Be prepared for the apprenticeship levy

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This article was first published in the July/August 2016 UK edition of Accounting and Business magazine.

The UK’s payroll agents – and, one hopes, their clients – are gearing up for the implementation of the apprenticeship levy in April 2017, which applies to all employers in all sectors. Despite its name, it has nothing to do with whether or not the business employs apprentices and everything to do with payroll processing. 

So what do we know about the design of the levy so far, and what questions remain unanswered?

The levy was announced as part of the Conservative manifesto at the general election and is expected to raise £3bn from employers by 2020 to fund three million apprenticeships in England. Even that sentence indicates some of the issues raised so far: 

• There is no real-time information communication into central government by ‘employers’ – only PAYE schemes. One employer might have one scheme or 100 schemes. 
• Apprenticeship frameworks are a devolved matter, with each of the four parts of the UK having their own structure. Yet the levy is supposed to fund only English apprenticeships – even for nationwide employers.
• The levy is predicated on those who pay it receiving money back to fund apprenticeship training through a digital account. But what about employers who are firmly committed to training but not via apprenticeships or external training, preferring on-the-job qualifications?

Much of the commentary to date has focused on the cut-off to pay the levy being those with an annual salary bill of £3m. Agents will know that this is far too imprecise a term, and in fact what the levy is based on is the PAYE scheme’s ‘NI-able’ pay from £1 – ie, not from the employer threshold of £156 per week. If that exceeds £3m per annum, then 0.5% of the excess will be payable as the apprenticeship levy. As NI-able pay is not inflated by payrolled benefits, but equally not reduced by net pay arrangement pension contributions and payroll giving, it has been chosen as the pay definition to be used. However, it is of course reduced by any salary sacrifices, so that may bring this vehicle for benefit provision back under scrutiny after we had a partial reprieve in this year’s Budget for pension, childcare voucher and bicycle sacrifices. 

What we do know – and this is still quite limited – is that the levy will be calculated by payroll software and paid over with the PAYE scheme’s tax, NI and student loan recoveries. There will be a levy allowance for all employers of £15,000 operated as a £1,250 per tax month offset, operated cumulatively (see box) to achieve the ‘you only pay if your payroll bill exceeds £3m’ strapline. 

Fluctuating costs

One of the difficulties with a monthly offset is that employers with fluctuating payroll costs, perhaps due to seasonal work, may find that a levy is payable in certain tax months and then needs to be repaid in later months. This will have a cashflow impact on the business, but equally one wonders if HMRC will be able to process refunds promptly if there is insufficient tax, NI and student loan recoveries to make a deduction from. We already have evidence this year of employers struggling to get HMRC to make payments of advanced funding for statutory payments.

One of the successes of initial consultation on the levy design is the concession by HMRC that connected companies or entities with multiple PAYE schemes, who will only get one levy offset for the whole group/company (ie one PAYE scheme), will be able to pass on any unused offset to another PAYE scheme in the group/company post-year end. Again, the administrative complexities of this are a concern. But it does mean that clients with multiple PAYE schemes need to budget for all but one of those schemes to pay a straight 0.5% of ‘NI-able’ pay as the levy, as the main PAYE scheme utilises the offset. 

We know the levy will be allowable for corporation tax purposes and will have to dovetail with existing levies that operate in certain sectors, such as construction.

ACCA has been closely involved in the development of the new apprenticeship standards, being one of the organisations running a pathfinder model from the new academic year. 

Incentivising employers

The levy is designed to work by incentivising employers to offer apprenticeships in order to receive funding towards their training – not salary – via a digital account, effectively a repayment of some of the levy they have paid over. Larger businesses will find it difficult to utilise the funds they pay over; it’s a shame that digital account funding cannot be used within the business’s supply chain – only by the direct employer and on a regional basis. 

It is also a concern that the management of the accounts will be particularly complex for nationwide employers and those who have crossborder issues.

Detail on both the digital account and how the levy will be calculated and paid is still sparse, partly because of the European Union referendum, which caused progress on so many new policies to grind to a halt. 

As payroll software changes for April 2017 need to be designed, tested and signed off by December 2016, let’s hope that HMRC and the Department for Business, Innovation and Skills are keen to engage with stakeholders over the summer so this new payroll tax doesn’t get derailed by implementation – or by a Brexit.

The levy guidance published on 24 April promised more to come in June, October and December; it can’t come a moment too soon.

Kate Upcraft is a payroll consultant