By David Lynch is managing director of Bis Henderson Academy .
In April the government is to introduce a new ‘payroll tax’ in the form of an Apprenticeship Levy. Those businesses with an annual payroll bill in excess of £3 million will see their payroll costs increase next year by 0.5% - a substantial extra cost burden for any company affected, across the public, private and not-for-profit sectors.
However, despite the shock that this will be for many businesses there are opportunities too for these organisations to benefit from the levy, provided they seek to fully understand its implications early and plan well in advance.
The good news is the incremental tax raised on the total payroll bill will be returned to the employer through an online account, along with an uplift of 10% from the government. But there is a catch. The employer can only spend the money on the delivery of apprenticeship-based training offered through an approved training provider. And if the funds are not used after 18 months the money is taken away. So you need to be prepared.
To give an idea of the sums involved, if you take a company that employs a thousand people with an average salary cost of £30,000, then, on that £30 million payroll bill the business would pay a levy of £135,000 (after deducting a £15,000 allowance). With a 10% top-up from the government the employer would have £148,000 available.
The problem comes in realising the full value from this ‘lost profit’. Funding for apprenticeships varies considerably, but if we took an average of £2,000 per qualification (which would be correct for some basic-level programmes) then that company with a headcount of 1000 will need to have 74 apprentices next year, and every year thereafter, in order to fully utilise the funds. This is hardly going to be practicable as few companies, if any, are going to want to, effectively, turn their business into a sixth form college by taking on such a large number of school-lever-age young people every year. The profile of the workforce would be completely changed.
The way forward is for organisations to start thinking in terms of ‘funded development’. Businesses are going to need to consider where they can utilise apprenticeship-based training to complement their future needs and to replace some of their existing training budgets.
For many organisations this will require looking carefully at the current skills base and what core skills programmes they are involved in, whether at an operational, supervisory, management or even board level. The key will be in trying to reverse-engineer those training goals into what can be delivered using these new funded frameworks. And this may be across a raft of levels. It could be at the basic NVQ Level 2 or right the way up to a degree apprenticeship at level six or seven.
Importantly, it takes time to put frameworks in place, to identify the individuals and to assess each individual’s funding potential, because there are strict funding criteria – not everybody will be fundable. For instance, a candidate apprentice has to be resident in the UK for a minimum of three years to qualify under the scheme.
An interesting consequence of the Apprenticeship Levy will be the inevitable change in businesses’ views on graduate programmes. The complex rules of the scheme only allow funding for vocational courses. Could we start to see fewer jobs available to graduates with non-vocational degrees and more businesses deciding to use their levied funds to engage young people in vocational apprenticeship degree courses?
At the Bis Henderson Academy we are working with a number of organisations that are ahead of the curve on planning for the upcoming legislation, by helping them to fully understand the new scheme, their own skills needs for the future and the best strategy for delivering value from their levied funds.
Unlike taxes on profits this ‘tax on costs’ coming down the pipeline in April is something that can’t be massaged by accountants. The only choice for management will be, do you take the hit or do you try and make it work for you?