A Review of the Apprenticeship Levy and How the Tax System Incentivises Employers to Invest in Training

In his Spring Statement the Chancellor of the Exchequer the Rt Hon Rishi Sunak MP announced that:

“The government will consider whether further intervention is needed to encourage employers to offer the high-quality employee training the UK needs. This will include examining whether the current tax system – including the operation of the Apprenticeship Levy – is doing enough to incentivise businesses to invest in the right kinds of training.” Spring Statement 2022 – p39.

Days later the Treasury clarified the position by noting that there would not be a formal review of the apprenticeship system, but that all taxes are under constant review.

UVAC’s position is clear. There is no need for radical changes to the Apprenticeship Levy system.  While the system is not perfect, apprenticeship is a success story and should not be considered, as the CBI has described previously, a ‘failed experiment’. The NHS is using its Apprenticeship Levy payments to recruit and train the new nurses and healthcare professionals needed by society and the police are using the Police Constable Degree Apprenticeship to professionalise police training and promote more inclusive recruitment.  In the private sector the introduction of the levy has led to an increased focus on training new and existing employees for the highly skilled roles the economy needs.  Since the introduction of the levy in 2017, apprenticeship has become an aspirational choice. Apprenticeship is supporting employers to raise their performance and apprenticeship is creating new pathways to highly skilled, professional and well-paid occupations.

Some changes have been necessary

Of course, some changes have been necessary.  The Apprenticeship Levy has not worked that effectively in some sectors.  New flexibilities such as Flexi-Job Apprenticeships, where an individual can work for several employers, will help employers in the creative sector and some other industries make greater use of the Apprenticeship Levy, and make eminent sense.  Other flexibilities such as front-loaded training, where more training takes place at the start of the apprenticeship, and accelerated apprenticeship programmes are also welcome developments.

Some of the ‘flexibilities’ proposed by a number of organisations, however, make less sense.  Proposals such as using the levy to pay for wage subsidies for apprentices and the widening of the Apprenticeship Levy to become a skills or training levy simply would not float.  Let’s do the maths.  The Apprenticeship Levy in England raises approximately £2.5 billion.  Assuming, around 393,000 annual apprenticeship starts a year, as was the case prior to the pandemic in 2018/19, this equates to around £6,400 of funding available for the training and end point assessment associated with an apprenticeship.  With employers increasingly focused on higher skill levels and longer duration apprenticeships, they will increasingly cost more than £6,400 to deliver.  Put simply, there is not the funding to pay a contribution to wage costs.  It is also highly questionable why, under normal circumstances, jobs should be subsidised by the state.  If a job is needed by the employer, which should be a feature of every apprenticeship, surely the employer should fund the salary and employment costs?

The problem of affordability

Where a skills or training levy has more logic, it too runs into the problem of affordability.  If the Apprenticeship Levy was extended to cover a broad range of skills and training programmes, how would it be rationed?  What type of programmes and employers would be included and excluded from support?  Alternatively, would those advocating this policy want to see a substantial increase in the Apprenticeship (or Skills) Levy from 0.5% of payroll to 1.0% or 1.5% of payroll to fund a wider range of programmes?

While there may not be substantial changes to the system of the Apprenticeship Levy what was particularly interesting in the Chancellor’s statement was the reference to the current tax system and whether it incentivises business to invest in training.  The Chancellor faces a raft of challenges, including Government debt, inflation, the cost-of-living crisis etc.  One of the answers to all these challenges is to raise productivity.  The US economy is approximately 23% more productive than the UK economy, while France is 18% more productive and Germany 10% more productive (figures from The Times, 25 March 2022). While there are several factors that can explain low UK productivity, a lack of investment in skills is undoubtedly a key factor.  Interestingly, in his statement the Chancellor noted that:

“UK employers spend just half the European average on training their employees. Furthermore, less than 10% of the spending on training by UK employers goes to high-quality formal training offered by external providers.”  Spring Statement 2022 – p38.

Undoubtedly Treasury officials will, in coming months, be considering how tax policy and potentially tax credits can be used to support employers to invest in skills and training that enhances organisational performance and productivity. In taking forward such a review UVAC would suggest consideration of the following four issues:

1. The Role of the State, Individual and Employer in Paying for Training – The Apprenticeship Levy requires employers above a certain payroll, to make a financial contribution, over and above general taxation, to the apprenticeship budget.  This was a new approach and has raised interesting questions.  The state, in the form of society, individuals and employers all, of course, benefit from investment in training.  But what should each pay?  What respectively should the state, employers and individuals contribute to the cost of training or retraining a chef, hairdresser, engineer or nurse? Practically how could employer tax incentives for training relate to the new Lifelong Loan Entitlement (LLE) available to individuals and funded by the state, or to apprenticeship funding?   Who pays what for training and what can they expect in return?
2. A Focus on Future Skills Needs and Skills Gaps and Shortages – In his statement the Chancellor referred to businesses investing in the right kinds of training.  We would hope the “right kinds” of training refers to developing the skills needed to raise performance and productivity.  Interestingly, when many employers used the Apprenticeship Levy to spend on management skills they were criticised for spending on the “wrong kinds of training”, this despite poor leadership and management skills being regarded as a key explanatory factor in low UK productivity.  Similarly, despite a very evident need to raise the skills of the existing workforce, employers were criticised for spending too much on apprenticeships for existing employees and too little on young people.  What will be key for any successful tax approach to skills, will be to support employers to invest in the skills provision their organisations need and for policy makers to remember that apprenticeship is a programme concerned with an individual’s stage of life, not age.
3. Skills Policy Should Not be Focused on Rectifying the Failures of the School System – Employers undoubtedly need to invest more in the training and development of their employees.  Too often in the past skills policy has, however, had a significant focus on supporting individuals who, after 11 years of compulsory education, failed to achieve level 2 competence.  While individuals without level 2 skills (equivalent to GCSE) should be supported, such support should be funded as part of the general education/schools’ budget.
4. Avoiding a Focus on the Magic Bullet – Skills gaps and shortages exist at all levels.  Unfortunately there is sometimes a tendency to see one type of training provision as the answer to the UK’s skills problems.  This may be the case with our current focus on technical and higher technical education.  No one would deny the importance of developing a better technical and higher technical education offer.  Indeed, UVAC is committed to supporting the higher education sector to deliver high quality higher technical education.  The UK, however, must also retain and develop its focus on level 6 (bachelor’s degree/professional skill level) and level 7 (master’s degree level) provision if we are to increase our productivity, address skill gaps and shortages in STEM, management etc. and deliver high-quality public-sector services and the net zero/green jobs agenda.

UVAC looks forward to the debate.

By Mandy Crawford-Lee, Chief Executive at University Vocational Awards Council and Associate Editor of the journal, Higher Education, Skills and Work-based Learning