How will the apprenticeship levy impact local authorities? Rajveena Sangha explains.
As we know, apprenticeships have long been recognised as a crucial way to develop the skills wanted by employers. That is why the Government wants to increase the quality and quantity of apprenticeships in England, aiming to reach three million starts in 2020.
In the 2015 Summer Budget the Government announced plans to introduce a levy on employers to fund apprenticeships. The idea is that the apprenticeship levy will shift incentives so that it is far more in employers’ interests to take on apprentices. This in turn will put investment in training, and apprenticeships specifically, on a long-term, sustainable footing.
Set to come into force in April 2017, the levy will require all employers operating in the UK, with a pay bill over £3m each year, to invest in apprenticeships.
So how will the apprenticeship levy work?
Employers with an annual pay bill of more than £3m will be required to spend 0.5% of their total pay bill on the apprenticeship levy. A "levy allowance" of £15,000 per year is being introduced, meaning that the total amount that an employer needs to spend is 0.5% of their pay bill, minus £15,000.
While the levy is being introduced in April, payments are set to start in May 2017 and it will be up to employers to notify HMRC each month as to whether they are eligible to pay.
Who does the apprenticeship levy apply to?
The apprenticeship levy will apply to:
(a) all employers with a workforce in England; and
(b) training providers who provide training for English apprenticeships,
who have an annual pay bill of more than £3m.
Currently there is no exclusion in the draft legislation, the Finance Act 2016 (Act), and so the apprenticeship levy requirement appears to 'bite' all employers who meet the turnover threshold. Although, there have been calls by the Local Government Association for local authorities to be exempted given their already significant financial constraints, these do not appear to have been responded to at the point of writing this blog.
Therefore, in the first instance the apprenticeship levy will apply to councils that are employers of their own workforce that have an annual pay bill of more than £3m. Where the annual pay bill does not exceed £3m then they will not be subject to apprenticeship levy regime.
Separately to councils, if a corporate entity has its own workforce and its annual pay bill is more than £3m then it would be subject to application of the apprenticeship levy. In this case, the corporate entity will need to consider how the apprenticeship levy will be calculated (as explained above) and start paying the levy to HMRC in May 2017.
In addition, councils will need to consider application of the apprenticeship levy where they have set up a corporate entity which is to enter into subsidiary or group company arrangements. This is likely to fall within section 101 of the Act which covers application of the apprenticeship levy in relation to "connected companies" which is discussed in more detail below.
Where several employers are connected as a group they will only be able to use one £15,000 levy allowance.
If an employer is part of a group of connected employers it will have to decide what proportion of the levy allowance each employer in the group will be entitled to. The decision must be made at the beginning of the tax year, and will be fixed, unless a correction is necessary because the total amount of the levy allowance claimed across the group exceeds £15,000.
As local authorities are public bodies and not companies they will not fall within the remit of "connected companies" under section 101 of the Act. However, this will apply to a corporate entity where it enters into grouped arrangements and each company is an employer of its own workforce (Group) and has an annual pay bill of more than £3m. In those circumstances, to ensure that section 101 of the Act is complied with, it would be necessary for the councils (who have set up the corporate entity) to consider what proportion of the levy allowance each employer in the Group will be entitled to. This cannot exceed the £15,000 levy allowance.
If it is only the corporate entity that has a pay bill of more than £3m and no other company in that Group, then section 101 of the Act will not apply as this does not fall within "connected companies" and only the corporate entity will separately be subject to the apprenticeship levy regime.
How does the legislation impact local authorities and company structures?
As an employer, local authorities and corporate entities (including Teckal companies) will be subject to application of the levy where each has a pay bill of more than £3m. However, if they do not then it will not apply.
In relation to connected companies, where a Teckal company enters into grouped arrangements, the local authority will need to consider two limbs. Firstly, they will need to determine whether those entities are “connected” as set out in paragraph 3(1) of the National Insurance Contributions Act 2014. Secondly, consider if those entities are connected with one another at the beginning of the tax year and that each of them is entitled to a levy allowance for the tax year (section 101(1) of the Act). If both limbs are satisfied then they will fall within "connected companies" under the Act and the apprenticeship levy regime will apply. This in turn will mean that where a local authority has set up a corporate entity (including a Teckal company) that enters into grouped arrangements, the local authority will have to consider what proportion of the levy allowance each employer in that group will be entitled to.
Therefore, come April 2017, the apprenticeship levy will apply to every employer, including local authorities, with a yearly pay bill of over £3m and companies that fall into this bracket will be required to invest money into apprenticeships.