United Kingdom: Mixed reactions to the new apprenticeship levy
The apprenticeship levy came into force in the UK on 6 April 2017, aimed at enhancing both the quantity and quality of apprenticeships. While the TUC welcomed the levy, employer bodies voiced concerns about the high extra costs involved.
In July 2015, the Conservative Government announced the introduction of an apprenticeship levy as a central element within its Productivity Plan. The levy came into force on the 6 April 2017, effectively replacing the system where the government had provided the bulk of funding.
The UK has a long-standing average labour productivity gap (PDF) (measured by GDP per hour worked) compared with several of its major competitors. According to the Office for National Statistics, average labour productivity was estimated to be about a third lower in the UK in 2014 than in the US, France and Germany. Skill deficiencies are said to be a major contributor to this gap. OECD statistics show that while the UK has a relatively high number of graduates (43.5% of the population), it also has a high proportion (21%) of people with qualification levels below secondary education level. Some 35.6% of the population are qualified to intermediate skill level (qualifications equivalent to upper-secondary level), but these tend to be of a general nature and at Levels 2 to 3. As such, there is a deficiency of technical/vocational skills, attributable to the poor quality and short duration of many apprenticeship programmes (and vocational qualifications in general) outside the manufacturing sector. The poor quality of UK vocational education means that it is perceived as inferior to academic education.
The government has consequently pledged to introduce an apprenticeship levy, with the aim of boosting the quality and quantity of apprenticeships. This followed some earlier changes, such as the creation of an Institute for Apprenticeships to monitor standards, and a legal commitment to the creation of 3 million apprenticeship starts by 2020. The term ‘apprenticeship’ was also legally protected (PDF) in 2016. This created a legal basis for apprenticeships equal to that for degrees and also empowered government to act where the term is misused to promote low-quality courses.
The creation of three million new apprenticeships is ambitious given cuts in public funding, and the levy was introduced to fund shortfalls. The government predicts that the scheme will raise £3 billion a year, which will be used to encourage employer investment and improve quality and make apprenticeships an attractive alternative to university.
Details of the scheme
Under the scheme, public and private companies with an annual wage bill of £3m or more, will pay 0.5% of their staff cost into the fund (PDF), regardless of whether the firms have apprentices. It is anticipated that the levy will be paid by approximately 22,000 companies, around 2% of UK firms. All employers have an annual allowance of £15,000 to offset against payment, meaning that employers will only pay the tax if their pay bill is above £3 million. Employers operating multiple payrolls will be able to claim only one allowance.
Payments will be collected monthly by HM Revenue and Customs. For apprenticeship training in England, money collected will be accessed via a new Digital Apprenticeship Service account (the operation of the schemes in the devolved nations is yet to be finalised). The government will make ‘top-up’ payments of 10% every month to the levy funds available to each employer.
Funds will be available in the form of vouchers (which will have to be used within 24 months), which can then be spent on training with registered training providers (training must meet an approved standard). Funds can only be used towards the costs of apprenticeship training and cannot be spent on other associated costs such as wages or setting up apprenticeship programmes.
There will be funding caps, which will limit the amount of levy funds an employer can spend on training for an individual apprentice. The cap will vary according to the level and type of apprenticeship; each apprenticeship standard will be linked to one of 15 funding bands, with upper limits ranging from £1,500 to £27,000. All existing standards have been placed within one of these bands, with new standards banded as they become available.
The upper bands thus set maximum limits and levy-paying employers will be able to use levy funds only up to the upper limit of the band within which the apprenticeship has been placed. If the costs exceed the limit, then the employer must pay the remaining costs from outside the levy account. However, additional payments may be made to the employer and training provider depending on the characteristics of the apprentice and the type of apprenticeship.
Non-levy employers will pay 10% of the cost of training and assessment with the government contributing the remaining 90% (up to the upper limit of the funding band). This support applies to all age groups.
For non-levy businesses with fewer than 50 employees (PDF), the government will provide 100% of the costs of apprenticeships for 16 to 18 year olds, up to the funding limits. These businesses will also receive a new £1,000 incentive to provide apprenticeships for those aged 16 to 18.
Reaction of the social partners
The Confederation of British Industry (CBI), representing employers, was opposed to the imposition of the levy. In its response to the government consultation, it expressed concern that the levy would be implemented at around the same time as National Living Wage increases and the expansion of automatic pension enrolment, arguing that businesses were being confronted with high extra costs which, for many, were not offset by concurrent cuts in corporation tax. It stipulated that if there was to be a levy, the system should be ‘proportionate’ and all money raised put in a ring-fenced fund. The CBI also suggested that this then could only be drawn upon by levy-payers in order to fund apprenticeship training. It said that a levy set at a rate of 0.5% of payroll would be far too high, concluding that it would be impossible for businesses to recover the entire fund levied from them. They predict that this level of obligation would, in most cases, represent the whole of existing formal training budgets, ultimately meaning that fewer apprenticeships would be offered.
Other employer bodies have also voiced criticisms. The Engineering Employers Federation also raised concerns as to whether the levy will actually help meet the costs of producing the next generation of trained staff for its members. It highlighted that the cost of delivering a degree-level apprenticeship in engineering is likely to exceed £27,000, the current top funding band for the scheme. The Federation therefore called for a review of the bands.
The TUC, the UK trade union umbrella organisation, broadly welcomed the levy, stating that it provided a good opportunity for skill and productivity enhancement. It called on the government to look at ways of ensuring that all apprenticeships would be of high quality.
Essentially, this new system is aimed at meeting the government’s commitment for three million new apprenticeships. However, critics such as the independent Institute for Fiscal Studies have voiced concerns that the significant expansion and design of the new system jeopardises quality. Although the government is trying to improve the latter, the Institute for Apprenticeships may come under pressure to approve new apprenticeships too quickly. Ofsted, the inspectorate for education, is to play an expanded role in monitoring training providers and employers, but has also expressed serious concerns about the quality of apprenticeship schemes, particularly those created recently. The CBI has argued that the new levy and associated targets risk repeating the mistakes of recent decades, and may even encourage employers to abandon successful training. The CIPD has warned of the dangers of ‘gaming’, where employers re-label current training schemes, even low-level ones, as apprenticeships so as to receive a subsidy rather than striving to offer the best possible training.