The Future of the Apprenticeship Levy
There has been several calls to reform the Apprenticeship Levy. Richard Guy looks at some of the options facing Government.
Training levies of one kind or another have been with us for a long time. From 1964 until the 1980s in the UK we had 24 “Industrial Training Boards” (ITBs) each covering a sector of the economy. Most of these were abolished in the 1980s and there are three left (Construction , Engineering Construction and Film). Each ITB operated a levy which was then handed back to employers (by the ITB) in the form of grants to pay for apprenticeships and other training. In the early 1970s many of the ITBs put in place exemptions from levy payments for employers which were deemed to be meeting the sector’s training expectations. So when the Thatcher Government set up a review of each sector’s ITB and employers were consulted, the best and often the largest employers did not see the need for an ITB.
ITBs were established to overcome the ‘collective action problem’ faced by employers, who have a powerful disincentive not to train their people because the more skilled their employees are, the more they are likely to be recruited or ‘poached’ by another employer. So employers, especially the less scrupulous ones, will try to recruit people who are already skilled – ensuring they need to spend only what is absolutely necessary on training.
The more recent 2017/18 Apprenticeship Levy is different from its ITB predecessors. It is not managed within the sector but rather it is a flat-rate tax (0.5% of payroll) which is used to pay for apprenticeships. It is paid by larger firms (those with £3m+ annual payroll – an average of about 100 staff), with these employers drawing down on average between 50% and 60% of their contribution for their own apprenticeships. A large proportion of the rest is then used centrally to pay for apprenticeships with smaller firms who do not pay the levy, and any left is eventually passed to HM Treasury.
Therefore many employers (though by no means all) are not using all of “their” levy but might prefer to use it to pay for more urgent, operational training. This is despite apprenticeships being a programme which can be used to train any age, any level, existing and new employees and people with extensive prior skills. But this is a tax and the employee and wider economy must benefit as well as the employer and, in any case, it also pays for apprenticeships in smaller firms. We have seen endless changes of policy in the skills arena over the last 30 years. Skills are an important issue for the economy but are easy for governments and individual ministers to change with little public reaction. The Labour Party has already said that it is considering making use of the levy more “flexible” although the Lord Blunkett, who led the Labour report which proposed this new flexibility, appears to have distanced himself from the proposal in recent weeks.
Could the levy be used more flexibly without damaging apprenticeships? Recent data shows that only £11m of Government’s £2.5bn apprenticeship budget was returned to HM Treasury in 2021/22, down from around £600m the year before – so there appears to be limited surplus underspend available. If we tinker with the levy in a way which is not thought through then there is a very real possibility that we could lose it altogether, as happened before.
No-one knows what percentage levy is actually appropriate if an employer were to use apprenticeships strategically to deal with all of their occupational training requirements. Research to establish this is needed as soon as possible and it will vary by sector.
The levy cannot be used to pay for training for updating, regulatory changes, health and safety, new machinery etc. Employers must train for these and pay for it themselves, investing many billions of pounds every year. If the levy were to be used for this, the revenue it would need to generate would rise very significantly. So what could it be used for without damaging apprenticeships? I would cite three possibilities:
Training for the whole job (but not the whole occupation) for new unemployed recruits. Many employers prefer to train staff to the requirements of their job, rather than to an occupation, but training to the level of occupation tends to work better for employees, who are better able to develop a ‘portable’ skillset that is easily translatable to other employers.
Training for a temporary period to encourage the introduction of substantial new technology. A good example would be to pay for plumbers and electricians in mainstream plumbing and electrical firms to be upgraded to undertake the installation and maintenance of heat pumps, solar power etc. This would encourage the “mainstreaming” of these technologies (which is beginning to happen) and so reduce the price for the consumer. It would only be necessary for a few years and similar technology situations could be selected for other sectors
Wage costs are a key barrier to delivery of apprenticeships but cannot be paid for using levy funds. This is right because the amounts of money required to do this are very large. However, this could be allowed in areas where we want to grow apprentice numbers, to create additional apprenticeships over a short period. This could help to establish “apprenticeship culture” in newer sectors such as Digital.
The levy is a tax, therefore it can be used flexibly at two levels. First, the examples above could be introduced for levy paying employers to do themselves. Or Government could instead use unspent levy which is “surplus” to pay for these types of training. This has the advantage that the money can move across sectors and into small firms whilst those employers who want to use their levy for more Apprenticeships, can still do so. However now that all of the “unspent levy” is being used for Apprenticeships in smaller firms, the 0.5% rate would probably need to increase to allow this to happen.