Finance Bill

Written evidence submitted by the Chartered Institute of Taxation (CIOT) (FB 08)

Finance Bill 2016 - Clauses 87-110 (Apprenticeships Levy)


1. The CIOT raised two main concerns with HMRC in March 2016, in response to the draft legislation. These were in respect of i) how the levy works in relation to connected companies and connected charities and ii) how the levy allowance is to be claimed.

2. We are pleased that in relation to the first issue the Government confirmed in April that an amendment will be brought forward to make the change we suggested.

3. On the second issue the decision had been made not to allow the full allowance up front. The Government wanted to see AL in earlier even if it means a later refund having to be made.

Apprenticeship Levy

4. The levy will be based on an employer’s total pay bill for Class 1 NIC purposes, but ignoring the Class 1 secondary threshold, excluding earnings of employees exempt from UK NICs, and including pay charged at the Class 1 0% rate (i.e. under 21’s and apprentices under 25).

5. There will be a £15,000 levy allowance to set against the 0.5% rate applied to the pay bill so that, normally, only employers with pay bills exceeding £3 million will have to pay the levy.

Connected companies and sharing the allowance

6. The original proposal was that if a group of companies or charities were connected then only one of them could claim the levy allowance, meaning that any other connected company cannot receive any part of the allowance, even if it has not been fully utilised by the nominated company. We did not believe that this was fair and we urged the Government to reconsider the approach so that the £15,000 levy allowance can be fully utilised in these circumstances.

7. We thought that this rule would have meant many SMEs having to pay the levy despite not having a large pay bill. Two companies can be connected for a myriad of reasons (e.g. in family situations a wife may run her own business and her husband a separate business but they are deemed to be connected). As a result, if only one company can claim the levy allowance the other would have had to pay the levy despite their combined pay bills being under £3m.

8. After further representations were made it was confirmed that the Government accepted that this would have led to a significant increase in the employer population subject to the levy. The Government will therefore put down an amendment to the Finance Bill to allow a group of connected employers to decide what proportion of the levy allowance each employer in the group will be entitled to. This decision must be taken at the beginning of the tax year and will be fixed for that tax year.

9. This change is welcome but it does mean that businesses need to know what their annual pay bill is going to be at the start of the tax year in order for them to allocate the allowance correctly. Any mistake in allocation could lead to the levy being paid even though the combined pay bills of the connected companies is under £3m. In our view there should be an end of year ‘reckoning up’ to allow companies to reclaim any levy overpaid as a result of getting the allocation between companies wrong at the start of the year.

Cumulative vs up front allowance

10. We also urged the Government to permit the levy allowance to be claimed in full upfront by an employer rather than be pro-rated across the tax year. The proposed approach, as we understand it, of only allowing 1/12th of the allowance per month could result in in-year over-payments being made to HMRC which will subsequently need to be repaid to the employer.

11. This approach means that 1/12th of the allowance will be available to set against the pay bill in tax month 1, 2/12ths of the allowance will be available to set against the combined pay bills for tax months 1 and 2 in tax month 2, etc. This approach is likely to result in over- and under-payments where earnings fluctuate across the tax year. For example, an employer that pays a bonus in June may find that the levy has to be paid for that month (because the total pay bill for the first 3 months of the year has exceeded £0.75 million) even though the pay bill for the whole year will be less than £3 million. The result is that the employer suffers a cash flow disadvantage and that the Exchequer has a ‘false’ receipt (revenue that ultimately will have to be repaid).

12. We understand that the Government is not minded to accept our proposal and permit the allowance being claimed in full up front and has confirmed to us that the allowance will be available cumulatively. The Government says it has recognised our concerns that this could lead to increased administrative costs and complexity in collection in certain situations. However, the Government has said that its overriding factor is that the purpose of the levy is to support apprenticeships and an upfront allowance will delay monies going into Digital Accounts for medium sized firms. This in turn would lead to those firms delaying starting apprenticeships which is not the outcome that the Government wants.

13. We remain of the view that it would be administratively simpler for employers (and HMRC) to replicate the Employment Allowance approach and allow the allowance to be claimed in full, up-front so that the levy is only paid at the point in time when the pay bill first exceeds £3 million, as this would mean that there should be no in-year over-payments of the levy to be recovered from HMRC.

14. The Office of Tax Simplification published recommendations in March 2016 on closer alignment of income tax and national insurance contributions having been asked to do this in the summer 2015 Budget. This was in recognition that the differences between the two main employment taxes (IT and NICs) are a significant source of complexity in the UK tax system. It is regrettable that faster than this proposed simplification can be evaluated the Government are introducing new complexity in this area through a new tax on payroll (the AL) but with a different approach to protecting smaller companies from the increased charge than the NI employment allowance.

15. Further information is provided in our submission to HMRC of 3 March 2016, which also raises technical points on the allocation of the levy allowance for businesses with multiple payrolls and either a single PAYE reference (e.g. some franchised businesses – are they one business with one levy allowance or multiple separate businesses, each with a separate levy allowance) or multiple PAYE references (e.g. each business segment runs its own payroll – how do you allocate the levy allowance between the payrolls).

Devolved administrations

16. We also have some practical concerns about how the apprenticeship levy will be allocated to devolved administrations and the practicality of accessing the funds to pay for apprenticeship training. Dialogue in this respect is ongoing.

17. We understand that HMRC will base the amount that each State will receive from an employer that pays the apprenticeship levy based on where the employees live (i.e. if 25% of employees live in each of England, Northern Ireland, Scotland and Wales then each administration will receive 25% of the levy raised to allocate in accordance with that State’s rules on apprenticeship funding). However, this does not seem to take account of where the work is carried out (e.g. employees living one side of a border but working the other) or where the apprenticeship training might be carried out.

18. Also, we understand that this initial allocation between the States will be carried out using postcodes but this is what HMRC said would be done when determining which taxpayers were Scottish Taxpayers, and many very clearly Scottish resident taxpayers did not received their Scottish Taxpayer ‘S’ code (because, we understand, they had ‘United Kingdom’ in their address rather than ‘Scotland’).

Appendix: The Chartered Institute of Taxation

The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 17,600 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

July 2016


Prepared 4th July 2016