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Companies (part 2)

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 are companies: 

• not being aware of the connected companies’ rules 

• not recognising they are a company 

• not identifying all their connected companies 

• not being aware of when to check if they have connected companies 

• not being aware that their group structure has changed 

• relying on payroll software or payroll agents to identify connected companies 

Definition of a company 

‘Company’ has the meaning given in section 101(18) of the Finance Act 2016, and section 1121(1) of the Corporation Tax Act 2010. This is extended to include limited liability partnerships. A company is defined as a body corporate. This means a company incorporated under the Companies Act 2006, predecessor Acts or incorporated by statute. A company can also be an unincorporated association, for example a club or an authorised unit trust. 

There is further guidance in HMRC’s Company Taxation manual. 

Certain public bodies fall within the definition of a company. This includes NHS trusts, NHS foundation trusts, Housing Associations and subsidiary companies.

Connected company rules 

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

Two companies are ‘connected’ with each other if one of the following occurs:

• one of them has control of the other

• both are under the control of the same person or persons 

The term ‘control’ is given the same meaning as in sections 450 and 451 of the Corporation Tax Act 2010. A person has control of a company if they exercise or is able to exercise or is entitled to acquire control over the company’s affairs. This could be direct or indirect.

Also, a person is treated as having control of a company if that person possesses or is entitled to acquire: 

• the greater part of the share capital or issued share capital 
• the greater part of the voting power 
• in the event of a distribution of the company’s income, the greater part of the amount distributed
• in the event of distribution of assets, the greater part of the company’s assets

In most cases that HMRC see, companies are connected because: 

• 1 owns more than 50% of the issued share capital of another company or companies
• 2 or more companies are controlled by the same person or persons

A typical example that HMRC would see is illustrated in the ‘example 1’. 

Example 1 

On 6 April 2023, company A owns 100% of the issued share capital of company B. Company A also owns 75% of the issued share capital of company C. In addition, company C owns 55% of the issued share capital of company D.

In this scenario all the companies are connected to each other. This is because:

• company A is connected to company B and company C — this is because company A owns more than 50% of the shares in both company B and company C

• company B and company C are connected as they are both controlled by company A 

• company C is connected to company D as it owns more than 50% of the shares

• company D is also connected to company A and company B — this is because the shares company C owns in company D are attributed to company A

This control test is modified in the case of a limited liability partnership. Control is determined if the other entity possesses, or is entitled to acquire either of the following:  

• rights to a share of more than half the assets

• more than half the income of the limited liability partnership

There is detailed guidance on connected companies at Employment Allowance: further guidance for employers. This also provides details on other ways that control can be established such as: 

• attribution of interests of associates and substantial commercial interdependence (you can find more detailed guidance in Substantial commercial interdependence: financial, economic and organisational links) 

• control by same person or persons — minimum controlling combinations  

• fixed rate shares 

• loan creditors 

• appointment of a trustee 

These guidelines do not comment further on these.  

Identifying connected companies 

HMRC regularly see instances of companies failing to identify all their connected companies. This results in under-reporting of the Apprenticeship Levy or incorrect Employment Allowance claims. This may be because employers are not aware of the connected company rules, do not fully understand the rules or assume companies that do not interact with each other cannot be connected. 

The following example is a typical scenario.

Example 2 

Company A is a manufacturer of garden furniture. From 2015 it has owned 100% of the issued share capital of company B, which manages a chain of restaurants. The 2 companies operate from sites 400 miles apart. They have different directors, have their own payroll teams and there is no interaction between them. 

In the tax year 2023 to 2024, company A has a pay bill of £900,000 and a Class 1 secondary National Insurance contributions liability in the previous year of £80,000. Company B has a pay bill of £5 million and a Class 1 secondary National Insurance contributions liability in the previous year of £450,000. 

The companies assume they are not connected because they operate in different sectors from different sites. They may not even be aware of the other company. This can be even more likely in larger group structures.

Both companies therefore claim a £15,000 Apprenticeship Levy allowance. This means that company A will not pay any Apprenticeship Levy and company B will have a liability of £10,000 (£5m × 0.5% - £15,000). 

Furthermore, company A will have claimed Employment Allowance of £5,000. Company B may not have claimed any Employment Allowance as the £100,000 limit has been reached. 

However, in the tax year 2023 to 2024, company A controls company B as it owns more than 50% of company B’s shares on 6 April 2023. Therefore, both companies are connected for the 2023 to 2024 tax year. 

This means that they were only entitled to one Apprenticeship Levy allowance of £15,000. It is up to the companies to decide how to split this allowance. In any event, there will be an additional £4,500 of Apprenticeship Levy due above the £10,000 already paid (£5.9m × 0.5% - £15,000 - £10,000). 

In addition, company A is not entitled to claim the £5,000 Employment Allowance. The combined Class 1 secondary National Insurance contributions liability of both companies is over £100,000. However, from the tax year 2025 to 2026 the £100,000 eligibility threshold will be removed. Therefore, one of the companies will be eligible to claim the Employment Allowance in the tax year 2025 to 2026.

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

In large groups this can be particularly difficult. An agreed process and good communications are critical. It is important that companies identify: 

• companies that they control in the group structure — this could include companies several tiers below them that they do not directly control 

• companies that control them in the group structure — this could include companies several tiers above them that do not directly control them 

• companies that are controlled by the same person 

You also need to consider non-UK companies when establishing if companies are connected. For example, if a foreign company controls 2 UK companies, then the UK companies will be connected.  

If a foreign employer has a PAYE scheme in the UK, then it may have to pay the Apprenticeship Levy. This may be the case if any employees are subject to Class 1 secondary National Insurance contributions. Foreign employers may also be able to claim the Employment Allowance.

If HMRC identify any errors, we will undertake compliance activity to rectify the position. 

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

When to check if companies are connected 

If at the start of the tax year (6 April), 2 or more companies 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 company ceases trading or leaves the group during the tax year. Companies who join a group during the tax year will not be connected to the group they join until the start of the next tax year. 

The following examples highlight scenarios HMRC see on a regular basis. 

Example 3 

On 6 April 2023 company A and company B are connected as company A owns 90% of the issued share capital in company B. Company C and company D are in a separate group. They are connected as company C owns all the issued share capital in company D. 

Company C decides it wants to sell all the issued share capital in company D.

Company A subsequently acquires all the issued share capital in company D (but not company C) on 30 June 2023.

Company D will still be connected to company C until the end of the 2023 to 2024 tax year, that is 5 April 2024.  It will not be connected to company A and company B until the start of the 2024 to 2025 tax year, that is 6 April 2024. 

Example 4 

Mr A has owned 55% of the issued share capital of company B since 2019. On 1 March 2023 he acquires 70% of the issued share capital of company C.

In the tax year 2023 to 2024 company B has a pay bill of £4 million and a Class 1 secondary National Insurance contributions liability in the previous year of £350,000. Company C has a pay bill of £10 million and a Class 1 secondary National Insurance contributions liability in the previous year of £800,000. 

A common error that HMRC sees in this scenario is that Mr A fails to recognise that company B and company C will be connected for the tax year 2023 to 2024. They are connected because they were both controlled by him on 6 April 2023. In error they both continue to claim the full Apprenticeship Levy allowance of £15,000. 

It is up to the companies to decide who should claim the allowance or how it should be split between them. 

Neither company should have claimed Employment Allowance. This is because Class 1 secondary National Insurance contribution liabilities exceeded £100,000 in the previous year. However, from the tax year 2025 to 2026 the £100,000 eligibility threshold will be removed. Therefore, one of the companies will be eligible to claim the Employment Allowance in the tax year 2025 to 2026.

Both companies should review their Apprenticeship Levy allowance and make the necessary amendments. Full details on how to make these amendments are found in next steps — further questions, feedback, legislation and guidance (part 5).

Companies should identify which companies have left or joined the group during the relevant tax year. They should then reassess who their connected companies 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 companies. 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. 

Company 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. Sometimes previous PAYE schemes are retained until the end of the tax year (5 April) to reduce PAYE issues for staff. 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. 

Political parties, trade unions and trade associations 

HMRC’s view is that, for tax purposes, political parties, trade unions and trade associations are classified as companies. If these organisations have local branches, they will be under common control for the purposes of section 450 CTA 2010. Therefore, they will be connected for the Apprenticeship Levy and Employment Allowance. 

Where a structure includes smaller entities for example local branches, all entities within this structure will be connected. An entity within a branch structure with a pay bill less than £3 million may have to pay the Apprenticeship Levy if the total pay bill of all the connected entities exceeds £3 million. Only one of the connected entities will be able to claim the Employment Allowance.