The Apprenticeship Levy came into being on 6 April 2017 and from April 2019, changes will be implemented to make it more flexible. Are you fully compliant and do you know how to maximise the funds available to you?
The Government introduced the Levy to address the UK’s shortage of skilled labour. Responsibility for the Levy rests with the Department for Education (DfE), with HM Revenue & Customs (HMRC) responsible for collecting and policing the Levy.
The Levy is charged at 0.5% of an employer’s ‘paybill’ – which is classified as total earnings liable to employer Class 1 NIC. The classification includes earnings for employees aged under 21 and apprentices under 25. For Levy purposes, the employer will be the organisation that has a liability. There is an annual allowance of £15,000 for employers to offset against the amount they have to pay. Employers with a paybill of less than £3m are, therefore, exempt from the Levy.
Is your organisation liable for the Apprenticeship Levy?
All employers (or groups of connected employers) with a combined pay bill of £3m or more are liable to pay the Levy, regardless of whether they are private, public sector or charities.
The calculation is not straightforward; it is a monthly, cumulative, calculation. So, for employers with multiple payrolls operating on different pay cycles, careful co-ordination is required. Payments liable to Class 1A or Class 1B NIC are excluded from the calculation, as are earnings of expatriate and inpatriate employees – assuming they do not trigger a Class 1 NIC liability.
Many organisations are part of a group and this has Levy implications. The paybills for organisations that are deemed to be connected for Levy purposes are aggregated for the £3m threshold test.
The £15,000 allowance can be shared amongst group members if appropriate. The connection test only applies at the start of the tax year. So, if a business comes into a group after 6 April and has an existing Levy liability in its own right, then its paybill need not be considered for Levy purposes until the following tax year.
Care is needed to ensure that more than one allowance is not claimed by any connected organisations.
Each organisation within a group is able to draw down funds for qualifying training (assuming it has a separate PAYE reference).
At or near the £3m threshold – do we need to consider the Levy?
Assuming you don’t breach the £3m threshold, no Levy liability will arise, but if your organisation is growing rapidly or has a fluctuating pay bill (eg a seasonal business) you need to monitor the threshold on a monthly basis. However, if the threshold is breached because your organisation has merged with or been acquired by another, the test will be applied at the start of the next tax year. So, for the rest of the merger year, both organisations are treated separately for Levy purposes.
Compliance and anti-avoidance
The legislation includes a range of anti-avoidance measures designed to ensure employers pay the correct Levy and do not introduce arrangements to reduce or avoid it. However, if an organisation has or seeks to implement an ‘optional remuneration arrangement’ (formerly known as salary sacrifice) or a flexible benefits arrangement as part of its reward and remuneration strategy, this would only be viewed by HMRC as avoidance if the sole purpose for introducing such an arrangement was to reduce a Levy liability.
What can be drawn down from a digital account?
All employers, whether they pay the Levy or not, are able to access funding for apprenticeships - most via a digital account which enables users to see their Levy contributions and/or how much apprenticeship training they may purchase with a qualified training provider.
While the Levy applies to all UK employees, Levy payments are split across the devolved nations in proportion with where employees live. So an employer with employees in England and Scotland, for example, needs to engage with the relevant funding authorities for funding apprenticeships located there. Separate funding arrangements apply in Scotland, Wales and Northern Ireland.
Employers paying the Levy receive a 10% top-up to their monthly contributions to spend on apprenticeship training. But this only applies to the English Levy liability.
Reform from April 2019
The Government is trying to introduce greater flexibility within the scheme and facilitate greater use of funds. From April 2019, Levy paying employers will be able to transfer up to 25% of their training fund to another, smaller company within their supply chain. Apprenticeship levy funds are currently severely underutilised by employers and it is hoped all funds will be used as fully as possible.
This initial stage of reform means that a number of smaller employers who do not pay the Levy can receive a larger amount of training funds to support their apprentices.
As this sharing will trigger the ‘State Aid’ rules, it is also important to continue to monitor the total ‘State Aid’ received during any three-year period to ensure it remains below the €200,000 limit per business.
Also, there will be a change to the amount small businesses will be required to pay for apprenticeship training costs. The previous requirement of 10% funding is halved to 5%.
What can we do?
We recommend that all organisations review how the Levy impacts the organisation. Points to consider are:
- Is your organisation exempt?
- Are your systems sufficiently robust to be able to correctly calculate the pay bill for Levy purposes on a monthly basis?
- Is it relevant to revisit your resourcing plans or remuneration strategy? Should benefits liable to Class 1A (eg under a flexible benefits scheme) be offered?
- If you are part of a group, how does the ‘connected persons’ definition affect each organisation? Do you have a process in place to ensure the single £15,000 annual allowance is correctly allocated and duplicate allowances are not claimed?
- What training are employees currently offered?
- Is this training likely to qualify under an apprenticeship standard? If not, have you explored how to change your training programme to maximise the level of draw down funds from your digital account?
BDO’s experts are experienced in analysis, systems review and process design as well as compliance and risk management. For the largest businesses, we can also help you identify qualifying training and explore the opportunities to maximise utilisation of the Levy throughout your portfolio. For help and advice please contact, please contact Caroline Harwood.