UK: The Apprenticeship Levy Looms: How Will It All Work?

Last Updated: 14 December 2016
Article by Jane Fielding and Tessa Livock

From April 2017 the new Apprenticeship Levy ("the Levy") will see large employers paying 0.5% of their annual wage bill towards the cost of apprenticeship training. Information about the Levy has been met with confusion and concern as to how it will work in practice.

In June we reported the Government's intention to publish details regarding the funding of apprenticeships, the eligibility rules governing who employers can spend apprenticeship funding on, requirements for apprenticeship training providers and how to calculate and pay the levy.

We now have the draft regulations from HMRC and Guidance from the Department for Education and the Skills Funding Agency (SFA) addressing aspects of the Levy and forthcoming changes to the system of apprenticeships. Here, our employment experts report on the key updates around the introduction of the Levy and the future of Apprenticeship training.

HMRC Regulations on calculation and payment of the Levy

On 19 September 2016 the Government published draft regulations, Income Tax (Pay as You Earn) (Amendment) Regulations 2017 which set out how payment of the Levy will work. The draft regulations provide for the Levy to be reported via the PAYE process along with income tax and national insurance contributions. The onus is on employers to assess their annual pay bill for the previous and current tax years to decide if they are liable to pay the Levy and notify HMRC of the amount of Levy (if any) to be paid via an Employers Payment Summary.

There will be a £15,000 annual allowance, which means employers with an annual wage bill below £3million will not pay the Levy. The draft regulations confirm that the Levy allowance will operate on a monthly cumulative basis so any unused allowance will be carried forward from one month to the next. The Government has recognised that wage bills of some employers will fluctuate around the £3million threshold for the Levy allowance and the draft regulations provide that at the end of the year, any overpaid Levy can be offset against the employer's other PAYE liabilities.

The draft regulations envisage employers will have to report to HMRC on payment of their Levy where their pay bill for the previous year was £2.8 million or more. This is to ensure that employers, whose pay bill may increase beyond £2.8 million to £3 million or more from one pay year to the next, engage with the Levy.

Where an employer has multiple PAYE schemes, it will only be able to use one £15,000 Levy allowance. The draft regulations provide this can be split between the employer's PAYE references or members of a company unit (company unit is not defined in the draft regulations for this purpose) within the group; however the decision on how this is split must be made at the beginning of the tax year, and remain fixed for that year. Group structures will be able to pool their funds together by registering to have PAYE schemes attached to a single digital account system ("DAS").

The final version of the regulations is expected to be published shortly with few, if any, changes.

Department of Education updated guidance on Apprenticeship funding

The Department for Education has also published further information about how it proposes apprenticeships will be funded from May 2017 - one month after the Levy is introduced. As part of its transition from the use of apprenticeship frameworks to the new employer-developed apprenticeship trailblazer standards, the Government is changing the funding rates and rules and frameworks will, on average, be less generously funded from May 2017.

Key features of the proposals are as follows:

Use it or lose it

Employers will have 24 months, rather than the 18 originally proposed, to spend Apprenticeship funding made available via DAS account before the availability of Levy funds in the account will expire.

Funding bands

The Government is proposing 15 new funding bands with the upper limit of each band ranging from £1,500 to £27,000. Within these funding limits, employers will have to negotiate prices with training providers for apprenticeship training and assessment on completion. This is a greater number of funding bands than in the current system and the Government has stated this is intended to militate against the tendency for prices to drift towards the top of a funding band. The Government has created a tool to check the funding bands for specific frameworks and standards.

Co-investment

The Government is proposing that employers who do not pay the Levy, or Levy-paying employers who are prepared to invest more in training than they have in their DAS, should be given financial support to help pay for apprenticeship training. The Government will fund 90% of apprenticeship training up to the top of the relevant funding band and require employers to co-invest 10%. Initially, employers who do not pay the Levy will need to pay their co-investment share directly to the training provider. Over time this will move to a system where all pay for apprenticeship training via the DAS.

Training for existing employees

The proposals confirm that employers will be able to use funds to train existing employees provided the training will allow them to acquire substantive new skills.

Financial support for young apprentices and those with additional needs

Extra support for apprentices between 16-18 years and 19-24 year old care leavers or those who have an Education, Health and Care Plan will be provided. The Government has indicated it will make available an additional £1,000 to employers and an additional £1,000 to training providers to help with additional costs in supporting these young apprentices.

Training providers will receive £471 per apprentice for apprentices who need support with English and Maths training. This will be paid directly by the Government to the training providers and will not be processed via the employer's digital apprenticeship system account. Also, training providers with apprentices who need additional learning support as a result of learning difficulties, dyslexia or disabilities will be provided with an additional £150 per month.

Although these are proposals and yet to be finalised, the Government has published an online tool for employers to use in order to estimate how much they will be required to pay for training, help them plan apprenticeship training and understand how to use Levy funds to buy training.

Directing funds to another employer

The Government is proposing employers will be permitted to transfer up to 10% of the value of funds entering into their DAS to other employers who are not part of their group. This will pave the way for employers to use some of the Levy for the training of apprentices who carry out work for them but are employed by a service provider. The transfer of Levy funds to other employers will not be possible until 2018.

The Government has indicated that such transfers may be subject to EU state aid regulations aimed at preventing public resources from being used to provide assistance which would give one organisation an advantage over others.

The State aid issue arises because the Levy contributing employer will not be using the funds transferred from its DAS for apprenticeship training for its own apprentices, but rather for third party employers outside its Group e.g. a company in its supply chain. As the Levy is essentially a tax imposed by the Government and is likely to be considered as State resources, if funds are transferred to selected employers who provide workers to a Levy-paying employer this could amount to State aid to the third party employer in receipt of the transferred funds. The third party employer may be considered under the State aid rules to have a selective advantage over other undertakings active within the same industry or sector because other undertakings may not have the benefit of receiving transferred funds from a Levy-paying organisation.

The Government has confirmed that employers will need to take responsibility for remaining within the rules. It will be up to the Levy-paying employer and the third party employer receiving the transfer of funds, to ensure that transferred funds do not exceed the amount permissible under the De Minimis State Aid Regulation (currently up to £200,000 over a three year fiscal period). Save for the largest employers making significant Levy contributions, this is likely to be manageable as the funds made available to third parties are unlikely to exceed the De Minimis.

Requirements for apprentice training providers

All apprenticeships will require 20% off the job training. The Government has stated it recognises employers can be extremely successful training providers and over the summer, the Department for Business, Energy and Industrial Strategy published guidance for employers on becoming apprenticeship training providers. This will be highly relevant to businesses who want to deliver some or all of their off-the job training element of their apprenticeships either to their own staff or to their own staff and staff of others.

Such employers will need to apply for approval to become a registered apprenticeship training provider and meet certain requirements. They will also be required to enter into a contract with the Skills Funding Agency which will monitor employer providers of apprenticeship training to ensure the provision of good quality training and to enable the providers to receive funding. Providers will also be subject to inspection by Ofsted.

The Skills Funding Agency register is open for employers seeking to register.

Skills Funding Agency draft rules and guidance for employers

The Skills Funding Agency has published draft rules and guidance for Levy-paying employers which set out the requirements for an apprenticeship and employers' obligations in respect of apprentices. These also address the draft funding proposals set out in the Department for Education paper on Apprenticeship Funding which are outlined above.

UK operations outside England

One aspect of the introduction of the Apprenticeship Levy which is unclear is the rules on cross-border funding within the UK. As education and training is a devolved policy and each of the devolved nations manage their own apprenticeship programmes, the Apprenticeship Levy will only be available for use for employees whose main workplace is in England even though all UK employers will be required to pay the Levy. This means employers will pay the Levy on their pay bill in the devolved nations but will not be able to spend it on employees who work in those nations. Employers in England will receive an "English fraction" of the value of their Levy payment into their DAS which reflects the proportion of their employees working in England. So for example, if 30% of an employer's workforce has their main place of work in England, only 30% of the employer's total Levy payment will be made available to the employer via the DAS. It is not clear whether the remainder of the Levy payment will be ring fenced for funding apprenticeships in the devolved nations or whether it will be available to the Government to fund apprentice generally. In addition, how apprenticeships will be funded for apprentices whose workplace is outside England remains unclear and will depend on the arrangements put in place by each of the Scottish, Welsh and Northern Irish governments.

What should employers do to prepare for the introduction of the Levy and changes to the funding of apprenticeships?

Although some aspects of the changes to apprenticeships remain unclear, there are steps employers can take to prepare themselves for the introduction of the Levy. Employers who do not currently use apprentices but who are likely to be net contributors to the Levy, should consider how best to use their Levy allowance.

Practical considerations employers should consider now include:

  • Check the likely Levy contribution and try to work out how much you will have to pay;
  • If appropriate, consider how the Levy payment will be split across any group companies and how the funds will be allocated where the Group has multiple employers;
  • For employers with operations in Northern Ireland, Scotland and Wales, consider what your 'English fraction' will be;
  • Consider what apprenticeship funding you will receive from April 2017, including the value of any top-ups, and consider what your training obligations will be against funding and Levy spend. The SFA has launched an online tool to support employers to estimate how much they will have to spend on apprenticeships.
  • Consider who in the Business will be responsible for managing the access to the DAS and for Levy paying employers, register with DAS from January 2017 to get used to the new system before the Levy is introduced in May 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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