Apprenticeships Contents

5Funding

101.In the Budget following the 2015 General Election, the Government announced that a new Apprenticeship levy on large employers would be introduced in April 2017.209 This followed extensive examination of other funding options during the final years of the previous Coalition Government, a process examined at length by the previous Education Committee.210 The Minister, Mr Halfon, told us that the levy was “not just about raising funds” but changing the behaviour of employers who the Government asserted have been failing to invest sufficiently in their employees’ training over the last 20 years.211

Design of the levy

102.The first £3 million of an employer’s annual pay roll is exempt from the levy.212 Above this level employers will pay at a rate of 0.5%. These funds are then lodged in an employer’s apprenticeship service account—along with a 10% Government top-up—from which they can be spent on training provision and assessment from approved organisations.213 The Minister told us that he expected “2% of businesses [ … ] roughly 20,000 businesses across the UK” to pay the levy.214 It is expected to raise £2.8 billion a year across the UK by 2020, allowing the apprenticeships budget to rise to £2.5 billion a year in England—twice what was spent in 2010 in cash terms.215 Separate agreements are in place with the devolved administrations to provide “funding certainty” and manage any difference between projected and realised levy revenue.216

103.Many non-employers we heard from were positive about the levy. This was often on the grounds that the previous system had required too little investment from employers who would now be motivated to take more interest in the programme.217 Employers were more sceptical with even generally supportive companies such as Deloitte LLP suggesting that the design of the levy may “create significant winners and losers”.218 Although provisional and final funding announcements answered many of the questions raised in the written evidence we received, some concerns remain outstanding.219

104.We heard evidence from representatives of sectors such as charity retail, pharmaceuticals and the creative arts who said that they would lose out under the new system.220 Despite having little need to employ apprentices, and few appropriate roles for them to fill, they would still be required to contribute. Some levy-paying employers suggested they should be allowed to transfer unused funds to other firms within their supply chain or sector to mitigate this.221 From 2018 levy-paying employers will be able to transfer up to 10% of the funds in their apprenticeship service accounts to companies in their supply chain. The Government has set up a working group to consider the matter further.222

105.A number of our witnesses, including Neil Carberry, Director for People and Skills at the Confederation of British Industry, called for far greater flexibility in how the money in employers’ apprenticeship service accounts could be used.223 He told us that “if you are genuinely taking one of your senior shop floor staff away from work for a day to do mentoring, in many levy systems you can claim that back”. We heard that this lack of flexibility may force some employers to cut back on their programmes as their projected levy contribution is higher than they are currently spending on off-the-job training and assessment, leaving them less to spend on other aspects of their apprentices’ training.224

106.We also heard fears that there would be too few appropriate standards ready for delivery for employers to use the funds in their apprenticeship service accounts when the Apprenticeship Levy begins to operate.225 The Chartered Insurance Institute suggested that such employers may be forced to write off the levy as simply a payroll tax.226 Other witnesses questioned whether sufficient safeguards were in place to protect against employers gaming the system to recoup their levy payments by rebadging existing in-work training programmes as apprenticeships.227 This would defeat the object of the Government’s reform of increasing the level of training employers are undertaking. In evidence before the Public Accounts Committee, Peter Lauener, Chief Executive of the SFA, provided further information about how the agency intended to detect and combat “11 categories of possible fraud and gaming”.228

107.The Minister told us he was instituting a “Ronseal levy” that “does exactly what it says on the tin” and rejected suggestions that it should be more nuanced.229 We are not convinced that such a blunt instrument is the best way to achieve the Government’s aims. Our country needs to invest more in training and it is right that employers should contribute, but this training must take place in the sectors of the economy and the regions of our country where it will do most good. The Government’s “experimental analysis” of projected levy yield by sector and company size suggested the two biggest contributing sectors to the levy would be Education and Human Health and Social Work Activities.230 Yet these are not the sectors of the most persistent skills shortages or where apprenticeships produce the highest wage returns.231 As a result, the contribution that apprenticeships can make towards solving skills shortages and improving productivity is undermined.

108.We also remain unconvinced that the levy will change employer behaviour to the extent the Government hopes. The Minister has said that the Apprenticeship Levy will bring about a “new world”, but this largely seems to involve employers pursuing the Government’s objectives.232 Past attempts to change employer behaviour have produced mixed results, and it remains to be seen whether sufficient safeguards are in place to ensure the introduction of the levy brings about the growth in high-quality new training the Government intends.

109.Levies are a feature of many successful apprenticeship systems around the world and we heard little to suggest they should not be part of ours. But the Apprenticeship Levy is a blunt tool in which contributions are unlikely to bear any relation to the skills needs of individual employers and their sector more generally. It is not sufficiently focussed on areas of the economy, and of the country, where training is most needed.

110.We recommend that the Government, as part of its continuing review of the operation of the levy, consider whether a single rate is the best approach and explore ways of restructuring the levy on a sectoral and regional basis.

Non-levy-paying employers

111.The vast majority of employers will not pay the levy. Instead they will pay for their apprenticeship training and assessment through a system of ‘co-investment’ with the Government.233 Professor Wolf, Professor of Public Sector Management at King’s College London, was one of a number of witnesses to question why the Government had chosen to create two “completely separate” systems.234 Some witnesses expressed concern that this would lead to disproportionate focus on levy payers—a small fraction of employers—which could deter smaller businesses from becoming involved.235

112.From May 2017 non-levy-paying employers will contribute 10% of their training and assessment costs, with the Government paying the rest up to the maximum amount of government funding available for that apprenticeship. In some cases employers with fewer than 50 employees will not be required to make any contribution.236 Employers that do not pay the levy will not be required to use the Government’s apprenticeship service until at least 2018, instead paying their contribution directly to their provider.237

113.The pilot funding model for apprenticeship standards had required employers to contribute one-third of the cost of their apprentices’ training and assessment, with the Government paying the rest.238 The outgoing system for apprenticeship frameworks is more complex, with different funding rates depending on the age of the apprentice.239 While the 10% rate is significantly lower than some employers had previously paid for training, which led some to see the changes as positive for non-levy-paying businesses, others were less convinced.240 Marcus Mason, Head of Business, Education and Skills at the British Chambers of Commerce told us that currently

about 75% of businesses do not pay training providers for apprenticeship training [ … ] the effect, what we are hearing back from this very short consultation period of our members [ … ] is that this will stifle demand to some extent.241

114.In view of these concerns, we asked the Minister why the Government was introducing co-investment, given that a 10% rate was unlikely to produce significant revenue. He told us that the contribution was important to ensure employers bought into the system, rather than sought to abuse it.242 Given the relatively small amounts of money involved we are unconvinced that the impact in either will be as pronounced as some of our witnesses suggested.

115.During the early stages of our inquiry, it was unclear exactly how much Government support would be available for non-levy-paying employers.243 In January 2016, Nick Boles MP, the then Skills Minister, said that he did not expect “that every [levy paying] employer will use up all of its money, because there are a lot of employers that do not currently.”244 However, Martin Doel MBE, then Chief Executive of the AoC, told us that he believed the Government was taking a “calculated gamble” that sufficient money would be available.245 In January 2017, in response to a written question, the Minister for Apprenticeships and Skills, Mr Halfon, confirmed that a minimum of £440m would be available for 2017/18.246

116.We remain unconvinced that the Government was right to choose such a dichotomous levy model. Traditionally levies are intended to promote cooperation between employers large and small. While one member may not benefit directly they should benefit indirectly from wider increases in skills levels. By limiting the ability of employers to transfer levy funds, the opportunity for this cross-sector cooperation is diminished.

117.There remains a lack of clarity about the long-term funding arrangements for non-levy-paying employers, and how this may or may not relate to levy yield and how much training levy-paying employers choose to provide.

Funding per apprentice

118.Throughout the first half of 2016, little detail was available about how much levy-paying employers would be able to spend per apprentice from their digital accounts. There was similar uncertainty about the level of Government support that would be available towards the training costs of individual apprentices employed by non-levy-paying employers. Airbus UK was among a number of representatives of the manufacturing sector to emphasise the importance of caps high enough to ensure employers in their sector were not deterred from offering apprenticeships.247

119.In August 2016, the Government launched a three-week consultation on its draft funding proposals.248 It proposed 15 funding bands, with the upper limit of these bands ranging from £1,500 to £27,000.249 The bands set the maximum amount of digital funds a levy-paying employer can use towards an individual apprenticeship and the maximum level to which the Government will co-invest.250 This was intended to ensure maximum value to the taxpayer.251 Funding bands would not have a lower limit; with employers free to negotiate a lower price for their training or use their own money to spend over the cap.252

120.We heard mixed views on what effect this increased competition would have. Peter Lauener, Shadow Chief Executive of the Institute for Apprenticeships, told us that this more market-based system would “drive up” quality by forcing providers to compete, but this was rejected by the AELP which said it would have the opposite effect.253 In a recent report, the Institute for Fiscal Studies questioned whether there was sufficient incentive for employers to negotiate at all when many would receive little or no direct benefit from the cost saving.254

121.The proposals also included additional payments for English and maths training and apprentices requiring greater learner support, increased funding for all STEM framework pathways, a waiving of the co-investment rate for small companies (those with fewer than 50 employers) “for apprentices aged 16–18 years of age, 19–24 year old care leavers and those who have an Education, Health and Care Plan”, and an additional payment of £1,000 each to both employers and training providers for such apprentices.255

122.The outgoing system of funding for apprenticeship frameworks is significantly more complex than that which the Government originally proposed in August 2016. It adjusts Government funding paid to training providers to support disadvantaged learners, mitigate higher costs of delivery in areas such as London and the South East, and incentivise employers to recruit 16–18 year olds.256 The Government stated that the new system would bring greater consistency between funding arrangements for frameworks and standards and be easier for employers to understand.257 However, this proved controversial with many questioning the possible effect of the Government’s changes on apprenticeship uptake.258 Analysis published by FE Week suggested that

proposed funding for 16 to 18 year-old apprentices will result in current rates to colleges and training providers being cut by around 30 per cent, rising to over half for those apprentices living in the most deprived areas of central London.259

123.In response to the consultation the Government confirmed many aspects of the proposals and attempted to mitigate some of these concerns, including a number of “transitional measures” for framework apprenticeships.260 The document committed to “make available at least the same amount on disadvantage payments as under the current system” and the Government would undertake to a full review of how best apprenticeships could ensure equal opportunity.261

124.Nevertheless, concerns remained that the changes would negatively affect apprenticeship uptake, particularly among 16–18 year olds. In January 2017, Jon Graham, chief executive of JTL, a training provider, told FE Week that “our employers say when the traditional age differentials in funding rates are removed, they would sooner employ people aged 19 and over”.262

125.We share concerns about the effect the Government’s changes may have on the number of young apprentices employers recruit. We also believe the changes raise a much wider question of whether two of the main aims of the Government’s reforms—giving employers greater control and widening participation—are complementary. One of the reasons many young and socially disadvantaged people struggle to get on in life is that they find it difficult to convince employers to hire them. They often lack experience and may require additional support and supervision.263 The previous system attempted to mitigate this by making it cheaper to train young apprentices, but it unclear whether this is still possible in a system in which employers and providers negotiate the cost of training. Of course, the Government’s proposals include additional incentive payments for both employers and providers who take on young and disadvantaged apprentices.264 But if a provider decides to offer training for an older apprentice at a significantly cheaper rate, this may not prove an effective incentive.

126.We are not convinced that introducing price competition into the apprenticeship system will have the effect the Government intends. It is unclear whether there will be enough information available to employers to choose between providers. If this proves to be the case, there will either be little competition or, more damagingly, competition based purely on price which could drive down quality.

127.We recommend that the Government, in cooperation with Ofsted and the Institute, closely monitor the effect of price competition on apprenticeship quality.

128.Given the Government’s commitment to using the apprenticeship system aid social mobility, we are surprised that its initial funding proposals looked likely to do the opposite. While some of these potential effects have now been mitigated we are sceptical as to whether this objective can be achieved under such a dramatically simplified funding system.


209 HM Treasury Summer Budget 2015, HC (2015–16) 264, July 2015, para 1.236

210 Education Committee, Sixth Report of Session 2014–15, Apprenticeships and traineeships for 16 to 19 year-olds, HC 597, Chapter 6

211 Q255, Summer Budget 2015, HC (2015–16) Cm 264 , July 2015, paras 1.270–1.271. This assertion was disputed by some witnesses: Q165 [Neil Carberry]

212 DfE, “Apprenticeship funding: how it will work”, accessed 22 February 2017

214 Q264

215 HC Deb, 9 January 2017, col 58225W; DfE, Apprenticeship funding in England from May 2017, October 2016, p 3

217 Association of School and College Leaders (APP 57), para 5, Q68, Greater Manchester Combined Authority (APP 117) para 3.1

218 Deloitte LLP (APP 133) para 4

219 Oil & Gas UK (APP 111), para 10, North East Chamber of Commerce (APP 44) para 12, General Electric (APP 98), para 7, British Beer & Pub Association (APP 149) para 6, ADS (APP 108), para 20, Society of Motor Manufacturers and Traders (APP 185) para 10, Pfizer (APP 198) para 2

220 Charity Retail Association (APP 58), Association of the British Pharmaceutical Industry (APP 67) para 4.5, Creative Skillset (APP175) para 7

221 ADS (APP 108) para 20, Society of Motor Manufacturers and Traders (APP 185) para 10. Some employers also wanted to transfer funds to Apprenticeship Training Agencies who employ apprentices on their behalf. See, for example, Pfizer (APP 198) para 2

222 DfE, “Apprenticeship funding: how it will work”, accessed 22 February 2017

223 Q165, Royal Opera House (APP 51) para 8

224 Qq121 [Lisa Burger], 132–133 [Stephen Tetlow]

225 See, for example, Framestore (APP 135) para 5.4, West of England Local Enterprise Partnership (APP 101) para 2.7

226 Chartered Insurance Institute (APP 161) para 4

227 City & Guilds (APP 42) para 3.3.8. See also, CIPD (APP 126) para 29

228 Oral evidence taken before the Public Accounts Committee on 12 October 2016, HC 709, Qq68 [Peter Lauener], 89 [Jonathan Slater]

229 Q294

231 Social Market Foundation (APP 74)

232 HC Deb, 1 November 2016, col 305WH

233 DfE, “Apprenticeship funding: how it will work”, accessed 28 January 2017. This system will also be used for levy-paying companies who have used the funds in their digital accounts. As with non-levy paying companies they will pay their contribution directly to their provider.

234 Q6

235 Pearson Education (APP 71) para 1.6

236 DfE, Apprenticeship funding in England from May 2017, October 2016, p 14–15. Additional support for such employers is also available to employ 16–25 year old apprentices. DfE, Apprenticeship Grant for Employers: Employer Fact Sheet, January 2016

237 DfE, “Apprenticeship funding: how it will work”, accessed 22 February 2017

240SFA could shoulder up to 90% of training costs for non-levy employers”, FE Week, June 2016. See John Hyde’s comments.

241 Q155

242 Q299

243 Institute of the Motor Industry (APP 137) para 12

244 Oral evidence taken on 25 January 2016, HC (2015–16) 704, Q40

245 Q68

246 HC Deb, 31 January 2017, col 61753W

247 Airbus UK (APP 65), para 5, Society of Motor Manufacturers and Traders (APP 185) para 8

249 DfE, Proposals for apprenticeship funding in England from May 2017, August 2016, Main points

250 As above, para 6

251 As above, para 8

252 As above. See also Chapter 6.

253 Q219, Qq68–69, AELP, Submission #29 Apprenticeship Funding & Register, September 2015, p 1

254 IFS, Green Budget 2017, Reforms to apprenticeship funding in England, January 2017, p 26

255 DfE, Proposals for apprenticeship funding in England from May 2017, August 2016, Main points, paras 14, 37–39, Main points

256 SFA, Funding Rates and Formula 2016 to 2017, March 2016, paras 17, 21, 42.

257 DfE, Proposals for apprenticeship funding in England from May 2017, October 2016, Main points

258 See, for example, HC Deb, 1 November 2016, col 281–306WH, FE Week, Save our apprenticeships briefing, September 2016

260 DfE, Apprenticeship funding in England from May 2017, October 2016, paras 21, 28–29, 48–50. The Minister told us that there will be “be 15 funding band levels that they cannot go above or below” [Q308]. However the final funding document stated “funding bands do not have a lower limit”.

261 As above, Summary of key changes

26216–18 apprenticeships are set to plummet”, FE Week, January 2017

264 As above, para 41




30 March 2017