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Apprenticeship levy risks becoming damaging jobs tax

The apprenticeship levy launched in April 2017 marks the most recent government initiative to address the issue on skills. Yet its goals may be overly ambitious and, in some respects, misguided.

After decades of failed policy attempts to improve the outcomes of vocational training in the UK, a rapid and sustained acceleration of apprenticeships without underlying structural reform risks reputational damage to the scheme.

Addressing the skills gap will require a far more nuanced approach that addresses not only the total number of apprenticeships started, but completions as well as the progression to higher-level programmes and well-paying jobs. Only 29 per cent of respondents to an RICS survey in Q3 2016 felt that the levy would help to alleviate the shortages of skilled workers.

To deliver maximum value for taxpayers and businesses, the additional funding generated from the apprenticeship levy should target those sectors, occupations and geographic regions that are experiencing shortages – the government’s industrial strategy and Occupational Shortages List are obvious starting points.

Skewed approach

Under the current system, apprenticeships are assigned to one of 15 funding bands that determine the maximum allowable training costs eligible for subsidisation, but this remains skewed towards jobs in low-wage sectors.

In the long run, the levy acts as a jobs tax that could disincentivise employers from hiring additional workers and reduce their overall levels of capital spending.

Relative to other industries, the construction workforce is employed predominately by smaller to mid-sized businesses that are amongst the least likely to be affected by the new payroll tax.

“Perhaps a more gradual pace is needed than the three million starts envisaged for England by 2020”

While only 2 per cent of employers will pay the levy, which is calculated on annual paybills more than £3m, a disproportionate majority of employees will be impacted. According to the Institute for Fiscal Studies, one in three construction workers may be affected by the 0.3 per cent reduction in aggregate wages as estimated by the Office for Budget Responsibility.

With just 23 per cent of the revenue generated earmarked for apprenticeship funding in England, the levy may soon become perceived as a cash cow for alleviating budget shortfalls elsewhere.

Unintended consequences

In such an environment, large businesses may consider restructuring for tax avoidance purposes rather than operational efficiency. Perversely, this would reduce the government’s tax base.

Providing more offsite training at near zero cost will likely also distort market prices in favour of ‘cheaper labour’ and is incongruous with recent trends towards on-the-job training. With the age profile of new apprentices on the rise, the risk is that apprenticeships get diluted and become a mere front for existing training schemes.

Nearly two-thirds of businesses surveyed by RICS invest in apprentices through direct training or hiring, so there does appear to be broad support for the expansion of apprenticeships.

But perhaps a more gradual pace is needed than the three million starts envisaged for England by 2020 under current plans.

Jeffrey Matsu is a senior economist at RICS

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