Navigating the Employment Allowance and Apprenticeship Levy

A recap: what is the Employment Allowance (EA) and the Apprenticeship Levy (AL)?

EA can be worth up to £5,000 per tax year for eligible organisations and is set against the employer's Class 1 National Insurance Contributions (NIC) liability. EA is available to businesses or charities (including clubs and societies) where the previous tax year’s NIC liability was under £100,000. If the Class 1 NIC liability of the employer was over or equal to £100,000 in the previous tax year, the employer isn't eligible to claim EA. 

AL is an annual charge set at 0.5% of total payroll costs after hitting an allowance of £15,000. This ensures that only employers with annual payroll costs exceeding £3m will be liable to pay and should mean that most small independent clubs and societies are exempt. Funds paid into the AL can then be used to help pay for apprenticeship training costs.

The rules

The complexity of understanding eligibility for both the EA and the AL is the requirement to look beyond the payroll of the immediate employer and add the value of total payroll or the secondary Class 1 NIC liability of any connected employers. These rules are applicable whether you’re assessing eligibility for EA or AL.

Many unincorporated associations (UA’s), such as clubs, societies, religious bodies, amateur sporting bodies, and political parties, should be aware of these rules. 

For example, local associations may be bound by the general rules or constitution of a wider national body or incorporate their rules into their own constitution or members’ rule book. They may also be aligned towards a common purpose or set of beliefs, leading them to be connected parties. Where these various UAs (local and national) are employers, all those bodies need to know whether all the UAs that follow the rules of the national UA are “connected” for the purpose of claiming the EA and paying the AL. This could mean anything from a religious order that follows the rules of an international religious order based outside the United Kingdom to a local branch of a sports club that follows the rules of the national association for that sport.

To determine whether two or more entities are connected for EA, you need to examine the control relationship as defined in Schedule 1 NIC Act 2014. This determines that a connection applies if one of the entities has control of the other or both are under the control of the same person or persons.

If the bodies are connected for the purposes of EA, they may not be entitled to claim the EA and may also be liable to pay the AL.

The changes

HMRC previously said that the rules relating to connected companies did not apply to unincorporated businesses or single companies, but this has been updated and the guidance now states 'the rules relating to connected companies do not apply to sole traders, partnerships or single companies'. HMRC is also keen to point out that UAs are considered to come within the definition of a company under s1121 of Corporation Taxes Act 2010. So, wherever you see ‘company’ in their guidance you need to include UAs.

This recent change of events implies that HMRC will start investigating EA claims and looking to make associated companies start contributing towards the AL. 

How we can help

With dedicated business and not-for-profit tax teams, we’re well placed to undertake a review of your organisation's payroll and associations to see what side of these rules you belong on. We’ll carefully consider your specific position and can advise on how best to proceed.