Apprenticeship levy turns into Treasury ‘cash cow’

The Treasury has been accused of short-changing employers after FE Week analysis revealed HMRC pocketed around £415 million generated from apprenticeship levy receipts last year.

Experts have now called on ministers to rapidly address the emerging mismatch between the cash the apprenticeship levy raises compared to what is being allocated for public spending before it becomes a government “cash cow” amid the fiscal crisis.

Treasury figures show that £3.580 billion was raised by the levy in the 2022-23 financial year but just £2.554 billion was handed to the Department for Education to spend in England, while FE Week estimates that £608 million was handed to the devolved nations.

It means that £418 million of apprenticeship funding went unallocated. On top of this, the DfE underspent its budget by £96 million, meaning the total savings to the Treasury hit £514 million in 2022-23.

And in 2021-22 the Treasury boosted their coffers by over £200 million in unallocated apprenticeship funding.

Simon Ashworth, director of policy at the Association of Employment and Learning Providers, said the figures show “just how much employers are being short-changed”.

He added: “The purpose of the levy is to fund high-quality apprenticeship training and assessment so the overall programme budget must reflect the amount raised much more closely. We cannot allow the levy to become a cash cow for the Treasury.”

‘Employers are being short-changed’

Since 2017, UK businesses with a payroll of £3 million or more pay each month into a levy pot which is used to fund apprenticeships for both large and small businesses.

The Treasury then distributes a portion of those receipts annually to the Department for Education which is ring-fenced to be spent on apprenticeships in England.

The devolved nations of Scotland, Wales and Northern Ireland also receive a slice of the receipts. But while the first three years – from 2017-18 to 2019-20 – had allocated budgets, the Treasury has kept exactly how much the devolved nations receive from the levy since 2020-21 a secret. It did however commit that beyond this point the “normal operation of the Barnett Formula should provide a similar outcome”.

FE Week analysed the early budgets for the devolved nations and found they were, on average, handed 17 per cent of the total levy receipts, so we used 17 per cent as an estimation for their share of the levy from 2020 onwards. The devolved nations also do not have their share of the levy ring-fenced for apprenticeships, so it can be spent on any area they choose.

In the early years of the levy, the Treasury appeared to over-commit to the devolved administrations, as figures show HMRC distributed more than what levy receipts generated. But underspends from the DfE’s budget prevented it from an overall overspend.

By using 17 per cent as the best estimate for devolved nations’ levy allocations, FE Week can reveal that the Treasury has retained around £316 million of levy receipts since 2017.

When we take into account DfE underspends, and assuming the devolved nationals spent all of their allocations, it shows that almost £2.5 billion of apprenticeship funding has been kept by, or returned to, the Treasury.

Experts told FE Week the Office for Budget Responsibility (OBR) believes the levy will raise £3.7 billion this financial year and that levy receipts have already raised £120 million more this year compared to the same period last year.

The government has only committed to increasing England’s apprenticeships budget to £2.7 billion by 2024-25.

Mark Corney, senior policy adviser at the Campaign for Learning, said the levy is raising more and more for the government because of “higher nominal wages and relatively stable number of employees, as the fall in employment is driven by fewer self-employed people”.

He told FE Week: “The bulk of the savings seem to be coming from the underspend in DfE rather than what the levy is yielding above allocation. What’s really interesting is the last two years, when we have got a fiscal crisis, the Treasury has got an extra £200 million in 2021-22 and £418 million in 2022-23.

“The levy is raising far more than is being allocated if we assume the devolved nations have spent all their funding.

“The decision clearly is that the country needs to keep reducing its deficit rather than investing in apprenticeships.”

He added that while these are the best estimations, it would be “better if the Treasury gave us an indicative devolved nation budget for full transparency”.

It comes at a time when big and long-running apprenticeship providers are either closing down or pulling out of the apprenticeship market due to unviable funding rates for apprenticeship standards and functional skills teaching.

Ashworth said: “Against the backdrop of a skills sector crisis this could then pay for a vital new minimum funding threshold and an across-the-board uplift in all apprenticeship funding bands to tackle the rising costs of inflation. It would also help to address the long-standing issue of inadequately funded English and maths qualifications.”

A government spokesperson said: “The apprenticeship levy is designed so that money not used by levy-paying employers is re-allocated to fund apprenticeships from smaller employers. In the last financial year, we were encouraged to see employers utilised over 99 per cent of the apprenticeship budget, benefitting big and small businesses alike.

“The government sets out its plan for departmental public expenditure at spending reviews. This was done most recently in 2021, where plans were set to 2024-25.”