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Today, Thursday (6 April 2017), the new ‘apprenticeship levy’ will come into force.The levy, which was introduced by sections 98 to 121 of the Finance Act 2016, will be potentially applicable to all UK employers and will go towards the cost of apprenticeship training.

The levy is set at 0.5% of an employer’s annual wage bill and each employer will receive an allowance of £15,000 per year to offset against the levy. This means that although the levy applies to all employers, only employers with a wage bill over £3 million will pay it. The levy will be paid by such employers through PAYE, alongside income tax and National Insurance Contributions.

A practical (and fairly simple) example of how this work is as follows;

Employer A has 250 employees, each with a gross salary of £20,000. They would pay:

• wage bill: 250 x £20,000 = £5,000,000

• levy sum: 0.5% x £5,000,000 = £25,000

• allowance: £25,000 - £15,000 = £10,000 annual levy payment

Employer B has 100 employees, each with a gross salary of £20,000. They would pay:

• wage bill: 100 x £20,000 = £2,000,000

• levy sum: 0.5% x £2,000,000 = £10,000

• allowance: £10,000 - £15,000 = £0 annual levy payment

It is worth noting that for “connected companies”, the requirement to account for the levy arises if the aggregate of their annual wage bills exceeds £3 million. The basic rule for determining if two companies are ‘connected’ with each other is that they will be connected if one of them has control of the other or if both are under the control of the same person or persons. The test for determining whether two companies are connected is one of control, as defined within sections 450 and 451 of the Corporation Tax Act 2010. If two or more companies are connected at the beginning of a tax year, they will normally be entitled to only one £15,000 allowance between them for that year. It will be up to those companies to determine the proportions in which the allowance is to be split between them.

The levy replaces the current system which enables employers to choose and pay for the apprenticeship training they want. It has been billed by the UK government as a way to plug the current “skills gaps”, boost social mobility and raise productivity. The plan is to reach 3 million new apprenticeship starts in 2020.

The levy has been welcomed by some employers. Many who feel there has traditionally been underinvestment in training and apprenticeships in the UK will feel this has been a long time coming. Other employers are less enthusiastic about the levy. It has been viewed by some as an unnecessary burden for employers who meet the annual £3 million wage bill threshold. Such employers will be required to pay the levy regardless of whether they engage apprentices. However, it is worth bearing in mind that, according to the UK government, less than 2% of employers will be liable to pay the levy.

Employers south of the border will be able to access the funding for the training of apprentices through an apprenticeship service account and draw funds to support their own apprenticeship training, or pass some of the funding onto an external training provider.

However, because apprenticeships and training is a devolved area, Scotland’s share of the money raised from the levy will be passed to Holyrood as part of Westminster’s block grant allocated under the Barnett formula. It is therefore at the discretion of the Scottish government as to how those funds are used (and it need not be on apprenticeships). Over 2017-18, Scotland will receive £221 million of levy funding through the block grant, while £230 million will be received in 2018-19 and £239 million in 2019-20. The Scottish government, which was initially critical of the levy, published its plans for the funding earlier this year. It has been indicated that the intention is to invest Scotland’s share of the levy at a national level rather than to allow employers to access it directly, as is the case down south. It is intended that the levy will be used through organisations such as ‘Skills Development Scotland’ and other such initiatives to support the creation of a £10 million “Workforce Development Fund”, with a view to reaching 30,000 new apprenticeship starts in Scotland in 2020. We will be keeping an eye on any further developments in this area.

A note setting out common questions and answers on the apprenticeship levy can be found here.

If you require advice on the apprenticeship levy, please do not hesitate to contact a member of the Stronachs Employment Team.

Eric Gilligan, Partner

Rowan Alexander, Solicitor

Chambers UK 2018

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