Authors: Victoria Goode, Anna Sella (Lewis Silkin LLP)
This article provides an overview of how the new apprenticeship levy in the UK will work and what it means in practice for employers.
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The UK Government has committed to boost productivity by increasing the quantity and quality of apprenticeships. It aims to create three million apprenticeships by 2020 and introduce new apprenticeship standards. To help to fund this initiative, an apprenticeship levy will apply from 6 April 2017.
Employers with a wage bill of more than GBP 3 million will pay an annual levy of 0.5%. Details of how the levy will be collected are set out in draft legislation and the Government is finalising the details of how employers will be able to use and access the fund from May 2017.
Who will have to pay?
The levy will apply across all sectors to all employers in the United Kingdom with a gross wage bill in excess of GBP 3 million. For “connected” companies, the levy will be payable if the aggregate wage bill exceeds GBP 3 million. Broadly speaking, companies are “connected” if one has control over the other or if both companies are under the control of the same person. The Government estimates that fewer than 2% of employers in the country will pay the levy. However, the impact is not limited to very large employers – a company employing just over 100 people with an average salary of GBP 30,000 per employee will be within scope to pay the levy.
How much is the levy?
The levy will be charged at a rate of 0.5% of an employer's total gross UK wage bill (excluding benefits in kind). This is the total amount of all employees' earnings (including wages, commission and bonuses) subject to Class 1 secondary National Insurance (“NI”) contributions, but ignoring the employer NI contribution thresholds. For example, this will include the earnings of employees under the age of 21 and apprentices under the age of 25, even though no employer NI contributions are payable on those earnings.
Are any reliefs available?
Each employer that pays the levy will be entitled to a GBP 15,000 allowance per tax year to offset it so that, providing an employer uses its apprenticeship allowance, the levy is in effect only payable on wages in excess of GBP 3 million. However, employers that operate more than one payroll can only claim one allowance and “connected” companies will only be entitled to one allowance – it will be up to those companies to decide how to apportion it.
In addition, the levy payment will be deductible for corporation tax purposes.
How will the levy be administered?
In terms of administration, the apprenticeship levy is effectively a tax. Employers will pay and report the levy to HM Revenue & Customs (“HMRC”) on a monthly basis under pay-as-you-earn (“PAYE”) real-time information, alongside PAYE payments and NI contributions.
Employers will need to keep such records as HMRC specifies in respect of the levy for a certain period of time and complete returns in respect of the levy. Employers that fail to do so will be liable to a penalty of up to GBP 3,000 per tax year.
Are there any anti-avoidance provisions?
There are comprehensive anti-avoidance measures designed to catch arrangements which attempt to circumvent the levy. Any arrangements designed to reduce the total wage bill below GBP 3 million are likely to be caught (e.g. deferring payment of wages or bonuses from one tax year to another or encouraging employees to work through personal services companies). Further, employers cannot reduce wages (whether of apprentices or other staff) to pay for the levy.
Ensuring it works in practice
While the apprenticeships levy will apply to employers across the UK, it will be administered nationally as a devolved policy, with different arrangements in place for England, Scotland, Wales and Northern Ireland.
For England, the key practical points are as follows:
- The levy will be paid into a central pot, accessed by employers in England via an online portal known as the Digital Apprenticeship Service (“DAS”).
- A 10% Government top-up to monthly levy contributions will be available for levy-paying employers to spend on apprenticeship training or assessment.
- Employers will access the fund created by the levy and the 10% top-up in the form of online vouchers to use via the online portal to pay for accredited apprenticeship training programmes. A levy paying employer who wishes to spend more on apprenticeship training than is available in their account can do so. They will only need to make a 10% contribution towards this additional training, with the remaining tab being picked up by the Treasury.
- Employers that have not paid the levy due to a smaller pay bill will also be able to access to the fund via the online portal. 90% of this will initially be funded by the Treasury, with the employer only having to “co-invest” 10% of the training cost (although the Treasury will fund 100% of the apprenticeship training cost for employers with fewer than 50 employees who employ certain types of apprentices).
- Levy paying employers will have available to them, in full, the amount that they paid into the fund for use on apprenticeship training and assessment. However, the vouchers to access those funds will only be available for two years. If not used in that time, the amount will go towards the funds for employers that do not pay the levy and the top-ups referred to above. Credit in the account will be used on a “first in first out” basis.
- The DAS can also be used to select an apprenticeship framework or standard, choose training provider(s) and post apprenticeship vacancies. Levy-paying employers can further use it to manage payments to payment providers.
- The levy will not affect funding for apprenticeships that began prior to 1 May 2017, which should be funded and run in accordance with the terms and conditions originally put in place in respect of those apprenticeships.
What standards will apply and how will they be monitored?
The Government’s intention is to ensure that the fund is used only to sponsor "high quality apprenticeships". In implementing the new system in England, the Government has taken a standards-based approach to ensuring the quality of apprenticeships. The previous apprenticeship frameworks were criticised as not being sufficiently rigorous or responsive to employers' needs.
To tackle this, the development of around 500 clearer, more concise, standards is being led by a group of “trailblazer” employers. This will provide a selection of approved training providers for each type of apprenticeship and funding will be available only for these approved providers. Apprenticeships will be available up to the highest level, with universities working with employers to deliver new “degree apprenticeships” in professions such as law, software development and accountancy. Higher-level apprenticeships (degree level and postgraduate study) and apprenticeships for school leavers (aged 16 to 18) are likely to be eligible for increased funding.
Public funding will gradually be withdrawn from framework apprenticeships from 2017, as employers take on apprentices through the standards-based system.
The Government has also made provision for an Institute for Apprenticeships (the “IfA”) which will be a new, independent body led by employers and business leaders to regulate the quality of apprenticeships. The IfA will work closely with apprenticeship providers to ensure that what is delivered is what is needed by employers. The eight board members of the new IfA were announced in late January 2017 and they will start their work in April 2017.
In another bid to safeguard the quality of apprenticeship training programmes, it is now an offence for a training provider to call a course an “apprenticeship” if it does not comply with the requirements of a statutory apprenticeship.
What does this mean for employers?
The new apprenticeships system will be introduced gradually and is intended to work with the old system until the latter can be replaced entirely. Some key implications are highlighted below:
- Increased costs for large employers. Employers are prohibited from recovering the levy from employees (by deduction from wages or otherwise). Combined with the introduction of the National Living Wage, the levy will increase costs, especially for large employers, although this may be offset to a limited extent by the NI contribution exemption for apprentices under age 25.
- Sector impact. Certain sectors, such as construction and engineering, already pay a training levy. Although the current draft legislation seems to apply to all sectors, it is understood that the Government is consulting with the construction and engineering sectors about how the two levies will interact – apparently it is not intended that those employers will pay twice, although this may need to happen for 2017/2018 while the consultation is finalised. Firms that need to pay both levies may be able to apply for additional funding (e.g. from the Construction Industry Training Board) to cover the apprenticeship levy in 2017/2018.
- Potentially limited benefit for some employers. If employers are to receive any benefit from paying the levy, they will need to employ apprentices and ensure that their apprenticeship scheme satisfies Government standards. It cannot be used to pay salaries or staff costs – or to fund existing in-house training for non-apprentices. Many employers that are liable to pay the levy have no or limited apprenticeship programmes and so may struggle to spend an amount equivalent to the levy in the specified way. This means that there is likely to be money left over at the end of the two-year spending window which can be accessed by others through the central fund.
- Unforeseen impact on “temping” agencies. Temporary employment agencies have a pay bill which can cover many thousands of (high turnover) temporary agency staff placed in other businesses, whereas an agency's core business consists only of a much smaller number of staff. Depending on the outcome of the current consultation, they may be liable to pay a disproportionately large apprenticeship levy compared to the number of apprentices they would be likely to train for their own purposes.
- Employers that have not yet done so should work out if the business will need to pay the levy. If so, budget for this extra cost, not just for 2017 but for any future years in which the gross wage bill is likely to exceed GBP 3 million.
- Liaise with the payroll department or provider about the practicalities of reporting on and paying the levy. Although it is helpful that the levy uses many of the same concepts as the NI contribution legislation, there are differences in the calculation.
- Consider how to get the best out of the apprenticeship fund (especially if a levy-paying employer). Review the structure of any learning and development programmes – can more training and development be delivered through apprenticeships? Remember that apprenticeships are not just for young people.
- Register for the online DAS.
- Identify relevant accredited training providers and how the online system works to ensure the system can be used as soon as possible.
- For national employers, identify specific arrangements in the relevant jurisdictions: England, Scotland, Wales and Northern Ireland. Skills training is a devolved policy area and there will be separate arrangements for accessing and using apprenticeship levy funds in each of these areas.