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Public Bodies, their related entities and group structures (part 3)

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 public bodies and their related charities make are:       

• not being aware of the connected entities rules 

• not realising they may be a company or a charity 

• not identifying that they are connected by being controlled by a public body 

• not understanding what ‘control’ means 

• not being aware of when to check if they are connected 

• not being aware that their structure or ownership has changed 

• failure to communicate changes to all entities within a structure 

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

Public bodies — Apprenticeship Levy and Employment Allowance 

Public bodies must pay the Apprenticeship Levy if they have an annual pay bill of over £3 million. However, provided they are not also a company or charity, they cannot be connected to each other or any other entities. Therefore, they will have their own £15,000 Apprenticeship Levy allowance.   

Entities in the same group structure as a public body may be connected to each other. For example, if they are both controlled by the same public body and are not themselves a public body.

Public bodies cannot claim the Employment Allowance unless they are also a charity.

Companies and charities

Public bodies may also be companies or charities. In these cases, the rules relating to connected companies or charities are relevant. If this is the case, you should read the sections on companies (part 2) or charities (part 4).

The definition of a company is wide ranging. It can include bodies corporate, unincorporated associations and limited liability partnerships. The definition can include:

• bodies set up by royal charter
• non-departmental public bodies
• agencies
• arms-length bodies
• subsidiaries of a public body

The definition of a company is dealt with in the companies (part 2) section.

The following entities will always be treated as companies:

• NHS trusts, NHS foundation trusts and certain other NHS bodies
• devolved NHS bodies such as Scottish health boards, Scottish trusts, Northern Irish health and social care trusts, Welsh local health boards
• non-charitable housing associations
• non-charitable subsidiary companies

These entities:

• should ensure they include connected entities when considering their Apprenticeship Levy liability
• cannot claim the Employment Allowance as they are public bodies and not also charities

The following public bodies will never be treated as companies or charities:

• government departments and their executive agencies who are part of their parent department and not employers in their own right
• local authorities

Therefore, these entities:

• will not be connected to other entities
• cannot claim the Employment Allowance

Some public bodies (such as universities and multi academy trusts) may be classified as charities. The connected charities rules will apply in those circumstances.  If this is the case, you should refer to the section on charities (part 4).

The meaning of control

If entities are connected for the purposes of Employment Allowance, then they are also connected for the purposes of the Apprenticeship Levy (and vice versa).

The basic rule for determining if entities are ‘connected’ with each other is that they will be connected if one of them has control of the other or if both are under the control of the same person or persons.  For example, companies owned by the same shareholders will be connected.

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 entitled to acquires control over company’s affairs. This could be direct or indirect.

In most cases that HMRC see, companies are connected because they own more than 50% of the issued share capital of another company or companies. This gives them control of the other company and therefore they are connected.

There is further information on companies (part 2). However, in the case of public bodies and entities in their structure, it is more common that factors such as having the power to make strategic decisions and appointing directors would give one entity control over the other.

There is further detail together with examples in specific sectors and employees: public bodies.

Related entities and group structures

The structures of public bodies can be complex and can include public bodies, companies and charities.

Companies or charities who are controlled by the same public body will be connected to each other. Therefore, each entity within a public body structure will need to consider whether they are connected to another entity.

Common entities that HMRC see within group structures are detailed below.

Local authorities

Local authorities are always public bodies and cannot be companies or charities. However, some entities of a local authority do not realise they are connected to another entity by virtue of the local authority being a controlling body.

This can include subsidiary companies of the local authority.

Government departments, non-departmental public bodies, agencies, and arms-length bodies

Government departments with an annual pay bill of over £3 million will have a liability to pay the Apprenticeship Levy.

A government department may have entities that are companies or charities. This could include non-departmental public bodies, agencies, and arms-length bodies. Some, or all, of which may be controlled by the government department and are therefore connected.

The government department as a public body would be entitled to its own full Apprenticeship Levy allowance (unless it is a company or a charity). However, those entities which are controlled by the government department would be liable to share the Apprenticeship Levy allowance.

You can find out more about this in the Apprenticeship Levy manual.

Schools

Schools may have a variety of structures that impact whether or not they are connected. The key is usually to identify who actually employs the employees, for example the school, a local authority or governing body. Full details on the various types of schools can be found in the HMRC’s Apprenticeship Levy manual.

Identifying connected entities

HMRC regularly see instances of entities failing to identify all their connected entities. 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 entities rules, do not fully understand the rules or assume entities that do not interact with each other cannot be connected.

To reduce risk in this area entities must ensure they understand the connected entities rules. They should also be able to identify all their connected entities. It is essential that entities 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 structures this can be particularly difficult. An agreed process and good communications are critical. It is important that entities identify:

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

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

• entities that are controlled by the same person

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

If a foreign employer has a PAYE scheme in the UK then it may have to pay the Apprenticeship Levy, 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.

Entities 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 entities are connected

If, at the start of the tax year (6 April), 2 or more 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 entity ceases or joins another structure during the year. Entities who join a structure during the year will not be connected to the new structure until the start of the next tax year.

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

Example 5

On 6 April 2023 public body A (not a company or a charity) has control over an arm’s length public body B (which is a company). Public body A acquires all the share capital of company C on 30 June 2023.

For the tax year 2023 to 2024 public body A will have control of public body B. But as public body A is not a company or a charity, both public body A and public body B will be entitled to a £15,000 Apprenticeship Levy allowance.

However, in the 2024 to 2025 tax year, public body B (which is also a company) and company C will be connected. They are both controlled by public body A. Public body A will still be entitled to its own Apprenticeship Levy allowance. Public body B and company C will have to agree which entity is entitled to the Apprenticeship Levy allowance (or how it is apportioned between them). Only company C will be able claim the Employment Allowance as public body A and public body B are public bodies who are not also charities.

Entities 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, restructures and joint ventures

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

• 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.

Further help for public bodies

HMRC recognises that public bodies and their related entities may have unique and complex structures. This may make understanding these rules challenging. We would encourage you to contact us to discuss your circumstances. We will work with you to ensure you are compliant with the rules.

Email us at ccgguidelinesforcompliance@hmrc.gov.uk if you wish to contact us. Make sure you include the GfC reference number (GfC10) in the subject line. If you have a Customer Compliance Manager (CCM) then copy them into the email.

Sending information to HMRC by email carries certain risks. We assume that, by sending information in an email, you understand and accept these risks.