Stephen Hemmings – Business Tax Partner
The Apprenticeship Levy has been with us for over five years but there remain employers unaware of what this is all about, whether it is payable, what action is available to mitigate the cost and what benefits are available to the business?
What is the Apprenticeship Levy?
It is a levy of 0.5% on employers in the UK who have a pay bill of over £3 million. All UK employers will fall within the regime but a £15,000 allowance is available. This means that the charge should only lead to additional tax for employers with a payroll bill of over £3 million. However, businesses with “connected” payrolls should take care because action is required to avoid unnecessary costs arising.
The levy is used to fund apprenticeships and the scheme is available to both levy paying and non-levy paying employers and the scheme is therefore applicable to many businesses, not just big business.
The Apprenticeship Levy detail
At the basic level, this is effectively an additional tax on employers, but it is used for targeted purposes designed to encourage training of apprentices to fill skills gaps.
For businesses that do not use the funding available though, this is just an additional cost that will generate funds to assist other businesses. It is therefore really important to make use of the funds generated providing the use of apprentices’ dovetails with business requirements and objectives. Theoretically the levy applies to all employers in the UK, although most have the ability to claim an allowance that will reduce the charge to nil.
For most standalone payrolls, this allowance will be claimed automatically through the payroll and no charge will apply. The problems arise where there are connected payrolls because for these it is important to apportion the allowance at the start of the tax year in a way that does not result in one payroll wasting allowance while a connected payroll remains chargeable.
Reliable estimates of your payroll costs for the year ahead are essential for determining how to apportion your allowance. Broadly, payrolls are connected where one company controls another or both are controlled by the same person or persons.
The levy is be collected through the PAYE process (on the 19th or 22nd of the following month) and the relevant pay bill of a business will be based on earnings subject to Class 1 secondary NIC contributions. This includes “deemed employees”, but not payments such as benefits in kind subject to Class 1A NIC.
The levy allowance of £15,000 operates on a basis of £1,250 per month, but if part of it is unused in a particular month, the unused allowance is carried forward. If a charge is paid in one month but there is an unused allowance in a future month, the business will receive a credit which it can use to offset against other PAYE liabilities.
The levy payment is a deductible cost for corporation tax purposes.
WHAT happens to the APPRENTICESHIP LEVY paid?
For businesses that pay the Apprenticeship Levy, the funds go into an account and the Government apply a 10% top up to these funds. These funds are available to the business to spend on qualifying training and assessment costs of their apprentices through approved training providers. Alternatively, the business has the ability to transfer up to 25% of their unused fund to a business of their choice that can then use the funds to pay for their own qualifying training and assessment costs.
There is however a 24-month time limit to use the funds and any unused balance will revert to the Government.
Businesses that do not actually pay the Apprenticeship Levy can still benefit from support with apprenticeship training costs and therefore even small businesses should be aware of the support available to them in funding the training of apprentices. You can get help to choose an Apprenticeship and training provider online.
Who benefits from the new digital apprenticeship service?
If you are paying the levy, and your employees are in England, you will be able to access funding for apprenticeships through a new digital service account.
The funding applies only to two types of specific apprenticeships. The ‘apprenticeship standards’ as well as an ‘apprenticeship framework’ which is being phased out by 2020. Links to both are set out below.
It should be possible to register for this account from 1 January 2017 and then use it to pay for training of apprentices from 1 May 2017. The first fund credits should appear in accounts after 22 May 2017, when the first levy amount is due to be paid.
The government will apply a 10% top up to funds deposited.
It is important to note that the funds will expire after 18 months, so cannot be built up over time.
The government is still considering whether the funds can be spent on another firms apprentices, such as a business in their supply chain, and specifically whether employers can transfer 10% of their funds for this purpose from 2018. However, they have confirmed it can be shared with other businesses in a group structure.
The scheme can only be used for new apprenticeships from 1 May 2017.
Funds will be taken from the digital account every month. To the extent the funds do not cover the cost of training, the Government will meet part of the costs of their shortfall, through what they call ‘co-investment’. The government is currently proposing that this level of support could be as high as 90% of additional funds, but will confirm the co-investment rate in October 2016.
The government have said that by 2020 all employers will be able to use the digital service to pay for training and assessment. Somewhat confusingly, in the same guidance they also say that non-levy employers won’t need to use the digital service until at least 2018. However, to the extent such an employer uses approved providers, they can benefit from so called ‘co-investment’ by the Government from May 2017.
Is it really happening?
For a number of months there has been speculation as to whether the levy proposal would be implemented by the proposed start date of 1 April 2017, or even whether it would be withdrawn entirely.
The Government’s self-imposed June deadline for the release of more detail passed without any further details being published. The Skills Minister at the time even suggested, before the Brexit vote, that the levy may not go ahead in the event of the UK leaving the EU. Like most politicians involved in the referendum he then revised his opinion and confirmed that the new system will still go ahead next April.
However, in mid-August HMRC eventually published further guidance and reaffirmed that the levy will be introduced next April. Further information is scheduled to be released in October and December, confirming levels of government support, funding and eligibility rules as well as further guidance on how the levy will be operated.
What the business world thinks of the Apprenticeship Levy
It is fair to say that these new proposals have not been met with a wholly positive response in the business world.
It is widely acknowledged that there is a distinct skills shortage within the UK industry. Therefore on the face of it, the chance to invest £11.6 billion in apprenticeships over the next five years is a great opportunity, and the Government’s 90% proposed co-investment does sound generous.
However, the CBI (Confederation of British Industry) believe that the plans need a radical rethink. They point out in particular a lack of flexibility in how the funds can be spent and a current lack of transparency over how the success will be managed and measured. On a practical level they are concerned about the extra administration and whether HMRC will have the necessary IT infrastructure in place by next April.
The first point on flexibility is particularly pertinent for Menzies clients. UK businesses spent over £45 billion on training in 2015, with only £1.8 billion of that being in relation to apprenticeships.
There is a dual risk that investment in other types of training will suffer, and that firms will attempt to shoehorn other training into the apprenticeship rules. Other countries such as Ireland, Germany, Denmark and France have a similar scheme which is apparently much less restrictive to businesses.
In May, the British Chamber of Commerce went as far to say that the proposals have already had a ‘chilling effect’ on British industry business as employers have begun to scale back successful training schemes to cope with the burden of a levy.
Therefore, whilst the idea of investment in skills training is a positive one, the detail of the rules already appear to restrict the potential benefits, as the government is missing deadlines to provide further information. Furthermore, there is a lot of uncertainty in UK businesses about these rules which may unfortunately hold back investment in wider training.