Introduction
Who will have to pay?
How much is the levy?
Are any reliefs available?
How will the levy be administered?
Are there any anti-avoidance provisions?
Ensuring it works in practice
How flexible will the fund be?
What does this mean for employers?


Introduction

The government is committed to boosting productivity by increasing the quantity and quality of apprenticeships. To this end, it aims to create three million apprenticeships by 2020 and introduce new apprenticeship standards. From April 6 2017, employers with a wage bill of more than £3 million will pay an annual levy of 0.5% to help to fund the initiative. Details of how the levy will be collected have been set out in draft legislation. However, details of how employers will be able to use and access the fund remain unclear and are subject to further consultation.

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 £3 million. The government estimates that less than 2% of employers in the country will 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 subject to Class 1 secondary National Insurance contributions, but ignoring the employer National Insurance 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 National Insurance contributions are payable on those earnings.

Are any reliefs available?

Each employer that pays the levy will be entitled to a £15,000 allowance to offset it and, as announced in the 2016 Budget, a 10% top-up to their monthly levy contributions which will be available for them to spend on apprenticeship training. Employers that operate more than one payroll will be entitled to claim only one allowance and group companies will be entitled only to one allowance – it will be up to the group to decide which company should receive it.

From April 6 2016, employers will not pay National Insurance contributions on the earnings of apprentices under the age of 25 up to the upper earnings limit (for 2016-2017, £827 per week).

How will the levy be administered?

Employers will pay and report the levy on a monthly basis under pay-as-you-earn (PAYE) real-time information, alongside PAYE payments and National Insurance contributions.

Employers will need to keep records in respect of the levy for a certain period of time and make returns. Employers that fail to do so will be liable to a penalty of up to £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 £3 million are likely to be caught (eg, deferring payment of wages or bonuses from one tax year to another or encouraging employees to work through personal services companies).

Ensuring it works in practice

Although draft legislation on the levy was published in February 2016, the details of how it will work in practice remain unclear. However, key 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. Employers will need to ensure that they know how to access and use the system.
  • It appears that 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.
  • Employers that have not paid the levy due to a smaller pay bill will also have access to the fund via the online portal – this will be funded by the Treasury initially.
  • Employers that have paid the levy will have available to them, in full, the amount that they paid into the fund. However, the vouchers to access those funds will not last forever. If the vouchers are not used by the employer within two years, the amount will go towards the funds for employers that do not pay the levy and the top-ups referred to above.
  • The Digital Apprenticeship Service will also help employers to choose types of apprenticeship, candidates and training providers.

How flexible will the fund be?

There is little information on how the government will oversee the quality of apprenticeships. The government says that it wants to ensure that the fund is used only to sponsor "high quality apprenticeships". In implementing the new system in England, the government is looking to take a standards-based approach to ensuring the quality of apprenticeships. The previous frameworks were criticised as not being sufficiently rigorous or responsive to employers' needs. To tackle this, the development of around 350 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.

The government will establish the Institute for Apprenticeships by April 2017, which will be a new, independent body led by employers to regulate the quality of apprenticeships and decide the cap on funding available for each type of apprenticeship. 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.

It is also intended that in Spring/Summer 2016 the word 'apprenticeship' will become a protected term to ensure that it cannot be misused by education and training providers.

What does this mean for employers?

It is clear that the new apprenticeships system will be introduced gradually and is intended to work with the old system until it can be replaced entirely. The government is yet to make a number of key decisions about how the levy itself will work, who will have access to funding and how much they will receive. However, some key implications are as follows:

  • 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 from April 1 2016, the levy will increase costs, especially for large employers, although this may be offset to a limited extent by the National Insurance 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 will be 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.
  • 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. 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, ensuring 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 the 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.
  • Payroll issues – although it is helpful that the levy uses many of the same concepts as the National Insurance contribution legislation, there are differences in the calculation. Accordingly, with just over a year until the levy is introduced, employers will need to work closely with their payroll teams to clarify how the levy will be paid.
  • UK-wide access to the fund – skills training is a devolved policy area and only employers in England will receive funds by means of digital accounts. The government is consulting with Northern Ireland, Scotland and Wales to decide how best to implement funding flows to ensure that all employers in the United Kingdom can access and use the funds.