Apprenticeship Levy – what’s the latest?

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?

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.

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.