If you are an employer in the UK, you may be eligible to claim the Employment Allowance to lower your annual National Insurance liability. However, the rules around claiming this allowance can get tricky, especially if your company is connected to one or more other companies. This article breaks down what you need to know to determine if your company can claim the Employment Allowance.

What is a connected company?

In basic terms, companies are considered “connected” for Employment Allowance purposes if:

• One company controls the other 
• Both companies are under the control of the same person or group of people

Control in this context means having power over things like voting rights, share capital, rights to income, and rights to assets if the company is wound up. Limited liability partnerships are considered controlled by another company if that company has rights to over half the LLP’s assets or income.

Only one connected company can claim

The key thing to know is that if two or more companies are connected at the start of the tax year (April 6th), only ONE of those companies can claim the Employment Allowance for that entire tax year. The companies have to decide amongst themselves which one will claim it. Any change in circumstances after April 6th doesn’t matter – the companies are treated as connected for the whole tax year, regardless.

This connected companies rule does not apply to sole traders, partnerships, or single companies not connected to any others. It only applies to multiple connected companies.

Determining if companies are connected

How do you figure out if your company is connected to another? There are a few factors and scenarios to consider:

Share ownership and voting power: If one company holds over 50% of the share capital or voting rights in the other at the start of the tax year, they are connected, and only one can claim the allowance. 

Substantial commercial interdependence: Even if two companies are only legally connected because of the attribution of rights between people like relatives, they will still be treated as connected for the allowance if they are “substantially commercially interdependent.” This means factors like:

• Financial support between the companies
• Shared economic/commercial objectives 
• Common management, employees, and premises

So, even without majority ownership, deep business and operational ties can connect companies.

Group structures: If you have a parent company with multiple subsidiaries, you’ll need to identify at the start of the tax year which company in the group will claim the allowance since only one can. However, if you create or acquire a new subsidiary after April 6th, that new company will be treated as not connected for the remainder of that tax year and can claim the allowance itself. However, the following tax year will be subject to the rules of normally connected companies.

Evaluating the full picture of control

Often, determining control and connection between companies requires looking at the full context and multiple factors, not just percentages of share ownership. Some particular scenarios to be aware of include:

Fixed-rate preference shares: These are sometimes ignored in evaluating control if the company that holds them is not a close company, takes no part in the management of the company that issued the shares, and subscribes for the shares in the ordinary course of its finance business. However, certain types of preference shares are still counted.

Minimum controlling combinations: Based on different factors, More than one person or group may be said to control a company at the same time. In these cases, only the minimum number of people necessary for control should be considered when determining whether companies are connected.

Loan creditors and trustees: Loan creditors are generally only considered when assessing company control if they have some other connection to the company beyond the loan. Control via rights/powers held in trust is only considered if some other connection exists between the companies.

Breaking down these key concepts helps clarify when the connected companies rule comes into play for the Employment Allowance. The essential points to remember are:

1. Connected companies must decide amongst themselves which single company will claim the allowance each tax year. 
2. Connection is determined based on factors like shared ownership, voting rights, and commercial interdependence
3. The status as of April 6th controls the whole tax year
4. Evaluating control requires looking at the full picture, not just ownership percentages

To manage your company’s tax compliance, you can seek assistance from our tax accountants. Our team of experts can provide you with professional tax advice tailored to your specific situation. Do not hesitate to consult us if you need help in this matter.