Lack of transparency is killing the Apprenticeship Levy and growth

By John Cope, former ministerial adviser and board member of the Institute for Apprenticeships & Technical Education.

The recent story in the Financial Times that employers ‘lose more than £3.3bn in unspent apprenticeship levy funds’ is the latest in a long line of gloomy stories around the Levy. We have lurched between ‘Levy underspend must be addressed’ and ‘Levy on brink of overspend’ headlines for at least four years. We find ourselves in a position where employers are frustrated they have not spent all their Levy while government officials are actively trying to stop an overspend. No one seems happy (other than the hundreds of thousands of apprentices that owe their training to the Levy, of course) – and the policy debate on growing skills investment beyond the Levy is neglected.

‘Underspend’ and ‘overspend’ worries on the Levy are both valid, counterintuitively, at the same time. In trying to explain this, I sympathise hugely with the frustration employers feel towards an opaque system.

When the 0.5% Levy was first raised on employers with a payroll over £3 million in 2017, it aimed to address the long-standing issue that UK firms spend around half the European average on training, as well as create stability in funding for apprenticeships. By this measure, the Levy has demonstrably succeeded – it has created an annual £3 billion tax revenue that underpins the system and focusses funding onto quality apprenticeships. This is roughly double what was spent in 2010/11.

But what happens to this cash? The figures differ every year, so I can only be indicative. About £0.5-0.6 billion goes to devolved governments as the Levy is UK-wide. About £0.5-0.6 billion is spent on apprenticeships at smaller firms (they don’t pay the Levy, just 5% of the cost of an apprenticeship, with the Levy paying the 95%). This leaves about £2 billion for Levy paying companies, which, by definition, is less than they pay into the system.

It is therefore legitimate for Levy-paying employers to say ‘we aren’t getting back what we pay into the Levy’, but claiming that billions from the Levy are squirrelled away by the government, as the FT article implied, is misleading.

That this must be explained (and I’ve given very much the simplified version) means there is something that needs fixing with the government’s Levy system.

The way it operates needs to be much clearer and a brighter light should be shone on the intentional design to support smaller firms. Big employers don’t, in my experience, have any issue when it’s explained. The smaller firms are their supply chains, so everyone is benefiting. 

There is room for more transparency from the business community too. We do not, frustratingly, have a comprehensive view of how employers invest in their people. We have indicators like estimates of hours spent training or the Department for Education’s Employer Skills Survey. Both are useful, but they do not provide the rigorous data that are required for sound policy making. Proper corporate reporting of employer spend on skills (beyond just apprenticeships) would be a game changer.

It has been achieved on gender and ethnicity pay gaps, modern slavery, and greenhouse gas emissions. Why not skills? They are, after all, the key that unlocks growth and prosperity. There are examples springing up organically, such as the scheme run by the 5% Club, but what’s really needed is a simple, standardised approach across the economy.

This would allow company Boards to interrogate skills spending and easily compare with other firms. It would highlight sectors that need extra government support. It would unambiguously reveal skills cold spots in areas of the country. And it would give the Government’s new Unit for Future Skills the data it needs to turbo-charge growth and effectively design the Lifelong Loan Entitlement.

Alongside transparency, the Chancellor should also consider new training tax incentives in the coming emergency budget to support larger businesses to invest more beyond the Levy – like those for R&D and capital investment. Tax incentives do not work as well for smaller firms who worry less about the long-term business case (which tax incentives help most) and more about short term cash flow – this means bringing back a version of the £3,000 incentive payment deployed during the pandemic. During the 18 months it was in place, it had great success with between 5,000 and 10,000 apprentices per month taken on through the scheme. Together, tax incentives for bigger firms and upfront cash incentives for smaller firms, would help give the UK economy the boost it urgently needs. It would also keep youth unemployment down, which although at record lows, was still 10.4% in April to June this year.

The ‘underspend’ and ‘overspend’ handwringing on the Levy helps no one. It’s time for the Government to be brave and open the books on the Levy and for employers to publish how they invest in their people too. And while the forthcoming emergency budget will rightly focus on tackling the cost of living as the most pressing issue facing the country, the Government shouldn’t forget about skills as we go for growth.