Brexit: What would no-deal mean for the levy?

The apprenticeship levy was introduced with growth and stability in mind, but in a no-deal Brexit, new rules will be needed

Mark Corney

Gavin Williamson: 'Apprenticeships are one of our great successes'

As Boris Johnson entered 10 Downing Street this week, the countdown to Brexit began. According to the Office for Budget Responsibility, a no-deal Brexit will push the UK into recession during October 2019 and September 2020.

Crucially, the OBR also predict significantly lower growth in nominal wages and levels of employment from 2019-20 to 2022-23. These economic variables are key determinants of the amount the apprenticeship levy will raise in 2019-20, the final year of the present Spending Review and in 2020-21 to 2022-23, the three years of the next Spending Review.

Last March, the OBR predicted the levy would raise £8.2bn between 2017-18 and 2019-20. On the assumption of a managed Brexit, the OBR forecast levy receipts of £9.3bn between 2020-21 and 2022-23.

Background: The apprenticeship levy a year on: lessons learned

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Quick read: Apprenticeship levy needs reform, UCU urges

Higher employment levels and growth in nominal wages would increase revenue from the levy by £1.1bn between 2020-21 to 2022-23 compared to 2017-18 and 2019-20, with the levy raising £3.2bn in 2022-23 compared to £2.9bn in 2019-20.

The levy is a relatively small business tax and so the OBR does not present a specific assessment of what it will raise in a no-deal scenario. Even so, a downgrade is certain. 

For instance, in the context of a recession generated by a no-deal Brexit, nominal wages will only grow by 1.4 per cent rather than 3.5 per cent. Employment in 2020-21, meanwhile, will be 400,000 fewer at 32.4m rather than 32.8m.

Another factor on the employment side is the composition between employed workers, whose wages fall in scope for calculating levy liabilities, and self-employed workers, who wages do not fall in scope.

During the spring, overall employment increased by 28,000 compared to the winter but the number of employees fell by 85,000 while the self-employed increased by 123,000.

To have a detrimental impact on the amount of levy raised, falling nominal wages and numbers of employees must occur in levy-paying employers. The warning signs, however, are there.

The future of the union 

The skills world in England is well aware of the political debate surrounding a hard Brexit and the future of the United Kingdom. And yet, the high politics of keeping Scotland, Wales and Northern Ireland within the UK in the context of no-deal also filters into the less dramatic issue of levy.   

As part of the deal to introduce the levy, the treasury guaranteed in advance to the three devolved nations, £1.3bn between 2017-18 and 2019-20 out of the £8.3bn expected to be collected – the equivalent to about 16 per cent. They also opted-out of routing levy payments into digital accounts and the flexibility to deploy the increase in the programme budget as they thought fit.

In the context of no-deal where the very existence of the union could be at risk, we should expect the devolved governments to striker an even harder bargain.

The high politics of no-deal in terms of a recession and the future of the union – with the prospect of lower revenue and demands for more money devolved to the devolved nations – will shape the review of the levy.

Revenue from the levy could be increased from £3bn to £5bn by reducing the pay-bill threshold to below £3m, thereby bringing more employers in scope. Politically, however, this could prove difficult bearing in mind a recession followed by slow growth stemming from a hard Brexit until 2022-23.

And yet, wider trade-offs might be on the cards. The levy was introduced by a conservative government as a pay-back for year-on-year cuts in corporation tax.

New context, new rules

If by the end of August, the new prime minister judges the outcome with the EU to be a no-deal Brexit, an emergency budget is anticipated, and a fiscal response is guaranteed.

Cuts in corporation tax from 17 per cent to 12 per cent have already been promised. A deal could be done to cut corporation tax even further to offset extending the scope of the levy to smaller employers.

There is no getting away from the fact, however, that the levy was introduced with the prospect of growth and stability in mind. Now it might need to operate at a time of recession and uncertainty. A new context will need new rules.

The skills world is well aware that the apprenticeship programme budget in England is already under pressure. 

The allocation in 2019-20 is expected to be fully spent. From 2020-21 onwards, a budget crisis is expected without extra resources or hard decisions on what should be funded and at what rates.

Less revenue raised from English levy-paying employers only increases the funding headache.

Mark Corney is a post-16 education and labour market consultant

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