means a group of persons which has control of the company but which would not have control of it if any one of the persons were left out from the group.

More than one person or one group of persons may control a company. For example, one person may have the greater part of the voting power, while 2 people hold the greater part of the issued share capital and a group of 3 people are entitled to the greater part of the assets in a winding up of the company. All 3 combinations of people can be said to have control of the company at the same time.

If 3 persons, A, B and C, each hold one third of the shares in a company, and they’re not connected in any way which would allow the rights and powers of one to be attributed to another, then control is held by A and B, or B and C, or A and C but not A, B and C together.

In deciding whether companies are connected companies, only minimum controlling combinations should be considered and combinations containing unnecessary members should be ignored.

For example, a company controlled by the unconnected persons D, E and F together, but not by any one or 2 of them alone should not be regarded as connected with any company controlled by one of them alone or by any 2 of them.

Two companies are only under the control of the same persons if:

• a group which controls one company is identical with a group which controls the other
• for each company, that group is a ‘minimum controlling combination’

Where the minimum controlling combination principle applies to determine control of a company and, as a result of applying the principle companies are connected, then only one company would be entitled to the Employment Allowance.

The minimum controlling combination also applies where it allows those with control to the greatest share of the company income upon distribution of company income and/or where those with control are entitled to the greatest part of the company assets upon a winding up.

7. Loan creditors

A loan creditor is disregarded when deciding if one company controls another, if there is no other connection between it and the company to which the loan was made,and,either the loan creditor is not a close company or the loan was made in the ordinary course of a business carried on by the creditor.

8. Trustees

Where 2 companies are under the control of the same person by rights or powers held in trust by that person, and there is no other connection between the 2 companies, those rights and powers held in trust are ignored when deciding whether the 2 companies are connected (the trustee may, for example, be a solicitor or the trustee company of a bank).