Apprenticeship update: recent updates and changes to apprenticeship funding in England

The government has recently introduced changes to the way in which apprenticeship funding works. 

The changes, that took effect on 1 April 2019, are relevant to:

• employers with a workforce or training providers who provide training in England;
• organisations that provide assessment for English apprenticeships; and
• individual apprentices.

The updates to the apprenticeship funding are as a result of feedback from employers, training providers and interested groups.

A survey undertaken by the British Chambers of Commerce in 2018 confirmed that over 50% of eligible employers had not accessed apprenticeship levy funds available to them at that time. This appears to have been a running theme throughout 2018 as reported by Foot Anstey.

In March 2019, the BBC also reported on the National Audit Office's confirmation that the number of those taking up apprenticeships had fallen substantially under the scheme.

The updates and changes therefore aim to improve the scheme, its availability and its uptake in industry.

The Apprenticeship Levy

The apprenticeship levy was introduced on 6 April 2017 and transfers much of the cost of funding apprenticeships from the state to employers. It was introduced in the hope that the levy would improve the quality of apprenticeships whilst addressing the skill gaps in the UK with the government aiming to create 3 million new apprenticeships by 2020.

The levy is charged at a rate of 0.5% of the pay bill for a tax year (less an annual allowance of £15,000) and is payable to HM Revenue and Customs (HMRC) through Pay As You Earn (PAYE) alongside income tax and National Insurance. The levy is only payable by UK employers with a pay bill of more than £3 million each year. The levy is therefore 0.5% of pay bills over £3 million in the relevant tax year.

The pay bill will be based on the total amount of earnings subject to Class 1 secondary National Insurance Contributions (NICs). Earnings include any remuneration coming from employment, such as wages, bonuses, commissions, and pension contributions that NICs are paid on but not benefits in kind.

In return for paying the levy, employers have access to the apprenticeship service where they can spend levy funds, manage apprentices, pay training providers and stop or pause payments to the training provider.

In addition, the government applies a 10% top-up to monthly funds entering levy paying employers' digital accounts for apprenticeship training in England and have done so from April 2017. All funds entering a levy payer's account are therefore increased, so every £1 is increased to £1.10 in value.

Employers who do not pay the levy do not yet have access to the apprenticeship service, and are unlikely to have access to this until at least mid-2019. The exception to this rule is that an employer who is not paying the levy, but is receiving a transfer of funds from a levy paying employer will have access to the apprenticeship service.

Summary of changes

The updated government funding policy details information on the changes in co-investment and a new concept of transferring funds relating to the levy. The policy also details information on the expiry of funds that is taking effect following the introduction of the levy in 2017. In brief the changes are as follows:

• Co-investment – the employer contribution will drop from 10% to 5% for all apprenticeships starting on or after 1 April 2019 for non-levy paying employers.
• Transfer – levy paying employers will be able to transfer up to 25% of their annual funding to support apprenticeships in other businesses.
• Expiry – unused funds will expire if they have been in an employer's account for 24 months from May 2019 on a "first in / first out basis".

The updated policy and the related changes apply to all employers (i.e. those that pay the levy and those that do not pay). However, the changes will only apply to new apprenticeships started on or after 1 April 2019; apprenticeships started before this date will continue to be funded under the rules that applied when they started. Further detail on each of these points is provided below.

Co-investment

What is co-investment?

Co-investment is a funding option for non-levy paying employers provided by the government to support their commitment to apprenticeships. It is also available to levy paying employers who want to invest more in apprenticeship training than is available in their levy accounts. This funding is available subject to the employer making financial contributions alongside the government funding.

All co-investment payments are made directly to the training provider. Employer contributions are considered important as it helps to increase employer engagement and, in turn, the quality of training.

It is still the case that levy paying employers must not ask their apprenticeships to contribute to their training.

There is a funding limit to co-investment. There are currently 30 funding bands with the upper limit of those bands ranging from £1,500 to £27,000. These funding band limits differ dependent upon the apprenticeship. Any training costs above that limit will need to be met in full by the employer.

Changes to co-investment

For all apprenticeships starting from 1 April 2019 the rate of employer co-investment will be reduced to 5% of the cost of training and assessment for their apprentices to the funding band limit with the government providing 95% of funding to cover the remaining training costs. This also applies to any levy-paying employer who wants to invest more in apprenticeship training than they hold in their apprenticeship service account. In this case, if in any single month a levy-paying employer has insufficient funds available in their account to meet the full costs of training and assessment, they need to co-invest 5% of the outstanding monthly balance, with government paying the remainder.

This does not affect apprenticeships that started before 1 April 2019 (they will still attract the employer contribution of 10% and government funding of 90%).

Transfers

What is a transfer of funds?

A transfer of funds in an employer's levy account was introduced alongside the levy to enable employers to transfer some of the funds in their levy account to support apprenticeships in other businesses. Levy paying employers were entitled to make a transfer of up to 10% of the funds available in their levy account to another business.

If you are in a group of companies paying the levy together, your group can already set up a single shared apprenticeship account and pool your funds.

Changes to a transfer of funds

Since 1 April 2019, organisations can now transfer unused funds in their account to any number of employers, for any number of apprenticeships up to the maximum of the 25% allowance. Employers who have unused apprenticeship funds can find employers who want to receive a transfer in a number of ways, for example, through employers in their supply chain. Transferred funds will be used to pay for the training and assessment costs of the apprenticeships agreed with the receiving employer.

Expiry of Funds

What is expiry of funds?

On the introduction of the levy in April 2017, funds raised from employers appeared in their apprenticeship service accounts in May 2017. The funds available in an employer's account were to expire 24 months' after initially showing in those accounts. The oldest funds expire on a "first in / first out basis". The purpose of this approach is to minimise the potential for levied funds to expire, as employers will only see funds expire in May 2019 if they have spent less than their contribution from May 2017.

Updates to the expiry of funds

May 2019 is the first month that employers will have seen any unused funds expiring in their account as funds were first shown as paid into accounts in May 2017.

In addition to funds paid by an employer into an account, the rules on expiry will also extend to the 10% top up that is paid into an account by the government.

Practical Issues: Funding

For further information, the Government guidance can be read by clicking here.

Please also note that apprenticeships are a devolved policy and the position may differ for employers with operations in Scotland, Wales or Northern Ireland.

Reminder of the types of apprenticeship to which funding applies

There are two legal forms of apprenticeship:

• A "traditional"contract of apprenticeship, entered into and governed by the common law which was subsequently referred to as a Common Law Apprenticeship; or
• An apprenticeship agreement, an approved English apprenticeship or an alternative English apprenticeship entered into and governed by the Apprenticeships, Skills, Children and Learning Act 2009 ("ASCLA 2009"), which came into force in 2011 and introduced the "apprenticeship agreement" (a"Statutory Apprenticeship").

Generally, the most common form of apprenticeship is the Statutory Apprenticeship. This is because compared to a contract of apprenticeship (which comes with onerous rules and obligations), an apprentice is who under a Statutory Apprenticeship is subject to similar rules on management and termination as a regular employee which effectively widens the scope of an employer in respect of dismissal. However, when starting an apprentice within your organisation it is important to use the correct form to ensure that an apprentice gets the appropriate employment rights.

A contract of apprenticeship can only be brought to an end by some fundamental frustrating event or repudiatory act. Misconduct that would usually justify dismissal of an employee is not sufficient. The only way in which a contract of apprenticeship can be terminated is if the apprentice does something that essentially makes them unteachable, therefore frustrating the purpose of the contract. It is also not possible to terminate a contract of apprenticeship by reason of redundancy. In short, the risk in dismissing apprentices employed under a contract of apprenticeship is far greater as if the same is found to be unfair an apprentice will be potentially entitled to damages for losses connected to the full term of the apprenticeship, and for loss of future career prospects

Given the restrictions and risks around terminating a contract of apprenticeship, it is essential to ensure that if you are employing an apprentice, you use a Statutory.

If you have used a Statutory Apprenticeship agreement, you will already have drafted into the contract a fixed term (for the intended life of the apprenticeship). Terminating an apprentice's employment in line with that fixed term (i.e. at the end of the apprenticeship as envisaged at the start) will still constitute a dismissal but it will be potentially fair, falling into the category of a dismissal for 'Some Other Substantial Reason' (as opposed to redundancy). As such, no obligation to make a statutory redundancy payment will arise.

Practical Issues: Employing an apprentice

For more information about the levy or apprenticeships in general, please get in touch with me on +44 (0)1392 685267 or email [email protected].