The Apprenticeship Levy: a guide for higher education institutions

In the 2015 Autumn Statement, the Government announced its intention to introduce an ‘apprenticeship levy’ to facilitate increased numbers of…

In the November 2015 Autumn Statement, the government announced its intention to introduce an 'apprenticeship levy' to fund and facilitate increased numbers of apprenticeships in the UK. For many higher education institutions the impact on budgeting, recruitment and workforce planning will be huge and is estimated that the levy will cost universities as employers approximately £60 million per year across the sector. The Levy is also an important opportunity for higher education to ensure it is geared up to access the levy income by developing and delivering Higher Degree Apprenticeships - either directly or in partnership with industry and other education providers. For some universities, work-based learning is part of the institutional DNA, however, for others getting into position to access this funding will present new challenges.

Current clients of Weightmans will find support and advice on the toolkits available through their Weightmans contacts or through Martin Vincent or Stuart Jones, whose contact details are given below.

What is the apprenticeship levy?

The apprenticeship levy is essentially a 'payroll tax' set at 0.5% of an employer's total wage bill. The levy is payable regardless of whether the business currently has or intends to have any apprentices.

When and how is the levy paid?

The levy comes into force on 6 April 2017 and will be paid through PAYE on a monthly basis. Employers will have responsibility for calculating, reporting and paying the levy to HMRC alongside their usual PAYE payments.

Employers must create an online account with the new Digital Apprenticeships Service to access funds. First funds will be deposited into levy accounts in late May 2017.

The regulations make clear that employers are not permitted to make any deductions in respect of the levy from the wages of apprentices or other employees or workers.

Who must pay the levy?

The levy is payable by all employers across all sectors. Calls from the Russell Group at consultation stage for universities to be exempt from the levy did not persuade the government. Therefore, higher education institutions will be liable to pay the levy if their pay-bill meets the required threshold (see below).

All employers will receive an annual allowance of £15,000 to offset the levy. This effectively means that any employer in the UK with a payroll of over £3million per annum will be subject to the payment. This figure will be calculated on the basis of total gross earnings, not including other payments such as benefits in kind.

According to government estimates this means that just 2% of UK employers (or 200,000 organisations) will pay the levy, while the remaining 98% will pay nothing at all.

Consequently, many headlines have held that only 'big business' will be affected. However the new charge will also hit many medium sized organisations and will cover most universities. For example, the consultation response document explains that a business with 200 employees on an average salary of £25,000 would be liable for an annual levy payment of £10,000.

The new regulations clearly state that 'connected companies' will only receive one levy allowance for the tax year and are free to decide which of the connected companies will take advantage of it. Essentially, companies are 'connected' if one has control of the other or they are under the control of the same person or persons.

It is important to note that the government also proposes to introduce a target for public sector bodies of a number of apprenticeship starts per year equivalent to 2.3% of employee headcount. It is proposed that public bodies will be required to report on progress towards this target and explain any reasons why the threshold is not being met. While the details of this scheme are still to be confirmed, it appears that Universities and further education colleges will not be subject to this target (as they do not appear either individually or 'en-bloc' on the government list of organisations considered to fall within the public sector. However, it appears that the target will apply to the Higher Education Funding Councils for England and Wales.

What will my organisation get back?

Contributing employers will be allocated funding via a 'digital voucher' system to allow them to purchase 'off the job' training (most likely from an approved bank of accredited providers). The government envisages that this will give employers more choice and control over the training offered to apprentices and ensure that standards remain consistently high.

The government maintains that larger employers will 'get out more than they are putting in', through a system of government 'top-ups' if they are 'committed' to the apprenticeship programme.

A 10% 'top-up' will be applied to monthly funds entering levy paying employers digital accounts, for apprenticeship training in England, from April 2017. Every £1 contributed will be increased to £1.10 in value. It appears that the 'top-up' will apply to all paying employers, as long as contributions are made monthly.

Spending levy funds

Government guidance reiterates that levy funds can be spent on apprenticeship training only (as opposed to wages, expenses or supervision costs). However, it confirms that this will include all aspects of training such as English and Maths and assessment/certification.

A call to permit employers to spend levy funds on 'allowable expenses' (such as administration costs, capital investment and staff time) as well as training were rejected by the government at consultation stage.

Employers can use levy funds to 'buy in' training from an approved provider or can deliver the training themselves. However, to deliver training, the employer would need to register as an approved provider and be subject to Skills Funding Agency (SFA) quality arrangements and Ofsted inspection. At April 2016, around 70 universities were registered with the SFA to provide degree level apprenticeships.

In the first year of the scheme, levy funds can only be used to pay for apprenticeships for a company's own employees. However, the government acknowledges in its guidance that many employers would like to re-direct their funding to other employers (e.g. suppliers). The government are considering how this might be achieved going forward.

It is important to note that unspent levy funds will expire 18 months after they enter an employee's digital account. The account will work on a 'first-in, first-out' basis i.e. when a payment out is made, the account will automatically utilise the funds that entered the account first.

Is there a limit to the amount my organisation can withdraw?

Withdrawal of money paid in will be subject to a funding-cap. Employers will not be able to spend an unlimited amount of money on a single apprentice. Funding per-apprentice will vary according to the type and level of apprenticeship. More expensive, higher quality training is likely to have a higher cap.

Where the cost of training the employer wishes to buy is greater than the funding cap for a particular standard or framework the employer will have to contribute additional funds.

My organisation is too small to pay the levy. Will the new scheme affect us?

Even if your organisation is not large enough to pay the levy there are still major changes ahead. Employers of all sizes will have access to the new 'Digital Apprenticeships Service' which will provide online support and guidance to enable businesses to effectively manage their apprenticeship programmes and source relevant training. The government has also indicated that smaller non-contributing employers will be able to access unused funds to finance their own apprenticeships.

Specific challenges: higher education institutions as employers

The apprenticeship levy poses a number of specific challenges to the education sector, not least around how higher education institutions will obtain 'best-value' from their contributions.

How can the apprenticeship model be applied to an already highly skilled workforce in higher education? Many of the core activities of higher education institutions are of course carried out by post-graduates and individuals pursuing research careers, who cannot benefit from levy funds. Higher education institutions will need to consider whether contributions can be usefully spent to develop professional services functions such as management, support services or HR. Crucially, there will no longer be an upper age limit to draw on funding, broadening scope for higher education institutions to develop management staff via an apprenticeship route.

In future years, higher education institutions may also wish to consider collaborating with other businesses (for example in the supply chain) to obtain maximum value.

Many higher education institutions have also expressed concern about the additional cost of the apprenticeship levy alongside other new costs such as the immigration skills charge (levied on employers that employ migrants in skilled areas) which will hit the higher education sector particularly hard.

Specific challenges and opportunities: higher education institutions as educators

The expansion of apprenticeship training following the introduction of the levy is to make it more difficult to engage students in existing higher education offerings.

Indeed, many institutions have already reported a significant decline in students taking up part-time degree level study, largely due to higher fees and restrictions on student finance, and this trend is likely to develop if there is a wider choice of funded vocational alternatives available.

There will inevitably be a change in employer behaviour, with businesses currently spending on training with higher education institutions seeking to recoup their levy contributions. The shift towards apprenticeship training is expected to be especially pronounced in the public sector (for example in health, social care and education). Higher education institutions will need to consider carefully how to re-position their current offering to align with this new employer focus.

Many higher education institutions will naturally wish to concentrate their efforts on Degree Level Apprenticeships (Level 6 or 7). Under this model, the apprentice will work a minimum of 30 hours per week and structure learning around workplace commitments (for example through block release, distance learning or blended learning). The apprentice will eventually attain a full Bachelors degree (Level 6) or Masters Degree (Level 7).

Information published to date suggests that employers will look to spend their levy funds on highly focussed or even 'tailor-made' courses. Higher education institutions will need to carefully consider how best to collaborate with local employers to identify business need and develop apprenticeship programmes.

These high-level apprenticeship programmes present a great opportunity for higher education providers to widen access to provide alternative routes to progression and attainment. However, the expansion of degree level apprenticeship provision carries some risk. Intelligence to date suggests that demand amongst employers for degree level apprenticeships may be limited, with employers perhaps focussing their attentions on the lower tiers of apprenticeship provision. There is obviously significant financial investment involved in developing and establishing these courses and queries persist as to whether degree level apprenticeship provision will be sustainable.

There is also the question of delivery. Will staff delivering external degree level apprenticeship training do so alongside existing research work and undergraduate and post-graduate teaching load, or will some rebalancing or even recruitment be required?

What do I need to do?

Start planning! Even though the apprenticeship levy does not come into force until April 2017, eligible organisations will have to factor this significant additional cost into budgeting exercises that are taking place now. The introduction of the levy is also likely to have a major impact on how training is organised and funded within larger organisations going forward.

As a provider of education, consider your partnerships with employers likely to want to access training using their credits under the Levy. Are any of those partners open to establishing a Trailblazer Group with you to develop a course? Is your institution registered with the SFA (vis the Register of Training Organisations (ROTO)) to deliver Higher Degree Apprenticeships? Assess the curriculum at your institution and identify any courses appropriate for development as Higher Level Degree Apprenticeships. Review HEFCE funding available to support your initiatives as part of the development fund made available to the sector.

As an employer, you may need to 'step-back' and conduct a fairly high-level review of the skills required by your business. Where might you expand your training offering (either by recruiting apprentices or encouraging existing employees to take up apprenticeship training) to make the most of your levy payment? Where will external training provision help you boost productivity?

However, beware of the 'investment trap'. Are you at risk of spending a huge annual sum on setting up and facilitating an apprenticeship programme that will far outstrip your mandatory contribution to levy funds? Would it better benefit your organisation simply to ‘write off’ the levy as just another unavoidable cost?

How has the levy been received?

Response to the apprenticeship levy amongst the business community has been very mixed. Whilst many applaud the government's stated aim to boost the apprenticeship programme and encourage more young people into training, the imposition of a mandatory payment has been controversial. Indeed, the CBI has described the levy as a 'blunt instrument' and has expressed surprise at its size and scope.

It appears that employers will only be permitted to spend funds 'withdrawn' by way of 'digital vouchers' to purchase apprenticeship training (as opposed to general training for the wider workforce). This has given rise to concerns that many employers might try to 'rebrand' all employee training as apprenticeship training, diverting funds away from 'genuine' apprenticeship schemes and diluting standards. However, the government has already taken steps to address this, for example by protecting the term 'apprenticeship' against misuse and rationalising the formal requirements of recognised apprenticeship schemes. Worries remain though that many employers may have no option but to reduce their investment in wider workforce training and development simply to offset the levy.

It is clear that many employers, even those already committed to apprenticeships, remain apprehensive about the mandatory charge. The government has taken the boldest of steps to boost vocational training, but may still have some convincing to do to win round the business community. Employers may look to higher education institutions in the first instance for guidance and inspiration on how to manage and structure higher level apprenticeship training and to maximise their levy contributions.

Further Information

The Digital Apprenticeships Service will enable employers to select an apprenticeship training course, choose training providers and post apprenticeship vacancies. Employers will be able to register for an account with the Digital Apprenticeships Service from January 2017.

The Institute for Apprenticeships will set funding caps and approve standards and assessment plans. It will be fully operational by April 2017.

View the government guidance.

View the Higher Education Funding Council for England (HEFCE) 'Frequently Asked Questions' on Degree Level Apprenticeships.

For further information please contact Martin Vincent, Head of Education at martin.vincent@weightmans.com or Stuart Jones, Head of Employment, Pensions and Immigration at stuart.jones@weightmans.com

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