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. 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. 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.
102.The first £3 million of an employer’s annual pay roll is exempt from the levy. 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. The Minister told us that he expected “2% of businesses [ … ] roughly 20,000 businesses across the UK” to pay the levy. 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. Separate agreements are in place with the devolved administrations to provide “funding certainty” and manage any difference between projected and realised levy revenue.
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. 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”. Although provisional and final funding announcements answered many of the questions raised in the written evidence we received, some concerns remain outstanding.
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. 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. 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.
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. 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.
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. The Chartered Insurance Institute suggested that such employers may be forced to write off the levy as simply a payroll tax. 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. 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”.
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. 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. Yet these are not the sectors of the most persistent skills shortages or where apprenticeships produce the highest wage returns. 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. 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.
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. 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. 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.
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. 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.
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. The outgoing system for apprenticeship frameworks is more complex, with different funding rates depending on the age of the apprentice. 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. 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.
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. 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. 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.” 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. 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.
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.
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.
119.In August 2016, the Government launched a three-week consultation on its draft funding proposals. It proposed 15 funding bands, with the upper limit of these bands ranging from £1,500 to £27,000. 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. This was intended to ensure maximum value to the taxpayer. 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.
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. 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.
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.
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. 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. However, this proved controversial with many questioning the possible effect of the Government’s changes on apprenticeship uptake. 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.
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. 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.
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”.
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. 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. 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 , HC (2015–16) 264, July 2015, para 1.236
210 Education Committee, Sixth Report of Session 2014–15, , HC 597, Chapter 6
211 Q255, Summer Budget 2015, HC (2015–16) , July 2015, paras 1.270–1.271. This assertion was disputed by some witnesses: Q165 [Neil Carberry]
212 DfE, “”, accessed 22 February 2017
213 DfE, , October 2016, paras 49–53
215 HC Deb, 9 January 2017, ; DfE, , October 2016, p 3
216 HM Treasury, “”, November 2016
217 Association of School and College Leaders (), para 5, Q68, Greater Manchester Combined Authority () para 3.1
218 Deloitte LLP () para 4
219 Oil & Gas UK (), para 10, North East Chamber of Commerce () para 12, General Electric (), para 7, British Beer & Pub Association () para 6, ADS (), para 20, Society of Motor Manufacturers and Traders () para 10, Pfizer () para 2
220 Charity Retail Association (), Association of the British Pharmaceutical Industry () para 4.5, Creative Skillset () para 7
221 ADS () para 20, Society of Motor Manufacturers and Traders () para 10. Some employers also wanted to transfer funds to Apprenticeship Training Agencies who employ apprentices on their behalf. See, for example, Pfizer () para 2
222 DfE, “”, accessed 22 February 2017
223 Q165, Royal Opera House () para 8
224 Qq121 [Lisa Burger], 132–133 [Stephen Tetlow]
225 See, for example, Framestore () para 5.4, West of England Local Enterprise Partnership () para 2.7
226 Chartered Insurance Institute () para 4
227 City & Guilds () para 3.3.8. See also, CIPD () para 29
228 , HC 709, Qq68 [Peter Lauener], 89 [Jonathan Slater]
230 DfE, , August 2016
231 Social Market Foundation ()
232 HC Deb, 1 November 2016,
233 DfE, “”, 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.
235 Pearson Education () para 1.6
236 DfE, , October 2016, p 14–15. Additional support for such employers is also available to employ 16–25 year old apprentices. DfE, , January 2016
237 DfE, “”, accessed 22 February 2017
238 SFA, , March 2016, p 7
239 SFA, , March 2016
240 “”, FE Week, June 2016. See John Hyde’s comments.
243 Institute of the Motor Industry () para 12
244 , HC (2015–16) 704, Q40
246 HC Deb, 31 January 2017,
247 Airbus UK (), para 5, Society of Motor Manufacturers and Traders () para 8
248 “”, August 2016
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, , September 2015, p 1
254 IFS, Green Budget 2017, , 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, , 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, , FE Week, , September 2016
259 “”, FE Week, August 2016.
260 DfE, , 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
262 “”, FE Week, January 2017
263 DfE, , October 2016, para 40
264 As above, para 41
30 March 2017