When the levy comes into play

When George Osborne rushed the Apprenticeship Levy into his last budget – at 0.5 per cent of a business’s payroll over £3m, raised monthly from PAYE returns – it gave the impression then of being hastily introduced. True to form, the details are still being worked out with announcements coming through every week even though the levy comes into force next April. With little or no prior consultation with industry before the announcement, employers now have to scramble to understand the implications of the measure.

Clearly, the government, concerned about the rising cost of further and vocational education, has placed the responsibility of training fairly and squarely on employers – and is using the stick and carrot of the levy to ensure that the largest employers can’t escape. In view of the industry’s patchy training record this might be thought to benefit hospitality but there are tens of thousands of small employers who will escape the levy and only a few hundred large enough to pay it. The burden is on the largest employers.

Many details, however, are still to be worked out. Each company’s levy will build up a fund, which will be added to by the government at 10 per cent, from which the company can withdraw money to pay expenses related to the training of the apprentices they employ. If the levy raised by each company is unspent after 18 months it reverts to the Treasury. So the scheme aims to encourage businesses to employ as many apprentices as possible in order to recoup as much as they can from their fund. The government believes this will create 3m additional apprentices although it’s not clear from where.

But there is clearly a limit to how many apprentices a company wants to train and employ and, in any case, only expenses directly related to the training and end-point assessment, can be claimed, which excludes ‘wages, statutory licences to practise, travel and subsidiary costs, managerial costs, traineeships, work placement programmes or the costs of setting up an apprenticeship programme.’ As wages represent by far the greatest cost of employing an apprentice, a company with, say, a total payroll levy of £1.5m a year would have to employ a prodigious number of apprentices to recoup even half that amount.

Worse, there are businesses which have little or no need for apprentice training or who employ them abroad; they will still pay the levy but they cannot reclaim any funding as all training has to be training provider or have their own training facilities registered and inspected by OFSTED. For those companies already providing good quality training schemes, the former is viewed as an unnecessary expense and may well make confidential training practices available to others, while OFSTED increases bureaucracy. Indeed, some companies have already failed OFSTED inspections and, for various technical reasons, are unlikely to ever pass.

At the same time, as an encouragement to small employers who do not pay the levy, 90 per cent of the cost of their apprentice training will be covered by government – but, again, only if they use an approved training provider. The money for the remaining 10 per cent will presumably come from unclaimed levies.

This might all seem rather complicated. It is. But let’s not think that 0.5 per cent of costs are rising, including the National Living Wage. Margins are low and tight, particularly in the restaurant and catering industry where employment is much higher. For those employers who do not see the business need to train as much as they can recoup in levy, it is, in effect, a payroll tax.

There is a further complication. At present, the scheme only applies to England: those companies (plenty in hospitality) who operate throughout the UK will face significant back office work to sort out the arrangements required by Scotland, Wales and Northern Ireland.

Now, of course the hospitality industry needs more skilled craftsmen. Of course, training them is an industry responsibility. Of course, the industry’s training record is not perfect. But in an industry where most large companies already have training schemes in place to meet their needs, it’s difficult to see how the levy will undertaken in the UK – a drawback for hospitality companies wanting to send key staff abroad for work experience. But, as a benefit, the government has broadened the meaning of ‘apprentice’ to include practically all kinds of training – from craft to management (even up to Level 7) so training providers reckon that with some creativity, the levy should be largely revenue neutral.

Companies who comprehensively train should be able to get back as much as they pay in levy. That’s the intention. Where it gets complicated is where a business has already set up training programmes, some of them award-winning, that aim to drive it forward according to its needs. In the hospitality industry, some companies have even set up their own training schools which successfully meet their objectives in terms of quantity and quality. They have no business need to recruit more apprentices than they already recruit.

This alone suggests that the levy will do little to encourage more training. The government also insists that any disbursements can only be made to employers who use a registered training provider or have their own training facilities registered and inspected by OFSTED. For those companies already providing good quality training schemes, the former is viewed as an unnecessary expense and may well make confidential training practices available to others, while OFSTED increases bureaucracy. Indeed, some companies have already failed OFSTED inspections and, for various technical reasons, are unlikely to ever pass.

At the same time, as an encouragement to small employers who do not pay the levy, 90 per cent of the cost of their apprentice training will be covered by government – but, again, only if they use an approved training provider. The money for the remaining 10 per cent will presumably come from unclaimed levies.

This might all seem rather complicated. It is. But let’s not think that 0.5 per cent of payroll is a small amount of money. Wage costs are the biggest single element in any hospitality business – anything up to 40 per cent of total turnover. Assuming that the total turnover of the hotel and catering industry alone is in the region of £50bn payroll costs at, say, 35 per cent would add up to some £17.5bn. At a low estimate, we can assume the largest hospitality employers represent about one-third of this – nearly £6bn, of which 0.5 per cent adds up to some £30m. That’s a very quick assessment – it’s unlikely to be less and may well be much more. For the largest employers it amounts to a levy of several millions.

Now £30m, for such a large industry, may not be considered much but size is hardly the issue. Hospitality is a low margin industry and 0.5 per cent of payroll is a significant cost whether sales are £3m or £500m. Other costs are rising, including the National Living Wage. Margins are low and tight, particularly in the restaurant and catering industry where employment is much higher. For those employers who do not see the business need to train as much as they can recoup in levy, it is, in effect, a payroll tax.

There is a further complication. At present, the scheme only applies to England: those companies (plenty in hospitality) who operate throughout the UK will face significant back office work to sort out the arrangements required by Scotland, Wales and Northern Ireland.

Now, of course the hospitality industry needs more skilled craftsmen. Of course, training them is an industry responsibility. Of course, the industry’s training record is not perfect. But in an industry where most large companies already have training schemes in place to meet their needs, it’s difficult to see how the levy will encourage them to train more people than they would otherwise have trained.

It’s difficult not to get the impression that the former Chancellor’s scheme is tantamount to fining successful companies who are already seriously committed to training but who may not be able to recoup all their levy – yet rewards those for whom it is a much lower priority.

It is too late to make significant amends before the scheme is introduced next April but major hospitality employers are now clearly pre-occupied in creating new and innovative ways to maximize funding from their levy pot, going so far as to consider seconding training staff to providers in order to reclaim some of their direct training costs. Doubtless there will be other similar wheezes. Will it be worth it? What is certain is that the levy will take time and plenty of management effort to implement. What is not so certain is whether the number of apprentices being trained will increase.

In hospitality, no figures yet have been produced to prove this.