In the News
There has been a rumble of concern about the apprenticeships budget. Over the past few years, FE and skills stakeholders have spoken out regarding the potential for the apprenticeship budget to go bust, with dire consequences for young people and smaller employers.
Before the pandemic, organisations were queuing up to warn that the apprenticeship budget was being exhausted:
December 2018: The Institute for Apprenticeships reveals to employers the apprenticeships budget for England is set to be overspent by £0.5 billion this year, rising to £1.5 billion during 2021/22.
March 2019: The National Audit Office releases a report saying: “There is a clear risk that the budget may be insufficient should demand pick up in the way that would be needed for the programme to meet its objectives.”
March 2019: The Department for Education’s then-permanent secretary Jonathan Slater tells the Commons’ Public Accounts Committee: “In 2020/21 [the levy] could be significantly overspent if we carried on, on the basis of current trends.”
The issue has not gone away. Higher and further education minister Michelle Donelan recently refused to reveal to FE Week whether the apprenticeship budget is still at risk of becoming overspent.
It’s feasible an overuse of the levy could become a problem again because apprenticeship starts, as ministers have boasted, have now returned to pre-pandemic levels.
Where the problem has come from. Levy-paying employers have been using their funding on more expensive standards to claw back some of the money they must pay into the levy as their payroll is above £3 million a year.
But at the same time, the levy is also being used to pay for such things as employer incentives, with many in the sector calling for £3,000 per apprentice payments to continue after they ended in January. The levy also pays for apprentices’ English and maths lessons.
There are also non-levy employers using apprenticeships. Levy funding pays for the training and assessment of apprentices employed by businesses which do not pay the levy. These employers pay just five per cent of the training costs, with the government forking out the other 95 per cent. Even smaller employers can pay nothing towards training costs. Levy-paying employers are also able to transfer 25 per cent of their funds to a small business, however.
Why it matters. If the levy does run out and the government does not step in with additional funding, employers will not be able to pay for their apprenticeships using public funds. Some larger employers might be able to shoulder the burden. But smaller firms could be locked out of apprenticeships if they have to fund it out of their own pockets.
This scenario is likely to hurt those who need apprenticeships most: A Learning and Work Institute report from 2019 found non-levy-paying employers are more likely to employ apprentices who are under 25 studying courses below level 4.
A key issue is that the government refuses to release data on how much is being paid into and out of the levy, as they insist this would breach taxpayer confidentiality. This prevents scrutiny of how the money is being allocated.
The effects are already being seen. Training providers reported in 2019 that their non-levy funding was running dry, and they had to turn apprentices away. In 2020, the Association of Employment and Learning Providers warned providers were “having to turn their backs” on up to 40,000 small businesses owing to a lack of levy funds.
The problems with apprenticeships start even before a penny of levy money has been spent: the Sutton Trust has just released Paving the Way, a report revealing widespread variability in the level of careers education between schools.
Interview
Following the publication of Paving the Way by the Sutton Trust, we asked report author Erica Holt-White about its key messages and what about careers education needs to change.
What are the key messages the report gives out?
While careers provision has improved in recent years, there is still far too much variability – with the biggest differences between state and private schools.
We have found that guidance on different routes is unequal – whilst 46 per cent of year 13s say they have received a large amount of information on university routes during their education, only 10 per cent said the same for apprenticeships. Thirty-nine per cent of state school students said they feel unconfident about their next steps in education and training.
The key barriers for teachers in state schools to delivering guidance are time in the school day and funding. To improve the guidance on offer, many senior leaders in English state schools want to see additional visits from employers (47 per cent) and more visits from apprenticeship providers (39 per cent).
What do teachers and leaders need to improve careers education? And what can they do themselves to improve this picture?
A new careers strategy is urgently needed from the government, which should set out a minimum ‘careers structure’ for all schools, including having a Careers Leader, being part of a Careers Hub and having access to a professional careers adviser. Better earmarking of careers guidance in both the overall curriculum and individual subject specifications could also help leaders make space for careers activities in the school timetable.
The government should ensure better support and guidance is offered
In the immediate term, there should be an individual with a clear responsibility for careers on both a school’s SLT (ideally a Careers Leader) and governing body so they can feed into top-level decisions. Where possible, we would also like to see careers activities as a key part of pandemic catch-up plans.
How can the skills sector, employers, and government help them?
As well as publishing a new careers strategy, the government should ensure better support and guidance is offered to schools so they can deliver high quality guidance on apprenticeships and other technical routes after leaving school.
We also found that only three in 10 year 13s have completed work experience arranged through their school, meaning thousands of young people are missing out on vital opportunities to experience the workplace and develop employable skills. We would like to see all 14- to 16-year-olds have access to work experience opportunities, with both schools and employers supported to offer high-quality placements.
Opinion
Tom Bewick, the chief executive of the Federation of Awarding Bodies, discusses how the apprenticeship levy went wrong and what can be done about it.
Apprenticeship Levy: A Taxing Problem or a Solution Misfired?
The apprenticeship levy was floated for years before a Conservative government finally introduced it in 2017.
It wasn’t a new idea. In the early 1960s, prime minister Harold Wilson, with his ‘white heat of technology’ vision, introduced sectoral training levies and training boards to plan the skills which industry needed, including apprenticeships. By raising collective funds, Treasury officials argued market failure in training would be overcome. It’s what colloquially is referred to as the ‘free rider’ problem.
Most of the boards were scrapped by Thatcher’s government but over half a century on and it’s as if we’ve stepped into a TARDIS. The £2.8 billion per annum apprenticeship levy is seen by many business groups as a “tax on jobs”. The Chartered Institute for Personnel and Development (CIPD) published a damning report last year saying it had “failed on all key measures”.
To understand what has gone wrong, it’s perhaps helpful to deploy three main concepts: substitution, displacement, and deadweight effects.
Substitution
In fiscal terms, substitution occurs when a societal group reacts to the imposition of a new tax by changing its behaviour. To be fair, George Osborne’s exchequer itself engaged in one big substitution effect. Before 2017 apprenticeship subsidies were handed out as grants to employers (via FE providers) equating to roughly the same amount levied today. These funds were paid out of general taxation with large and smaller employers treated broadly the same.
The big wheeze about the introduction of the levy was that government was able to substitute general taxpayer funds with a charge paid separately by businesses. One key problem with this approach, in net terms, is that no additional investment was actually put into apprenticeships to meet the ambitious goals originally set out by policymakers. This included the spectacularly missed target of three million apprentice starts by 2020.
Government policy has resulted in almost the opposite of what was intended
Driven by austerity, the measure was in fact a cost saving exercise substituting the general taxpayer (and voter) for a targeted group of company taxpayers. At the time, it was sold as “putting companies in the driving seat” of the reformed apprenticeship system. Put one pound in, take one pound and ten pence out, declared skills minister Nick Boles at the time.
It’s perhaps no wonder then that the “levy pot” has apparently gone from feast to famine, with massive underspends anticipated in one year, only to be offset by overspends the next. The truth is that no one really knows exactly how the levy is spent because officials hide data behind tax confidentiality concerns.
Meanwhile, non-levy firms are still stuck with the old grant subsidy scheme and so-called ‘digital accounts’ simply mask a highly complex ESFA contracting regime. This has meant small firms being unable to access apprenticeship support funds even when they’ve been desperate to hire.
Government policy has resulted in almost the opposite of what was intended. Overall employer investment in skills has actually collapsed in the past decade, according to the Labour Force Survey. The empirical evidence appears to show firms have substituted paying the levy by cutting back on training investments elsewhere.
Displacement
The levy was meant to provide more apprenticeship starts. In fact, starts fell off a cliff immediately after the tax was first introduced. The pandemic has exacerbated the situation for sure, even if a declining trend was already in place well before coronavirus.
Even as starts recover, we’ve seen how the apprenticeship programme in England has been displaced over time. In world leading systems like Germany and Switzerland, apprenticeships are seen as predominantly for the under 25s and usually at sub-degree level. But here, employers have opted to spend the levy, over time, on more of over 25s already in employment; with the lion’s share of new growth going to ‘degree-level’ apprenticeships. Virtually the opposite of what most people would perceive as an apprenticeship!
The displacement effect has resulted in employers spending £378 million of the levy on just four generic management standards in 2019. It’s what economists call the Matthew effect: a biased system of workplace reward where those who already have access to good training opportunities will disproportionately receive a lot more.
Deadweight
Closely interrelated with substitution and displacement in fiscal interventions are so-called deadweight effects. In the context of apprenticeship, we have to ask ourselves how many of the apprenticeship opportunities would have happened anyway, without the levy?
The older-age profile of most apprentices these days suggests that firms have found a way of simply gaming the system to provide training opportunities to the existing employees they always preferred. Instead of creating additional entry-level posts within their organisation, they have opted for the status quo.
By developing over 600 employer-led standards in areas that meet specific occupational training needs, firms have been able to expand the umbrella of apprenticeship to take in more generic skills training. One of the main criticisms of the levy from business groups is the training eligible for funding is still not generalised enough.
The other key phenomenon is that overall skills investment by employers has declined. They use the levy to not only pay for what used to be covered by general training costs: they have helped mitigate the adverse payroll tax element of the scheme by not incurring the additional investment costs of new hires and young people who are less productive (at least initially).
Conclusion
In my opinion, there is no doubt that the current scope and operation of the levy is simply not working. It needs major reform and recalibrated differently.
If the payroll tax approach of HMRC is not working, maybe it needs to find other ways to ensure co-investment in apprenticeships. The Institute for Apprenticeships and Technical Education, the architects of England’s so-called reformed apprenticeship system, also needs a major overhaul.