Financial Directors and the Apprenticeship Levy

Posted by  Steve Morris, Sales and Marketing Director,

We’ve all read that joke on LinkedIn, where an FD asks his MD a question…

Q: What happens if we pay to train staff and they end up leaving us?
A: What happens if we don’t and they stay?

Well, that question has now changed somewhat …

Q: What happens if we pay to train staff and then we don’t make use of it?
A: No problem, we’ll call it a tax

And that, I’m afraid is the stark reality of the new Apprenticeship Levy which the Government is introducing in April 2017. If your company has a payroll in excess of £3m per annum, then you will be paying HMRC an amount equal to 0.5% of your payroll cost each and every month. For some of our largest clients that equates to £2m a month – a staggering amount of money!

And here is the financial decision. If you utilise that money to up-skill and develop your workforce, then it is a ring fenced L&D budget and if you don’t… well, the smart MD was right, as it’s simply a tax!

So, what do we know and what decisions do we need to make?

Just in case you have managed somehow to miss the deluge of information that has been written about the Apprenticeship Levy, I have provided you with a summary of the levy at the end of this article.

Firstly though, I want to focus on the bigger picture and consider the two crucial questions facing the Finance Director.

Q1. How do we make best use of the Levy?

Whilst the mechanics of the Levy are more widely known, this is the area that is less familiar and full of misconception. For example, Apprenticeships are not just for the blue collar trades or for the younger generation only. Nor do you have to hire a new apprentice, as you can also use the Levy to train existing staff to acquire substantive new skills. Furthermore, Apprenticeships are not just for those who didn’t achieve at school, as you can now do three year Apprenticeships at degree level and those already holding a degree can be eligible to do an Apprenticeship.

At learndirect our oldest apprentice is 67 and a former policeman who is re-training in a niche role within a specialist part of the service sector.

So, whilst it is difficult to generalise, many businesses are initially using the Levy to re-train their existing workforce and/or management teams. In the future, it is very likely that more businesses will also use Apprenticeships as a means of bringing new staff into their organisation.

Q2. How do we maximize the Return on Investment?

ROI is crucial for all in business and especially for Finance Directors.

Whilst many questions initially focused around how a business gets its Levy money back, (it doesn’t), there is now more focus on ROI and VFM. There are certainly some current incentives, whereby a business can receive help to mitigate the cost of the Levy. Indeed, the Government will pay £1, 000 to both the employer and the Training Provider when the employer takes on a 16-18 year old apprentice.

However, many businesses are now accepting that the Levy is a mandatory spend, and instead of focusing their efforts on this area, they are turning their attention to the other discretionary areas in their business. We are actively working with companies to look at some of the other training they deliver and to explore whether this can be delivered as part of an Apprenticeship. This could encompass spend in areas such as management training and replacing it with a management Apprenticeship – thereby reducing discretionary spend and utilising the mandatory spend.

So, in summary many of the discussion points over the last few months have now been confirmed and businesses are finally in a position where they can start to plan for the future. Remember that it is ‘use it or lose it’, as far as the Levy is concerned. The Levy is indeed a semi-hypothecated tax, but it is also an excellent vehicle for businesses to use to improve their retention, their employee engagement and also build a pipeline of talent for the future – so not all bad!

Summary – The Apprenticeship Levy

Firstly, the Levy is payable from April 2017 as there had been many rumours that Brexit might cause it to be delayed or even postponed altogether. From 1st May 2017 all new Apprenticeship starts will operate under the new system, with any starters prior to this date following existing funding rules.

Employers will receive a 10% top up monthly to their digital Levy account, courtesy of the government, and also 10% is a key figure for co-investment purposes.

Should an employer want to spend more than the funds available in their digital Levy account, then they will only need to pay 10% of the additional cost, as the Government will co-invest and pay the remaining 90% of the additional cost. Co-investment is how employers with a payroll less than £3m will be expected to pay for their training. Full Government funding however is available in some circumstances for employers who employ less than 50 employees & whose payroll is less than £3m. Please contact learndirect to find out more.

Sometimes less is more but in this case, in order to simplify the system further, there will be the introduction of 15 new funding bands (we did have 5 for Trailblazers) stipulating the maximum costs to deliver both Apprenticeship frameworks and Trailblazer standards. The lowest band is £1,500 and the highest band is £27,000. As the standards are generally more expensive to deliver, they are funded at a higher rate. All age groups within each band will be funded at the same rate with no premium rate for 16-18 year olds, but the government will pay £1, 000 to both the employer and the Training Provider when the employer takes on a 16-18 year old apprentice. This payment will be in equal instalments of £500 at both 3 and 12 months, so a clear incentive to entice employers to invest in the younger generation.

One very significant change is to the eligibility criteria and who can be funded to undertake an Apprenticeship. The eligibility criteria has been relaxed and employers can now use their Levy funds to train apprentices at the same or lower level qualification than they already hold, provided that the Apprenticeship will allow the individual to acquire substantive new skills and the content of the training is materially different from any prior training or previous Apprenticeships. This will now allow individuals who have higher level qualifications such as degrees, to do Apprenticeships in management.

Unfortunately, to quote Donald Rumsfeld, there are still ‘known unknowns’ as regards the devolved nations which impacts businesses with workforces spread across the UK. As Scotland, Wales & Northern Ireland have their own arrangements for supporting employers to access Apprenticeships, we are still waiting to hear whether they will replicate the English model or simply do their own thing. We do know that Levy funds can now be used for apprentices whose main workplace is in England, (even if they live outside of England), provided they are undertaking an English framework or standard, but that only really covers those living on the border.

Finally, there is a proposal to allow benevolent employers to transfer the magic figure of 10% of their funds to another employer’s digital account, but this will not be until 2018, and that is then subject to EU State Aid regulation.