Why the Apprenticeship Levy needs reform at Spring Budget 2023

As we approach Spring Budget 2023 on March 15th, there is escalating criticism of the Apprenticeship Levy, with major industry and political figures now calling for its reform.

The big question, and be aware, we think we already know the answer, writes Kate Shoesmith, deputy CEO of the Recruitment & Employment Confederation, is this -- can the Apprenticeship Levy help overcome labour and skills shortages in the UK?

In the first quarter of 2023 alone, we’ve seen several heavyweights from the business sector enter the Apprenticeship Levy debating ring.

Tesco, M&S and Balfour Beatty are the Apprenticeship Levy's latest critics

Stuart Machin, chief executive of M&S called for expanding the levy.

Then, Tesco CEO Ken Murphy said the current rules put entry level apprenticeships at a disadvantage over those who are already in management positions.

Next, Leo Quinn, chief executive of Balfour Beatty, suggested that the levy has utterly failed the British economy and said a more user-friendly ‘skills levy’ would make it truly responsive to employer needs.

And last but definitely not least alongside the British Retail Consortium, UKHospitality and techUK, we at the REC co-wrote a letter to government calling for Apprenticeship Levy funds to be spent on a broader range of accredited but shorter, more targeted training courses.

Born at a Budget, the levy is what this chancellor's next statement should reform

It remains to be seen if the chancellor, Jeremy Hunt, will heed these numerous calls for reform of the Apprenticeship Levy.

First announced back in the Summer Budget of 2016, the levy was mooted to apply to all UK employers who had a pay bill exceeding £3million, on or after April 6th 2017. The levy is charged at a rate of 0.5% on an employer’s annual pay bill.

But in the contractor sector, it is important to understand that the £3million threshold also applies to umbrella companies and contractors – and they too struggle with the inflexibility of how the Apprenticeship Levy works.

Contractor sector complaints with the Apprenticeship Levy (cont.)

The rub is this. The recruitment and staffing industry (of which contractors and umbrellas play an integral part) contributes about £43billion of direct value added to the economy every year -- yet the levy just isn’t working for the sector.

This is mainly because the funds are only available to those who have the same employer for at least one year (i.e. the time it takes to complete an apprenticeship). By our calculations, out of the one million temporary workers on assignment in the UK every day, around 960,000 are ineligible for levy funding.

Unused, unspent, and unable to budget for additional training

In 2019, our Training for Temps Report showed that the amount of unused funds paid into the levy by REC member companies, by then, was over £104million. We dread to think how much it is now.

More recently, in November 2021, we asked our members if they had been able to use the Apprenticeship Levy in the previous 12 months. An overwhelming 88% of respondents said that they had not. Furthermore, at a recent parliamentary debate on the levy’s funding, it was estimated that up to £3billion of levy funds to date (in total) have gone unspent.

At this time of acute labour and skills shortages and high demand for temporary workers, this is such a tremendous waste.

Businesses want and need to invest in their people – of course, but paying into the levy does not leave budget for additional training, further exacerbating skills shortages.

Making the case for reform

We have made exactly this point in our submission to the chancellor ahead of the Spring Budget, and in every other government forum we are attending. Just last week, we made the point in a room with No 10, HM Treasury, DfE and DWP civil servants. The minister in the meeting asked our point to be noted, interestingly; with a glint in the minister’s eye.

Labour is putting pressure on Mr Hunt too. Party leader Sir Keir Starmer’s statement at the CBI conference last November said that the levy 'just isn't flexible enough'. In recent months, the opposition has announced its wish to turn the levy into a ‘Growth and Skills Levy.’

In addition, the Liberal Democrats want to expand the levy into a wider ‘Skills and Training Levy’ – an objective they first announced in 2018. The Lib Dems also proposed that 25% of the funds raised by the levy should go into a ‘social mobility fund’, targeted at areas with the greatest skill needs.

'Pretty much every business agrees the levy isn't working'

The disquiet with the Apprenticeship Levy is so widespread, that it’s almost deafening.

As Labour’s shadow chancellor Rachel Reeves has put it -- just last week: “Pretty much every business I speak to tells me that the skills system in Britain isn't working. And that failure is a drag on economic growth.”

From our perspective as a staffing body, the most important thing is to introduce into the levy the flexibility so businesses can spend levy monies on addressing our most pressing workforce issues. That has to include a focus on entry-level training and apprenticeships, where employers are reporting significant staff shortages. The core purpose of the Apprenticeship Levy should be to provide individuals with a route to skilled work – if government can get that incentive right, they will be doing their part to boost business growth and productivity at a critical time for the economy.