Apprenticeship Levy update – are you about to start throwing money away?

When the levy was launched in 2017 it was billed as a major step towards improving the efficiency of the UK economy. Two years on, apprenticeship starts have declined and time is running out for employers to make use of hundreds of millions of pounds.

Background

The Apprenticeship Levy was introduced with effect from April 2017 with the aim of improving the skills, efficiency and therefore the productivity of the UK workforce by attracting millions of new apprentices into workplace learning. The government target in 2017 was to achieve an additional 3 million apprenticeship starts by 2020.  

On 8 March 2017 we published an article that outlined the details of the scheme but we can summarise the scheme as follows:

• Employers with a pay bill higher than £3m per year must pay the levy at the rate of 0.5%;
• Employers are given a levy allowance of £15,000 and therefore only the wages above £3m incur the levy charge;
• The levy is directed to an online account through a portal from which employers can access the funds and pay for training;
• An apprentice for the purposes of the levy can be any employee who wishes to receive training to provide them with new skills and help them to develop;
• The levy is paid monthly with funds becoming available to ‘spend’ on the 23rd of each month;
• Investment in training above the amount paid under the levy attracts additional government subsidies/grants.

How successful has it been?

Most commentators would say that it has been less than completely successful with the number of apprenticeship starts falling significantly since 2017. Many employers are critical of the scheme and point to the fact that some of the more advanced apprenticeship standards are being provided at a cost higher than the maximum contribution permitted under the levy scheme. Other employers opine that the levy is nothing more than a tax on business; a position that appears to be confirmed by government data:

• Between April 2017 and November 2018, the levy was paid by around 19,000 employers who in total paid in the region of 4.5bn into the fund.  For the FY 2017 this equated to around £225m per month;
• The average employer paying into the scheme contributes around £140,000 per annum;
• In the period from April 2017 to September 2018 only £370m had been paid to providers from levy accounts; the equivalent of around 1.6 months of payments into the scheme.

On the flip side, the number of apprenticeships now available has increased and there are more providers in the market; including many higher education providers.  The government also points to the increasing standard of the apprenticeships that are on offer.

Where has it all gone wrong?

This is the big question which must be coupled with asking “Has it all gone wrong?” The answer will, of course, depend on your perspective but with lots of criticism being directed at the government we need to be asking, “Why would an employer pay £140,000 into the levy fund and not use it”?

There are numerous answers to that question including:

• Many employers already have an apprenticeship training scheme that does not/cannot make use of the levy and it will take some time to change those schemes to take advantage of the levy funding
• Training is only one cost to the employer; the levy fund cannot be used to pay salary and that is the cost that is preventing the engagement of more apprentices. The flip side to this argument is that apprentices do not need to be new employees. An existing employee that is in a developing role or has been promoted will be able to take on apprenticeship training and access the levy funds
• Employers cannot afford the time to allow an apprentice to be released for the 20% off-the-job training requirement
• The inflexibility of the scheme.

What next?

Reacting to the criticism of the scheme, the government has already introduced the option for levy paying employers to transfer some of their fund to other businesses within their supply chain.  Since April 2018 employers have been able to transfer up to 10% of their annual levy payment to another business. In October 2018 the Chancellor, Phillip Hammond, announced that the government was proposing to extend this option so that up to 25% of levy funds could be allocated to businesses within the supply chain.  In addition, there are proposals to increase access to courses in science, technology, engineering and mathematics (STEM) subjects.

No doubt such changes are to be welcomed, but employers and business groups continue to argue that the reforms do not go far enough and that more change is needed to ensure that the bold ambition of the levy scheme may be realised.

Comment

Perhaps the single and most useful change that could be implemented would be to delay the date when levy funds are lost? Come April 2019, the government will absorb all payments that were made into the levy fund in April 2017 and which remain unspent with further funds being ‘absorbed’ every month thereafter. Applying the figures described above, this could be as much as £200m per month being moved from funds that are reserved for training to government funds – at which point the levy truly does become a tax.

If the process is recognised to be overly complicated and that employers are being slow to apply their funds, is it right to punish businesses for not having made use of the funds? 

One solution could be to widen the scheme so that businesses are encouraged to sponsor school leavers through their full-time degree programmes. Such a step would in turn improve higher education funding and reduce student debt. 

Other solutions are out there, but it is clear that further work needs to be done to ensure that the most is made of these significant funds so that the levy does not become a white elephant, to be consigned to history as a well intentioned failure.