The Apprenticeship Levy: a New Tax on Business or Essential for Talent Development?

Earlier this month we held a meeting for REC members with the Department for Business, Innovation and Skills (BIS) to discuss the much talked about “apprenticeship levy”. The detail is still limited but there are some specifics we do know, and that members should prepare for:

• The levy will be set at 0.5%
• It will be charged from April 2017
• There will be a £15,000 allowance for all employers, meaning only those UK companies with an annual payroll (on PAYE) over £3 million will have to pay it
• HMRC will collect the levy directly and monthly, based on RTI
• Employers will be able to claim back the levy to fund apprenticeships within their business. This should help government achieve its target of having 3 million new apprentice starts by 2020.

And this is where the information ends. This was an important session for us as it was a good chance to inform deliberations ahead of more details on the levy, expected around the time of the Budget.

Given the nature of the temporary agency market and that many recruiters run several payrolls, the government’s chosen mechanism of setting the levy throws up significant challenges and will constitute a hefty tax – one that could be payable even by SME recruiters.

We explained to our BIS colleagues that in recruitment, our only product is “people” and the supply of people. Therefore, the payrolls run by recruiters, including for those recruitment businesses that only employ very few staff directly, are much higher on average than those you would see for businesses in other sectors. Official government rhetoric is that the levy will only be payable by around 2 per cent of all employers – but by our calculations, it will apply to at least 15 per cent of recruiters.

We made a number of important points which aimed to help inform government as they develop the levy:

• The recruiters present at the meeting were emphatic that they have no problem with paying a levy on their own staff (ie those directly employed as recruiters etc) and that this could help them deliver more apprenticeships internally. But it was difficult to see how it would support agency workers.
• BIS defined a quality apprenticeship as lasting one year or longer. We explained how most temporary agency workers (who may be on the payroll of employment businesses) are typically on assignment for a much shorter duration – usually for eight to ten weeks. To pay a levy on workers who cannot possibly benefit from or participate in a quality apprenticeship is not a fair way forward – and it is a stated intention of government that the levy should be “fair to all”.
• At a time when HMRC are making significant strides to clamp down on arrangements that do not go via PAYE (e.g. think about the upcoming travel & subsistence changes), a levy calculated on an agency’s payrolls could have the exact opposite effect.
• The labour supply chain is notoriously complex and so we would need absolutely clarity on who is responsible for paying the levy within the supply chain to avoid any form of double counting. We understand this is a point clients have also raised directly with BIS.

What next?

We were told to expect more news on the levy this spring, most likely on or around the time of the Chancellor’s Budget on 16^th March. We’ll be live tweeting the Budget as always and summarising the key announcements, so watch this space.

There may be a further consultation on the mechanisms for the levy later this year. We stressed that for a levy to start in April 2017, businesses need plenty of time to prepare.

Our discussion with BIS was informed by both our earlier consultation response and our position paper but the work doesn’t stop here – we’ll take our messages to Treasury and HMRC as well. We would be happy to share our position paper with REC members to inform your own submissions to government at this important time. If you’d like a copy of these or to discuss further, please get in touch (kate.shoesmith@rec.uk.com).

And we’ll share all the latest information at our member-only ‘Tax & Regulation’ special event on 10^th March. Book here.