Why we shouldn't extend the apprenticeship levy to SMEs

With SMEs struggling, this would be the worst possible time to get them to help fund apprenticeships, says Jane Gratton
9th October 2019, 12:03am
Jane Gratton


Why we shouldn't extend the apprenticeship levy to SMEs

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Since the introduction of the apprenticeship reforms, the British Chambers of Commerce (BCC) has argued consistently against imposing additional costs and taxes on employers, as this limits a firm's ability to invest.  We lobbied successfully to halve the small and medium-sized enterprises co-investment rate and to increase the percentage of levy they can receive from larger firms, to help reduce the costs of apprenticeships. 

We believe that bringing SMEs within the levy threshold would be a huge mistake. It would add to the cumulative up-front cost burden that weighs them down, and would stymie opportunities for people development.  The government should fund non-levy apprenticeships separately and allow larger firms the flexibility they need to train their people in the best way to meet the needs of the business.

Background:  Apprenticeships: providers face cash shortage for SMEs

More: Chancellor 'brings forward' £700m apprenticeship package

Opinion: 'Managers are no use without skilled workers'

It is in everyone's interests to encourage businesses to train more people and that requires greater flexibility in the apprenticeship levy system.  More broadly, it means putting businesses at the heart of planning for the future workforce of this country and celebrating, supporting and developing the most important part of any business - its people. That's why the focus of BCC's new national People Campaign is about helping to make the UK a more productive, attractive and modern place to work.  

A simple and coherent skills system

Multiple changes to the skills system, varying quality of training and resources, and an evolving working environment have left businesses struggling to find the right people for their teams.  Never has it been more important for employers to take the initiative and invest proactively in skills at all levels of the business. Improving workforce skills is crucial to boosting business productivity, competitiveness and growth. 

But we need to create an environment that gives SMEs the confidence to invest in people for the longer-term. That means creating a simple, stable and coherent skills system - without the continued tinkering and change - and ensuring employers have the freedom, flexibility and funding to invest in the training that best meets the needs of their team. 

Access to skills is in the top three concerns of our members across all regions and sectors.  While demand for skilled workers is increasing, it's becoming more difficult to recruit them. This year, levels of employment have reached record highs and BCC research shows that over three-quarters of manufacturing and services firms recruiting to fill job vacancies will experience difficulties. It can now take up to six months to fill a skilled role, and many job vacancies remain open, jeopardising the future of the business and its employees.

This situation is likely to be exacerbated by proposed changes to UK immigration policy that could restrict access to EU workers for businesses who rely on their skills. Against this background, businesses know they need to invest more in workforce skills, and that apprenticeships are a big part of the solution. What they need right now is support, not an additional tax.

Apprenticeship reforms 

While the apprenticeship reforms have boosted business confidence overall in the quality, relevance and coherence of the apprenticeship system, we have yet to see a significant increase in apprenticeship take-up among SMEs. In fact, we have seen a worrying decline, particularly in opportunities for young people.  

Firms report a range of barriers, including a lack of apprenticeship candidates applying for jobs, difficulty in finding an apprenticeship standard that meets their needs and problems accessing local training provision. On top of this, SMEs are struggling to manage off-the-job training and the broader costs of taking on an apprentice. The apprenticeship system has undergone a massive upheaval - and needs time to settle down. Similarly, businesses need time to adapt to the changes.  

How would extending the apprenticeship levy to SMEs at this stage make things better?  It wouldn't, of course.

Brexit uncertainty 

Our research shows consistently that firms are weighed down by the growing, cumulative up-front costs of doing business. Pensions auto-enrolment, above-inflation national minimum wage costs and immigration skills charges, for example, together with business rates and Making Tax Digital add up to an unsustainable cost burden that stymies future investment. 

All this, against a backdrop of overwhelming uncertainty over Brexit, means this is the worst time to contemplate taxing SMEs to fund the apprenticeship system. It would simply add to the unsustainable cost burden and prevent them from investing in the training and development needs of their people. 

It's great that more employers are using apprenticeship funding to upskill and reskill parts of their existing workforce. We should celebrate the fact that businesses are using apprenticeships to improve the skills of managers - as this is key to driving up productivity and increasing opportunities for everyone in the workforce. 

Crucially, the government must ensure that SMEs can continue to access funded apprenticeship standards from level 2 to level 5 and above, to provide a genuine route to progression and ensure we deliver the parity of esteem and opportunity for people choosing a technical and vocational route to learning and employment. The big question is, how do we continue to fund this desired level of access for all employers when only a few businesses are paying the levy?   Reports of a predicted levy overspend are concerning, but extending the levy to SMEs would be counterproductive.

The system is not yet working for levy payers. Too few businesses are able to use their levy monies to meet the training and development needs of their people - and too many are resigned to simply writing the levy off as a tax.  

Moreover, for many firms, the levy has displaced other training budgets, resulting in employees being denied access to other forms of essential workplace training and development.   

Apprenticeships are great, but they are not the only form of valued training that a business relies on. So, before the government considers bringing SMEs under the levy threshold, the system needs to be reformed, made more flexible and easier to access, to ensure that all workplace training needs can be met. 

Three recommendations

  1. Levy payers should be allowed greater flexibility in how they can use the levy to ensure greater take-up of apprenticeships and that all workforce training and development needs can be met.

  2. SME apprenticeships should be funded separately by government to ensure continued access to apprenticeships from level 2 to level 5 and above.

  3. Over time, the apprenticeship levy should become a training levy, to include all forms of accredited training.

Jane Gratton is the head of people policy at BCC

This blog was originally published in the NCFE's Future Proofing Apprenticeship Funding in England for the 2020s report, which is published today and can be found in full here.

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