How the levy has affected employers. Part 3

This is part 3 of a daily analysis of the Reform report on the Apprenticeship Levy that FE News are running this week.

Maintaining the support of the business community for any major reforms to apprenticeships is vital, yet business leaders have expressed serious misgivings in recent months about the apprenticeship levy. In January 2018 Steve Nash, Chief Executive of the Institute of the Motor Industry, said that the slump in apprenticeship starts under the levy was caused by “a combination of confusion amongst employers about the new processes [and] reluctance by smaller employers to take on what they see as an increased administrative burden”.

In February 2018 Dame Judith Hackitt, chair of the EEF manufacturing group, described the levy’s impact on employers as “disastrous” because “it is complex, companies are unable to access their funds and many view it as another tax on business.”

Such is the degree of complexity and bureaucracy associated with the apprenticeship levy, she added that employers were “near breaking point” and consequently the Government must “rethink the entire levy system from top to bottom.”

In March 2018 the CBI business group said that the apprenticeship levy is ‘broken’ and the Government must go back to the drawing board.

While it may be tempting to dismiss such concerns on the grounds that some organisations could be unhappy with having to pay the levy, the reality is far more complicated. The difficulties facing employers of all sizes since the introduction of the levy can in fact be traced back to the very beginning of the reforms.

The funding proposals in the Richard Review

The Richard Review articulated the view – shared by many at the time – that the funding model for delivering apprenticeships “drives a system which is too provider-driven and not sufficiently responsive to employers”.

The proposed solution was that government should contribute to the cost of training apprentices but “the purchasing power for training must lie firmly in the hands of employers” as “employers are best placed to judge the quality and relevance of training and demand the highest possible standards from training organisations”.

This proved more popular among employers than the Richard Review’s following recommendation that they should be forced to make financial contributions to the cost of training over and above paying their apprentices’ wages. This was deemed necessary to make employers “demand the highest quality and most cost-effective training.”

The Review’s preferred approach to achieving this was that government should fund apprenticeships through National Insurance or the tax system – ideally through a tax credit (based on the R&D tax credit already in operation). More generally, the Review wanted the funding system to be simple and accessible, particularly for small firms, and that government should consider varying how much it pays for training according to the size of the firm and the age of the apprentice.

Research evidence on the Richard Review proposals

Some of the Review’s proposals looked questionable from the outset. A government survey of the employers of apprentices, published shortly before the Review, found that over 80 per cent of employers were ‘satisfied’ or ‘very satisfied’ with the quality of training delivered by their external training provider, the relevance of that training to their needs and the support and communication they received. The vast majority of employers also felt able to influence the structure, content and delivery of the external training. For the Review to propose that employers wanted, and needed, more responsibility for organising and overseeing training provision appeared wide of the mark.

The Richard Review recognised that enforced contributions might affect employer’s willingness to offer apprenticeships noting that “the funding system should encourage and not deter employers from participating – particularly recognising that today many receive apprenticeship training as a free good.” To resolve this, the Review proposed that “the Government could be more generous in other respects, for example [it] could offset or partly offset employers’ contributions to training, by reimbursing part of the cost of internal training or even a proportion of the wage costs. Therefore, it should be possible to ensure that overall, employers are not worse off”.

The journey towards the apprenticeship levy

Following the Review, the Government set out to deliver its vision of employer coinvestment coupled with government funding. Four different funding models were put forward across two large-scale consultations throughout 2013 and 2014, which triggered hundreds of responses from stakeholders. In the end, all four models were either rejected or withdrawn – typically on the grounds that the administrative burdens they would generate were too high or that they would create cashflow problems, particularly for smaller employers.

In the March 2015 Budget, the Government opted for a new approach in the form of a ‘digital apprenticeship voucher’ that would put employers in control of government funding by using the vouchers to directly purchase training. This was soon followed by the announcement of an ‘apprenticeship levy’ in the Summer 2015 Budget to support all post-16 apprenticeships in England, with the digital vouchers being used to control where the levy funds would be spent.

After yet another consultation, the 2015 Autumn Statement described how the levy would operate from April 2017:

It will be set at a rate of 0.5% of an employer’s paybill. Each employer will receive an allowance of £15,000 to offset against their levy payment. This means that the levy will only be paid on any paybill in excess of £3 million and that less than 2% of UK employers will pay it. The levy will be paid through Pay As You Earn. By 2019-20, the levy will raise £3 billion in the UK.

Over 60 countries have a levy scheme in operation, including the UK in sectors such as construction. Even so, there were elements of the Government’s proposed levy that made it highly unusual. For example, employer funds would be passed directly to HM Treasury with no arms-length body or agency to coordinate how the funding is used. The OECD has previously stated that this approach would create “a risk that the proceeds might be diverted to different purposes.”

Professor Alison Wolf had recommended earlier in 2015 that a levy be introduced to fund apprenticeships but emphasised the need for it to be placed into a hypothecated (i.e. ring-fenced) fund to ensure that it remains a secure source of long-term funding.

Should any government fail to protect the funds it collects through a levy, the OECD warned that “employers may look at their contribution simply as a tax and lack commitment.”

Other causes for concern included the prospect of substantial deadweight as companies try to claim levy funds for as many forms of training as possible. In addition, the OECD had previously found that “better qualified employees or those at higher occupational levels, and employees in large firms seem to derive greater benefit from levy schemes” as the returns on investment are seen to be higher.

Numerous issues were also raised by business groups after the levy’s announcement. The CBI almost immediately called for a “radical rethink”, citing a range of design flaws.

A survey of their members in 2016 found that 45 per cent of respondents planned to increase prices or reduce margins in response to the levy, 39 per cent would cut investment in non-apprenticeship training and 22 per cent felt that there would be downward pressure on wages.

Meanwhile, the EEF manufacturing group stated in their response to the levy consultation in 2016 that their members did not expect to deliver much more training in response to the levy.

In hindsight, the above predictions have been proved largely correct. The OECD was of the view that some employers might write off the levy as a tax, there might be significant deadweight costs and better qualified employees stood to benefit the most – all of which appear to be borne out by the decrease in apprenticeship quantity and quality discussed earlier in this report.

The fears among employers, namely that the levy was not designed properly and would not necessarily encourage organisations to offer apprenticeships, look equally robust. With the evidence available both then and now, there was no need for the levy system to be constructed and begin operating in such a way that these outcomes became more likely (or, in some cases, almost inevitable).

The administrative burdens created by the levy

For those employers using the new HMRC digital accounts, the task facing them is a daunting one. Although large companies with sizeable HR departments will presumably find a way to navigate this new regime, that does not excuse its complexity or onerous nature. Levy-paying employers must now take responsibility for the following tasks through their digital accounts:

• Constantly monitoring the amount of levy funds they have available in total and for each apprentice in their organisation.
• Monitoring their transactions with training providers for each apprentice on a monthly basis.
• Keeping track of the expiry dates of all the levy funds they currently have available.
• Adding, reviewing and checking the status of all their current contracts with training providers for each apprentice.
• Searching for, and updating the status of, each apprentice in their organisation.

These tasks are all on top of the requirement for employers to search for, and then engage in price negotiations with, training providers and assessment providers for each apprentice as well as organise and sign contracts. Large employers may be able to handle these extensive duties, but the plan to bring small and medium-sized employers into the same system by April 2019 are concerning in light of these new responsibilities. At no point during the reforms to apprenticeships enacted since 2012 have employers expressed a strong desire to take on these burdens. Under the pre-levy system, training providers were able to shoulder most of these responsibilities, which allowed employers to concentrate on training apprentices. It is difficult to see how employers can pass some, or indeed any, of these responsibilities onto providers under the levy system given the use of HMRC-operated accounts. In these circumstances it is unsurprising that, as described at the beginning of this chapter, employer representatives have been forceful and direct in their criticisms.

Reducing the burdens on employers

The Richard Review was adamant that the only way to justify asking employers for cash contributions was if the Government was more generous in other respects by, for example, reimbursing part of their internal training costs or a proportion of an apprentice’s wages. Offsetting of this nature was necessary “to ensure that overall, employers are not worse off”.

This need to balance employer contributions with some related employer benefits has been ignored by ministers and civil servants, removing any justification for demanding a cash contribution from employers. It is hard to know at this stage which factors have contributed most to the decline in apprenticeship starts since the levy came into effect.

That said, previous research suggests that the demand for cash contributions from employers, who already face significant costs when hiring and training apprentices, is likely to have played an important role.

As always, it is small employers who are the most vulnerable, as neatly described by the OECD last year:

The provision of apprenticeships and the use of subsidies involve costs. The cost of these procedures may be less significant for bigger enterprises, relative to their overall training costs. Small enterprises may lack the capacity to determine training needs, plan accordingly and file applications for cost reimbursement or grants. It is therefore important to assist small companies with access to and the processing of available funding in parallel to providing financial incentives for apprenticeships.

The OECD believe that smaller employers should be getting more support, not demands for more money. The Richard Review, countless research papers, the international evidence on employer incentives and the OECD are all stacked against the notion of employer cash contributions. This strongly suggests that the 10 per cent co-investment rate is likely to lead to widespread disengagement from apprenticeships by small employers as well as some larger organisations.

The requirement for 10 per cent employer co-investment towards the cost of training apprentices should be removed with immediate effect to avoid employers disengaging from apprenticeships.

Even in the absence of employer co-investment, the administrative and logistical burdens placed on employers by the HMRC digital accounts need to be reconsidered. The best system to support the levy is one that hands the ‘purchasing power’ to employers without the need for substantial administrative burdens, particularly for smaller organisations. Ironically, the Government has already designed such a system five years ago. In the first government consultation on funding apprenticeships released in 2013, one of the options presented was a ‘Provider payment’ model.

While the employer in this model was still responsible for selecting a training and assessment provider, the crucial difference between this and the new levy system was that the training provider took on the bulk of the administrative duties throughout the duration of the training (as was the case before 2012). The Government said in March 2014 that it would not pursue the ‘Provider payment’ model because “it does not go far enough to deliver the Richard principle of giving employers the purchasing power”.

This made little sense given that employers would be fully in control of selecting and paying training providers and assessment providers and would also be more involved in managing the apprenticeship than ever before. Small businesses were particularly disappointed by the decision to ignore this model, as was evident in the small print included at the end of the Government’s consultation response. It was acknowledged in the consultation annex that the “common themes in the responses received included the importance of minimising administrative burdens on employers” and “smaller businesses in particular tended to prefer the provider payment model as they felt this was likely to generate the smallest administrative burden.”

To accommodate these concerns, a new ‘apprenticeship voucher’ model should be introduced to replace the current system for distributing funds collected through the levy.

This model would put the purchasing power firmly in the hands of employers by allowing them to choose an apprenticeship standard and training provider, but the administration of the Individual Learner Record, arranging assessments and other bureaucratic burdens would rest with training providers.

This system also removes two unhelpful and burdensome features of the current levy system:

1. All employers now have access to a single pot of funding produced by receipts from the apprenticeship levy with no differentiation between levypayers and non-levy payers and no complicated HMRC infrastructure for constantly monitoring and moving levy funds
2. The digital accounts for each employer are much simpler as they only need to include their voucher purchase history, the names of their chosen training provider and a list of their current apprentices

This represents a considerable simplification over the current levy system that will benefit all stakeholders, especially those who do not necessarily have the time or resources to engage with the apprenticeship system as it now stands. Crucially, all of this can be achieved within the existing ‘digital account’ infrastructure designed by HMRC for employers.

The Government should replace the existing HMRC digital payment system with a simpler ‘apprenticeship voucher’ model to give employers control of government funding while reducing their administrative burdens.

One notable impact of introducing this new ‘apprenticeship voucher’ would be that it creates a truly demand-led system for apprenticeships with employers in the driving seat. This would have implications for HM Treasury in terms of controlling public expenditure. Consideration should be given to the ESFA setting a ‘maximum annual allocation’ of apprenticeship starts for each training provider (based largely on historical performance data in terms of ‘completions’ and OFSTED ratings).

This would ensure that better providers are promoted while guarding against any provider over-extending their operations. It would also be beneficial to award small-scale allocations to new providers who wish to enter the market, with the ESFA closely monitoring them during their first phase of apprenticeship delivery.

Tom Richmond, Senior Research Fellow at the Reform Think Tank

About Reform: An independent, non-party, charitable think tank whose mission is to set out a better way to deliver public services and economic prosperity. 

Now that the apprenticeship levy has completed its first full year of operation, last Friday (13 Apr) Reform published “The Great Training Robbery: assessing the first year of the apprenticeship levy” which reviews the available evidence to determine whether the levy will, as the Government hopes, “incentivise more employers to provide quality apprenticeships” and “transform the lives of young people who secure them”.