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Charities (part 4)

Published 7 November 2024

Read Purpose, scope and background (part 1) of these guidelines, if you have not already.

You should read these guidelines alongside the existing HMRC published Apprenticeship Levy and Employment Allowance guidance.

Common errors

The most common errors HMRC see charities make are:

• not being aware of the connected entities rules
• not identifying they are a charity
• not being aware of when to check if they have connected entities
• not identifying all their connected entities
• not being aware that their group structure has changed
• failure to communicate changes to all entities within the group

Charities — Apprenticeship Levy and Employment Allowance

Charities must pay the Apprenticeship Levy if their (or the total of all connected entities) pay bill is more than £3 million. 

Charities are also eligible to claim the Employment Allowance. This is subject to their (and total of their connected entities) Class 1 secondary National Insurance contributions liabilities being less than £100,000 in the previous tax year. From the tax year 2025 to 2026 the £100,000 eligibility threshold will be removed.

The definition of a charity

For UK tax purposes a charity must be:

• established in the UK
• established for charitable purposes only
• registered with the Charity Commission or another regulator for example the regulator of Social Housing (or similar) or the Office for Students or the Department for Education (or similar)
• run by ‘fit and proper persons’
• recognised by HMRC

There is further information on charities and tax: overview.

Connected charities rules

Charities connected for the purposes of Employment Allowance are also connected for the purposes of the Apprenticeship Levy (and vice versa).

Charities will only be connected with each other if:

• their purposes and activities are the same or substantially similar
• they are controlled by the same or connected persons

The rules in place for determining whether charities are connected with each other are similar to the ‘connected charities’ provisions. These are set out in section 5 of the Small Charitable Donations Act 2012.

If a company controls a charity, they are not considered to be connected for the purpose of claiming the Apprenticeship Levy allowance or the Employment Allowance. However, the same does not apply if a charity controls a company. In this case, both entities are considered to be connected.

Example 6

Company A has direct control of charities B, C and D. Charities B and C have a similar purpose and activity. Charity D’s purpose and activity are different to charities B and C.

Company A is not connected to any of the charities. Charities B and C are connected as they are controlled by the same person and have similar purposes and activities. However, charity D is not connected to any other entity. Therefore, each may be able to claim the full £15,000 Apprenticeship Levy allowance and Employment Allowance.

Example 7

Charity A owns 100% of the issued share capital of companies B, C and D. Charity A, and companies B, C and D are all connected. Only one Apprenticeship Levy allowance and Employment Allowance claim can be made.

There is further information for connected charities in connected charities and Employment Allowance: further guidance for employers and their agents.

Identifying connected entities

HMRC regularly see instances where charities have failed to identify all connected entities. This results in under-reporting of the Apprenticeship Levy or incorrect Employment Allowance claims. This can be because they are not aware of the connected entities rules, do not fully understand the rules or do not check who they are connected with on an ongoing basis.

To reduce risk in this area, charities must ensure they understand the connected entities rules. They should also be able to identify all their connected entities. It is essential that charities and their connected entities have a process in place to communicate with each other. They should agree who will claim the Apprenticeship Levy allowance and the Employment Allowance.

In large groups or structures this can be particularly difficult. If HMRC identify any errors, we will undertake compliance activity to rectify the position.

Charities should regularly review their group structure and the ownership of entities in the group. This will lower the risk of a compliance intervention by HMRC.

When to check if charities are connected

If, at the start of the tax year (6 April), two or more charities (or entities) are connected with each other they will be connected to each other for the whole tax year. This will still be the case if one charity (or entity) leaves or joins another group during the year. Charities (or entities) who join a group during the year will not be connected to this group until the start of the next year.

The following example highlights a scenario HMRC see on a regular basis.

Example 8

On 6 April 2023 company A controls charities B and C. As they have a similar purpose and activities, charities B and C are connected.

Unconnected company D takes control of charity B on 30 June 2023. Charity B will remain connected to charity C for the entire 2023 to 2024 tax year. It does not matter that it left the group during the year. From the 2024 to 2025 tax year charity B will not be connected to charity C.

Charities should identify which entities have left or joined the group during the relevant tax year. They should then reassess who their connected entities are on the 6 April each year. This will reduce the likelihood of an HMRC compliance intervention.

Payroll agents and payroll software

Nearly all employers will use payroll software or a payroll agent to process their payroll. Neither the software nor the agent will be able to decide if there are any connected entities. It is therefore critical that any allocation of the Apprenticeship Levy allowance or claim for the Employment Allowance has been checked before using software or instructing payroll agents. Care should be taken when changing software or payroll providers during the year.

Mergers, acquisitions, restructuring and joint ventures

Employers must ensure that they make the correct Apprenticeship Levy reports and Employment Allowance claims. Particular care should be taken when companies:

• merge
• acquire other companies
• are subject to restructuring
• are part of a joint venture

It may be that new PAYE schemes are set up. This may result in the new company having multiple PAYE schemes for a period. This could result in employers incorrectly claiming the full Apprenticeship Levy allowance and Employment Allowance for each PAYE scheme.

You can find further help in the Apprenticeship Levy manual — mergers, acquisitions and joint ventures.