In recent years, the government has sought to help British businesses benefit from apprenticeships, which are crucial for workforce planning and skills building.

The introduction of the Apprenticeship Levy, a payment designed to fund apprenticeship training, has encouraged companies to create apprenticeship opportunities to fill skills gaps and shortages that can hinder business growth.

However, small business owners may struggle to understand the scheme’s financial complexities and how the scheme relates to initiatives like Employment Allowance.

The Apprenticeship Levy and Employment Allowance are distinct initiatives, but they both involve aspects of employer financial management related to workforce costs.

HMRC has published guidance to help determine whether businesses with multiple entities are ’connected’ for the purposes of the Apprenticeship Levy and the Employment Allowance.

Understanding what ‘connected entities’ are and how they apply to your business is particularly important, and relevant to both initiatives.

Learn more about Employment Allowance.

What exactly is a connected entity?

Understanding what constitutes a ‘connected entity’ is crucial because it affects eligibility and how allowances or levies are applied.

Connected entities are businesses or organisations that are linked because one controls the other or they’re both controlled by the same parent company.

They can include companies, charities, and public bodies, each with their own specific rules.

companies – must follow specific rules about their connection to other companies. When it comes to who has control over the company, this can be determined, amongst other factors, by who has the most voting power or the majority of sharespublic bodies – usually have their own Apprenticeship Levy allowance, but this can change if they share control with another entity. They can’t claim Employment Allowance unless they’re also a charitycharities – if controlled by the same organisation as another entity, they might be connected, affecting their allowance claims.

HMRC’s guide explains further important nuances of the rules.

For example, if a company controls a charity, they are not considered connected for the purpose of claiming the Apprenticeship Levy or Employment Allowance.

However, if a charity controls a company, they are considered connected.

The general rule is that if two or more entities are connected, they need to share specific financial responsibilities.

This connection will affect how each entity pays the Apprenticeship Levy, and how Employment Allowance is claimed and used.

What is the Apprenticeship Levy, and how does it work?

The Apprenticeship Levy is a government initiative to encourage employers to invest in apprenticeships.

It works like a tax collected by HMRC, based on 0.5% of a company’s annual pay bill if it is over £3 million.

Employers who pay the levy can access the funds through their apprenticeships service account and use the money to cover the cost of training and assessment for apprentices.

Other businesses, including smaller ones, can use any leftover funds for apprenticeships.

Employers also get a £15,000 annual allowance to reduce their levy payment, which must be shared among all connected entities.

Businesses need to understand their structure well to avoid problems with HMRC when calculating and paying the levy.

Why connected entities are relevant to Employment Allowance

Employment Allowance allows employers to reduce their Class 1 National Insurance contributions liability by up to £10,500.

While it’s an allowance and not a levy, it’s managed across connected entities in a similar way to the Apprenticeship Levy.

When entities are connected, only one can claim Employment Allowance.

Therefore, employers must know which entities are connected to their business.

Common errors and how to avoid them

Employers often make mistakes related to the Apprenticeship Levy and Employment Allowance, so you’re certainly not alone if you’ve made errors in the past.

Here are some common mistakes and how to avoid them:

1. Not understanding connected entities

Regardless of their sector, many businesses struggle to understand what constitutes a connected entity.
This can lead to incorrect reporting and potential non-compliance.

Potential solutions

Regular training and awareness sessions could benefit employees dealing with financial reporting.

Putting together comprehensive guides for your business to refer to can also be helpful.

This can help you become more prepared when it comes to compliance with HMRC rules.

2. Incorrectly identifying connected entities

Not identifying all connected entities can lead to errors in reporting and using allowances.

Potential solutions

Conducting regular audits can help identify any changes in group structures.

You could also develop a checklist or flowchart to map out entities connected to your business and review it regularly.

Seeing the group structure as a whole could make it easier to correctly identify the relevant entities you should consider.

Refer to HMRC’s examples and definitions to help you do this accurately.

3. Relying too much on payroll software and agents

Entities may depend too heavily on payroll software or external agents.

The danger here is assuming that these systems will automatically account for all connected entities. 

Potential solutions

Cross-check any automated data carefully and check that payroll configurations are up-to-date with current guidelines and regulations. 

This could help you reduce reliance on software alone.

It’s also important to conduct regular audits and actively remain informed.

4. Applying allowances incorrectly

Businesses often apply allowances incorrectly for connected entities, leading to compliance issues.

Potential solutions

Think about assigning a team or individual to manage the application of allowances.

Having someone with a good overview of all entities could help to ensure that decisions are made collaboratively.

This can also help to make sure your organisation is compliant.

It’s also helpful to maintain clear records and communication across all entities to help with accurate reporting.

If you’re in any doubt about what to do you should seek independent, specialist advice.

Sector-specific potential errors

Different sectors face specific challenges, including the following:

corporate sector – if there are frequent changes in corporate structure this could cause confusion about connected entities, so there may need to be regular internal communication regarding this. Particular care should also be taken when companies merge, acquire other companies, restructure, or are part of a joint venture to ensure that the rules regarding transitional years are followed. HMRC provides guidancepublic sector – sometimes, public bodies don’t realise they qualify as companies (depending on the regulation). It’s important to review classifications regularly and speak to HMRC if in doubtcharitable sector – the complexity of funding structures can mean that charities face challenges when applying allowances. Enlisting the help of a financial advisor could be beneficialsmaller businesses – without an experienced team to conduct compliance checks, smaller businesses could make mistakes. Using all the support available, such as government resources or seeking independent, specialist advice, could helpeducation sector – complex relationships with local authorities or trusts can lead to confusion around organisational structures, so it’s best to consult legal and financial experts for help with compliance if needed.Best practices for understanding connected entitiesStay up to date with the HMRC guidelines – regular training can help you foster a culture of compliance when it comes to reportingOrganise regular audits to identify any errors and address them early onUtilise the experts available to you – tax experts or advisors can help you with complex compliance issuesStay informed about any new legislative changes so you can adjust your compliance strategies appropriately.

You can find the latest guidelines on connected entities relating to the Apprenticeship Levy and Employment Allowance on the HMRC website.
 

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