Learning a trade or profession: How will the new apprenticeship levy work?

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Donald-Drysdale By Donald Drysdale for ICAS

1 July 2016

Donald Drysdale finds that a new UK-wide levy to fund apprenticeships is causing uncertainties for employers.

There’s a deal of controversy surrounding the Chancellor’s plans for Britain’s substantial new payroll tax.

In the Summer Budget of July 2015, he announced the introduction of a new levy on large employers “to significantly increase the quantity and quality of apprenticeships in England to 3 million starts this Parliament” – that is, by 2020 – with control of funding in the hands of employers.

In March the Finance Bill 2016 included draft legislation setting out how this new UK-wide apprenticeship levy will apply from April 2017, administered by HMRC. In April the Department for Business, Innovation & Skills (BIS) published guidance on paying the apprenticeship levy, aimed at all employers operating in the UK whether they will be liable to pay the levy or not.

The BIS guidance also explains how employers will be able to access money paid under the apprenticeship levy, and this is where the confusion begins. Although the levy to be imposed on all UK employers is a matter reserved to the Westminster government, BIS is only concerned with the funding of apprenticeships in England. Arrangements for accessing the funds are devolved – so separate arrangements will apply in Scotland, Wales and Northern Ireland.

What is the apprenticeship levy?

From April 2017 the apprenticeship levy will replace all pre-existing taxpayer funding of apprenticeships for UK employers of all sizes. It is proposed that it will start at a rate of 0.5% of an employer’s pay bill. It will be collected at source from their payroll through PAYE.

For this purpose the pay bill will include all salaries, wages, bonuses, commissions and pension contributions on which national insurance contributions (NICs) are due – in other words, the total earnings upon which Class 1 secondary NICs are due. It will not include other compensation such as benefits in kind.

Employers will receive a levy allowance (proposed to be set initially at £15,000 a year) to offset against their levy payment. Thus the levy will only be paid on annual pay bills in excess of £3m – representing fewer than 2% of UK employers. Under a ‘connected persons’ rule, associated employers or payrolls will be able to claim only one levy allowance but will be able to choose how to allocate it between them.

Employers of all sizes will need to ensure that their payroll departments are geared up to comply with their obligations to account for the levy through PAYE, even if they are within their £15,000 allowance and therefore don’t have to pay. In many cases this will require engagement in advance with their payroll bureaux or software providers.

The levy will apply to employers in all business sectors – including those such as construction and engineering which are already covered by statutory levy arrangements. In sectors with pre-existing levies, industry training boards will consult with employers on potential changes to such arrangements.

The levy is expected to raise £3bn a year by 2019/20, with £0.5bn of this being allocated across Scotland, Wales and Northern Ireland – presumably through adjustments to the Barnett formula.

Access to apprenticeship funding

Once an employer in England has paid the levy to HMRC, they will be able to reclaim their levy contributions as digital vouchers to pay for training and assessment of apprentices through a new digital apprenticeship service account. This will allow them to pay for the services of third party approved training providers to help them develop and deliver their apprenticeship programme. The service will also assist them in finding such providers.

In England, employers who pay the levy and provide apprenticeship training will receive a top-up to their digital accounts. Smaller employers, who don’t pay the levy, will be able to access government support for apprenticeships. The government will establish a new independent employer-led body to set apprenticeship standards, ensure quality and advise on the level of levy funding each apprenticeship should receive.

BIS recognises that employers in England can be extremely successful training providers, and wants to encourage those who want to take this route to deliver high-quality apprenticeships. An employer wishing to use funds from their own digital account to pay for apprenticeship training that they provide and manage themselves will need to be an approved training provider.

Skills Ministers from the devolved administrations have expressed their shared concerns about the new levy and its potential both to undermine their respective apprenticeship policies and impact negatively on employers.

Further guidance from BIS between now and December 2016 will provide more details on how employers in England may access funding, and will also contain information from HMRC on how employers UK-wide should calculate and pay the apprenticeship levy. This mixing-up of UK guidance on the levy with guidance for England only on access to funding seems an unnecessary recipe for confusion.

The devolved administrations currently provide support for apprenticeship schemes in their own respective ways – see separate details for Scotland, Wales and Northern Ireland. They all place a high value on national occupational standards developed in partnership with industry to define levels of competence and underpin apprenticeships. They are reluctant to move away from qualifications which are both rigorous and occupationally relevant.

Skills Ministers from the devolved administrations have expressed their shared concerns about the new levy and its potential both to undermine their respective apprenticeship policies and impact negatively on employers. They are united in their misgivings that this additional payroll tax will discourage inward investment into their jurisdictions and into the UK generally.

In the meantime, large employers in Scotland, Wales and Northern Ireland know that they will have to pay the levy, but don’t know how they will be able to access the funds raised. There have been no suggestions yet that similar digital voucher systems will be introduced.  The uncertainties involved place these employers at a potential disadvantage compared with their competitors in England.

Business reaction to the levy

It seems that many employers throughout the UK mistrust the new apprenticeship levy, seeing it as little more than a new payroll tax. There are also worries that the levy might prove a convenient tool for the ‘tax locked’ Chancellor to use in raising extra revenues – simply by increasing the rate above 0.5% and/or reducing the levy allowance below £15,000. Of course, following the vote to leave the EU, the Chancellor or his successor might not regard the tax lock as relevant or effective.

Britain already has a skills shortage. Recent press reports suggest that uncertainties about the new apprenticeship levy are causing some employers to scale back successful training schemes – with adverse effects on their businesses, their profits and the training available to their employees.

In some cases businesses currently offering effective training schemes are reportedly cutting these back because their existing training is not an official apprenticeship and therefore won’t be funded under the new scheme.

Article supplied by Taxing Words Ltd

Topics

  • Tax
  • Business
  • Accountancy

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