The UK’s new Apprenticeship Levy will come into force next month. It forms part of a significant reformation of apprenticeship programmes in the UK, with the aim of providing – through what is, essentially, a tax on large employers – three million new apprenticeships.

However, a recent survey by City and Guilds has shown that around a third of UK employers who will have to pay are still unaware of the scheme. In this article, we explain some of the changes being introduced and ask whether they are likely to achieve their aims.

Why introduce an Apprenticeship Levy?

The Apprenticeship Levy was introduced by the UK government as part of the Finance Act 2016, with the aim of raising up to £3 billion to fund three million new apprenticeships by 2020.

Who will have to pay the Levy?

It makes no difference whether an employer has, or intends to have, any apprentices. The Levy will technically be applicable to all employers, set at 0.5% of the employer’s pay bill. However, in practice, this means that the Levy will only be payable by employers with an annual pay bill of £3 million or over, the equivalent of £250,000 per month, because an annual allowance of £15,000 is available to employers (paid through e-vouchers as explained below) to offset against the liability. The government estimates that less than 2% of employers will in reality be required to make any payment in respect of the Levy.

Group companies and other connected employers

Each company in a group of two or more connected companies must pay the Levy if it meets the pay bill criteria, but only one company in a group is entitled to benefit from the £15,000 allowance in any one year. This may increase the number of businesses liable for the Levy. It is up to the group to decide how the allowance will be allocated each year and group companies will be able to pool their vouchers into one digital account.

Employment intermediaries (companies that account for tax and National Insurance Contributions on payments to workers who are supplied to clients) and public authorities will also be liable to pay the Levy if they have a qualifying pay bill.

How will the Levy be calculated and paid?

An employer’s ‘paybill’ for the purposes of the Levy will be the total employee earnings in a tax year that are subject to employer’s National Insurance Contributions (secondary Class 1 contributions) (NICs). This also includes earnings that attract a 0% rate of NICs (for example, for employees under the age of 21 or an apprentice under the age of 25) but does not include benefits in kind.

Responsibility for calculating and paying the Levy will lie with the employer and it will be paid by employers to HMRC via their usual PAYE mechanism. The first payments will be due in May 2017. It will be up to employers to notify HMRC each month as to whether they are required to pay.

How can employers benefit from the Levy?

All employers – not just those who pay the Levy – will benefit from it.

Once the Levy comes into effect, all employers will be able to login to an online portal to access training providers and assessment organisations and to use their Digital Apprentice Service (DAS) account. Here, employers can use their vouchers (£15,000 or the value of the company’s contribution to the Levy if they pay it ,whichever is the greater) to pay for apprenticeship training and assessments from approved providers for new apprentices or current staff and/or to find candidates for their new programmes. However, this allowance cannot be used to pay apprentices’ wages or travel costs.

Those employers who pay the Levy will also be able to benefit from a 10% top up of the value of their vouchers to be used in the DAS account. This means that for every £1 paid in, the employer gets £1.10 to spend – technically allowing them (if they fully utilise the vouchers) to extract greater value from the scheme than they put in.

Employers’ vouchers for the DAS account will be time limited and will expire after 24 months.

If an employer does not have enough in its account to pay the whole cost of training, it will be expected to pay the additional amount directly to the provider.

Will the changes work?

The new Levy regime has already come in for criticism from some quarters.

The City and Guilds survey of 500 decision makers in large companies published last month found that:

  • 33% felt fully informed about the new rules
  • 28% were not sure whether it would affect their business
  • 31% said they would hire more apprentices because of the levy
  • 15% said they would have to cut other recruitment schemes to pay it

The Institute for Fiscal Studies (IFS), in its recent report, has branded the government’s target to rapidly increase the number of apprenticeships in the UK as being “poor value for money”, warning that it could devalue the “brand” of apprenticeships by reducing it to “just another term for training”. Whilst acknowledging there is a “desperate need” for better vocational training, the IFS report sets out concerns that the government has “failed to make a convincing case for such a large and rapid expansion in apprenticeships” and warns of “wildly optimistic” claims of how increased earnings could result from the intended increased investment in apprentices.

Some have raised the possibility that employers may seek to pass on the cost of the Levy by pushing down wages for other workers, or for apprentices themselves. The National Minimum Wage for apprentices who are aged under 19 or are in the first year of their apprenticeship is only £3.50 per hour. The IFS also point out that there could be a reduction in the quality of apprenticeships if employers seek simply to rebadge other types of training as apprenticeships with a view to trying to get the best value possible from the Levy scheme.

Others have asked the question, “If the Levy is expected to raise £3 billion by 2019-20, but only a proportion of that is expected to be spent on apprenticeships, then where will the rest of the money go?” and raised the possibility that some employers may seek to pass on the cost of the Levy by pushing down wages for other workers.

There have also been concerns raised on behalf of small council schools which will be caught by the Levy on the basis that their staff fall under the wage bill of the relevant local authority, rather than the school itself. The government has suggested that it should be the local authority, rather than the schools themselves, which foot the bill for the Levy. However, it is expected that the cost will have to be factored into each school’s budget, potentially having a greater negative impact on smaller schools, where finances are already stretched.

Whilst the new scheme may be of benefit to those employers that either already run apprenticeship programmes or whose business suits the apprenticeship model, in reality many companies may be unable to fully utilise the allowances provided by the new system to extract its purported benefits. Therefore, for companies that will be liable to pay the Levy, it will often amount to little more than an additional payroll tax. The question then is how businesses will pay for such additional liability, with a potential risk being that the cost could be passed on in some indirect way to staff. Alternatively or additionally, the impact of the Levy could be a necessary increase in the cost of the business’ products or services.

However, it should not be forgotten that all businesses are able to benefit from the Levy by way of the allowances made available for apprenticeship schemes. The City & Guilds survey found that overall, 47% of respondees felt the levy was a good way to get employers to pay for training, 43% said it gave them more control and 34% believed it would improve quality. As such, this could result in employers being more creative and thinking about how apprenticeships could be used within their business model where they have not been previously, contributing towards the increase in apprenticeship schemes targeted by the government when the Levy was initially introduced.

Institute of Apprenticeships and the Register

Employers will only be able to pay government-approved training providers with DAS vouchers. These providers will have to pass quality and financial tests and will be inspected by Ofsted, the education inspectorate. In order to make sure standards are consistent and rigorous, the government has opened a new register of apprenticeship training providers.

In addition, the Institute of Apprenticeships (IoA) will be launched in April 2017. The IoA will be an independent body, tasked with guaranteeing the integrity of the apprenticeships system, assuring quality and providing objective advice on future funding for apprenticeship training for employers throughout the country.

The Secretary of State will be able to provide advice and support to the IoA and the government intends to publish an annual guidance document aimed at outlining the remit of the IoA and its functions. A draft has been published for consultation, which includes guidance on the role of the IoA and how it should operate in a wider context, details of its core principles and functions, and establishes standards for the development and approval of apprenticeship schemes. The consultation closed on 31 January 2017 and the final version is expected in due course.