THE BLOG
11/10/2013 08:52 BST | Updated 10/12/2013 05:12 GMT

Using the Taxation System for Apprenticeship Funding

One of the core criticisms of apprenticeships up until now has been that training has not accurately reflected or been aligned with what employers need or want. In order for apprenticeships to be truly effective, they must become central to the workforce planning of business and not an add on...

In his review of the apprenticeship system, Doug Richard clearly stated that the Government should create the right incentives for apprenticeship training by placing purchasing power in the hands of employers.

One of the core criticisms of apprenticeships up until now has been that training has not accurately reflected or been aligned with what employers need or want. In order for apprenticeships to be truly effective, they must become central to the workforce planning of business and not an add on.

The Government's Consultation of Funding Reform for Apprenticeships in England proposes three new models for apprenticeship funding - two of which place employers firmly in the driving seat (Direct Payment and PAYE payment).

As its name suggests, the PAYE payment model involves providing funding directly to businesses through the taxation system. Employers would effectively pay training providers for the apprenticeship training and then recover the government funding through their yearly PAYE return. The model is designed to give employers more choice in the process to ensure they receive training that more accurately reflects their needs.

A shake up to apprenticeship funding through the use of PAYE would undoubtedly bring a lot of change along with the potential to deter many - particularly smaller businesses from being involved altogether. As a result, the question remains as to whether asking employers to meet full training costs up front will drive investment in apprenticeships or act as a disincentive?

Advantages

The proposed PAYE model meets the principle of employer control. Employers will buy the training direct from the provider for a price that they are free to negotiate.

Although the PAYE model requires a new registration database, unlike the Direct Payment model, it will not require a potentially complex new system for processing payments to thousands of employers. Payments will be through an established HMRC system which employers are already familiar with and has the facility for adjustments around allowances and benefits. As an example, this is the route currently used by many employers for reclaiming statutory maternity pay. Payments are also generally automatically calculated using specialist software packages, which reduces the burden for employers.

The model has the potential to improve cash flow for employers as claims made are deducted from PAYE owed rather than having to invoice and wait for a payment to be made. The process would naturally become a part of everyday business embedded in the organisation - rather than sitting as a separate process.

Disadvantages

The primary disadvantage in making employers contribute all payments up front is the risk that small employers will walk away. For SMEs in particular, the notion of increased paperwork and processes in claiming tax back for training apprentices might be all too much. While large employers have the resources to deal with PAYE, smaller employers may not be as well versed in the system nor have experience of maternity pay and similar examples. The potential advantage of the use of specialist software packages for calculating PAYE will also be off set by the complexity and cost of updating software to meet the new requirements.

It's also worth noting that a considerable number of small businesses outsource payroll due to lack of size, resource, knowledge etc. A similar exercise in updating all their systems and processes would be required.

The advantage of reduced liability mentioned above also carries an associated risk, that is, what happens if an employers' PAYE liability isn't enough to cover repayments required? And, what happens if an employer misclaims the money to which they are entitled? One assumes, an additional funding application would need to be resubmitted in these instances, adding another layer to an already seemingly complicated process.

Use of the PAYE system assumes that the draw down will be linked to relevant employees National Insurance number. Not only does this place an absolute premium on ensuring that the databases across the funding agencies and HMRC are properly aligned, it also raises data protection issues around the sharing of information between departments. Suffice to say the record of Government in implementing IT database initiatives is at best patchy.

There is a simple old proverb: "he who pays the piper calls the tune". AAT has long argued that the only way to make a reality of a demand led system is putting greater control of funding in the hands of employers. As we've seen, the potential advantages of this do not come without risks. It will require a significant cultural shift and it will be important to ensure that the compliance and audit regime is fit for purpose.