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HMRC warns of payroll risk for clubs and societies

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If clubs and associations are controlled by a national organisation they may not be entitled to claim the employment allowance and may also be liable to pay the apprenticeship levy.

28th Nov 2023
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HMRC is warning certain clubs and associations that they may be liable to pay the apprenticeship levy (AL), and that they should not be claiming the employment allowance (EA).

AL is an annual charge set at 0.5% of payroll costs, subject to an annual allowance of £15,000. This allowance ensures that only employers with annual payroll costs exceeding £3m will be liable to pay AL. 

This should mean that most small independent clubs and societies are exempt from paying the AL. However, the £15,000 allowance applies to all companies or charities that are connected with the employer.

EA is worth up to £5,000 per year to set against the employer’s class 1 national insurance contribution (NIC) liability. But there is also a size restriction on eligibility for the EA. Where the class 1 NIC liability of the employer and any connected employer was £100,000 or more in the previous tax year the employer is not eligible to claim the EA. 

The connection catch

The catch for both the AL and the EA 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.

The gov.uk guidance for AL says: “You have to pay apprenticeship levy each month if you… are connected to any companies or charities for employment allowance purposes and have a combined annual pay bill of more than £3m.”

The rules for whether two employers are “connected” are the same for the AL and EA.

Common purpose

Single stand-alone unincorporated associations (UAs) need not be worried about the connected rules. But many local clubs, societies, religious bodies, amateur sporting bodies and even political parties, have a relationship with a national body in their own sector. For example, the various local associations may be bound by the general rules or constitution of a national body, and they may also be aligned towards a common purpose or set of beliefs.

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.

Incorrect HMRC guidance 

Before HMRC’s detailed guidance on EA for employers was updated in 2022, it included this statement in the first paragraph: “The rules relating to connected companies do not apply to unincorporated businesses or single companies.” 

You can check this by using the web archive on wayback machine.

That guidance has now been corrected to state: “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 CTA 2010, s 1121. So when you see “company” in the guidance you need to read “unincorporated association”.

How are organisations connected?

To determine whether two or more companies or UAs are connected for the EA you need to examine the control relationship as defined in National Insurance Contributions Act 2014, sch 1. This determines that a connection applies if:

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

Definition of control

The definition of control is set out in CTA 2010, ss 450 & 451. It has a very broad meaning and is a trifle circular. In section 450(2):

A person (P) is treated as having control of a company (C) if P:

(a) exercises,

(b) is able to exercise, or

(c) is entitled to acquire,

direct or indirect control over C’s affairs.

To test whether two or more trading companies are connected you would generally examine whether there was substantial commercial interdependence between them, looking at financial, economic and organisational factors (NIA 2014, sch 1 para 3(3)). 

But as a social UA may not have a trade or any shareholders, the elements of substantial interdependence won’t be present. Where there are no shareholders, control can only be exercised through the votes of the members of the various UAs that have a common purpose or other relationship. 

The NIA 2014, sch 1 para 3(2) also requires you to look at the rights (including voting rights) that can be attributed under CTA 2010, s 451

How are voting rights exercised?

There are two (or possibly more) alternative structures for UAs.

  1. The members of individual local UAs are also members of the national UA, and votes at the national level influence the rules the local UAs work under. 
  2. Members of local UAs are not also members of the national UA, but those local members may nominate representatives to serve on the national UA that sets the general rules of the whole organisation.

In a) there is common membership of the local and national UAs. HMRC argues that this means all the local UAs are controlled by the national UAs through the existence of common membership.

In b) the control relationship is not so clear cut. But HMRC may argue that the fact that the local UAs abide by certain rules set by the national UA means that the local UAs are under the common control of the national UA. 

Check independence

Look again at the clubs and associations you act for. Are they really independent bodies, or are they controlled by a national organisation? 

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

Replies (5)

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By FactChecker
28th Nov 2023 12:17

"EA is worth up to £5,000 per year to set against the employer’s class 1 national insurance contribution (NIC) liability. But there is also a size restriction on eligibility for the EA.
Where the class 1 NIC liability of the employer and any connected employer was £100,000 or more in the previous tax year the employer is not eligible to claim the EA."

Worth noting that it's not *only* a matter of eligibility (i.e. eligible? Yes/No).
Isn't it still true that, even if eligible *despite* there being other connected companies, then the 'split allocated' to some of those connected companies has to be notified to HMRC and pre-agreed with them?

Thanks (1)
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By johnjenkins
29th Nov 2023 09:56

HMRC being petty again.

Thanks (2)
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By Postingcomments
29th Nov 2023 11:07

God forbid anyone should try to form a group in their community. There are more rules and regs every year.

Thanks (0)
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By GMTax
29th Nov 2023 14:32

Thanks for this helpful article which makes some important points.

It is worth noting that anyone dealing with charity accounts already has to consider very carefully whether a charity is part of a group structure, for which the 'control' test is essentially the same as quoted above. Where a charity controls another charity, or (more commonly) where a charity controls a non-charitable trading company, group accounts are required if the consolidated income of the group is more than £1M (England and Wales) or more than £500k (Scotland and Northern Ireland).

However, it is very rare for group accounting to apply to federations of charities - i.e. where there are multiple local charities with their own charity registration affiliated to a national 'umbrella' charity. Although some trustees of local charities may be elected as trustees of the umbrella body, it would extraordinary for the local and national charities to have near-identical trustees boards.

And whilst the national body will often set certain standards for the work of local charities in the federation that is very different from direct control - it's more like a franchise agreement in the commercial sector.

So, as a general rule, if two or more charities are separately registered, the control test is only likely to be met if charity A has the right to appoint more than half of the trustees of charities B or vice versa.

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By Calculatorboy
01st Dec 2023 23:31

Hmrc always go for the easy targets , which generate very little revenue, they are truly disgusting.

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