Employer-routed funding: PAYE or....PayPal?

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We have blogged previously on the benefits of giving employers control of apprenticeship funding. Government has firmly acknowledged this and has committed to shifting the flow of funding away from the provider and towards the employer. The question now is what mechanism should be used to direct funding through employers?

The government's Technical Apprenticeship Funding consultation was published in March and offered up two models. Now for a Technical consultation it lacked any real….technicalities. Instead, it offered up two rather brief descriptions of two possible models to pursue. The first was a PAYE model, building on the government's earlier consultation. The second was an 'Apprenticeship Credit Model' - a model that we hadn't seen in the earlier call for evidence but had heard rumours off given the De-Regulation Bill including a provision of the use of 'vouchers'.

Changing the way we fund apprenticeships is a fundamental reform so we consulted widely with members, and continue to do so after the consultation had closed. Employers have long waited for government to commit to changing the apprenticeship system so that it is responsive to business needs and increases the number of high quality apprenticeships – getting the funding framework right is critical.

So what did we find?

Firstly, manufacturers can clearly see the benefits of having control of funding – which would go some way to creating the responsive training market employers have been looking for.

We also found some companies that had built up strong relationships with providers - both public and private – and who were already able to demand the provision they need. In particular, those smaller firms who rely on Group Training Associations (GTA) wanted to maintain the flexibility to delegate some funding responsibilities to their chosen provider.

Nonetheless, we found the majority of companies said they would want to take direct of funding as they were finding it extremely difficult to both access pots of funding for skills and local, high quality provision. Many said they were simply training their apprentices in-house as a result of not finding the provision they need.

Two in five EEF members said they would offer Higher Apprenticeships if funding was routed through the employer.

THE MODELS

Apprenticeship Credit Model

We have, perhaps cheekily dubbed this model the PayPal model as we found it was the only way we could describe it. The model doesn't currently exist, and whilst it could be argued by some that it will replicate the Child Tax Credit model – this is skills – nothing is ever simple! It consists of employer payments in, government top-ups, payments out, possible withdrawals (you can begin to see why we call it the 'PayPal' model!)

The process

What was our conclusion?

We could not see how this model would work in practice. Setting up the system and the proposed ‘online account' would we imagine require substantial public funding to build and sustain. Moreover, EEF members had a number of questions around the Apprenticeship Credit Model that were not answered in the consultation:

  • Who owns the account?
  • What about interest on payments?
  • Would there be a sub-account for each learner?
  • How would the account operate?
  • How would the account track payment?

All in all, more questions than answers – and for the government's second consultation on this, we were hoping for a little more (to say the least)

We also found companies who had Head Offices (and central bank accounts) in other countries would be denied authorisation to put money into a new online account that was separate from the business' central bank. This, the companies said, would immediately rule them out of offering apprenticeships (a strong statement from EEF members, two-thirds of which currently offer apprenticeships).

So that's the Credit Model out, what about PAYE?

This model was included in the previous consultation and has been floated by UKCES for far longer. In short, employers would balance their liabilities (NI, PAYE, student loans) with government payments (SMP, SSP and now Apprenticeship Funding) and deduct from their Employer Payment Summary.

The process

Initial concerns with this model were cash flow, and possible penalties form HMRC. On cash flow, to some extent this could be mitigated with careful timing of when the employer pays out to their chosen provider and then deducted from their next return. The HMRC penalties issue still remains and as such we would want to see a significant amount of tolerance from HMRC, particularly in the early stages of transition

What was our conclusion?

Well, for starters PAYE is already hardwired into a business and this is what made it more attractive to manufacturers – using existing machinery was clearly seen as being beneficial and something employers had familiarised themselves with. It also made it a lot of easier to explain to companies as the model is already in existence.

We also found that companies saw it as less susceptible to change, because it would be another element hardwired into the system (like when student loan repayments were introduced). An online system/bank account, which the Credit Model is based on, could easier be tweaked, or even dramatically overhauled by any incoming government. What we like about PAYE is that it has a far greater degree of sustainability.

What do we want to see happen now?

The timeline for change is pretty ambitious. Government would benefit from slowing down the reforms and better engaging with industry. – presenting the detail of the models, including the processes and systems that would be required. Those leading in the Trailblazers would be a good starting point for government to determine exactly what a new system should look like.

After full and careful consideration we have concluded the Apprenticeship Credit Model is unworkable and would like to see this model as it is taken off the table. Going forward the only credible model proposed is one that uses the HMRC platform. Even then we believe there is still much more work to do.

We expect the government to announce their chosen mechanism in autumn – until then we will continue to raise our concerns, and suggestions to policy-makers to ensure we adopt a model that will allow manufacturers to continue to offer high quality apprenticeships.

Read our full response.

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Head of Education & Skills Policy

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