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Apprenticeship levy: Key questions answered

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1st Mar 2017
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The apprenticeship levy and the skilled migrant charge both apply from 6 April 2017. Kate Upcraft runs through fundamental questions for businesses to answer before running April payrolls.

Apprenticeship levy

Employers will be eligible to pay this levy (set at 0.5%) if they have “pay subject to employer’s national insurance (NI)” of £3m or more for 2016/17, or predicted that amount for 2017/18. HMRC use the shorthand of “pay bill” to describe the amount to measure, but that is not precise enough for our purposes.

Pay bill

According to the HMRC guidance on the apprenticeship levy, the pay bill is the total pay of all employees on the payroll who have earnings liable to NI. This is not a definition currently in payroll systems.

It is not just the portion of the pay which is subject to employer’s NI (i.e. earnings over £156 for 2016/17). If employer’s NI would be due in respect of the employee’s pay, even where the rate is currently set at 0% (for example for under 21s), the whole of that employee’s pay is counted in the “pay bill”. But if no NI is due as, say, the employee is aged under 16, the pay for that person is not included.

Connection

Where the employer has multiple PAYE schemes within one entity, or is connected to another employer or charity, all their PAYE schemes are aggregated to see if the £3m threshold is reached. Employers will be familiar with the concept of connection from the restrictions for claiming the employment allowance.

In the public sector, where employers have no eligibility for employment allowance, there is no concept of connection (somewhat counter intuitively, as you could argue the whole of the public sector is connected), so each PAYE scheme stands alone.

This is important when we consider the apprentice levy allowance. Once the £3m threshold is reached, or is predicted for the current tax year, there is a reporting obligation from 6 April 2017. This reporting obligation applies even if the total paid under a PAYE scheme will only reach £3m later in 2017/18, perhaps because the entity is a seasonal employer, or has a restructuring or acquisition planned.

In-year credit

Seasonal employers will be able to recover any levy that has been overpaid in prior months, if their pay bill fluctuates. The employer will offset the levy that needs to be recovered from other tax, NI and student loan liabilities payable to HMRC. If there are insufficient other liabilities to recover any overpaid levy, the employer must wait until after the tax year end for a refund from HMRC. 

Payroll software

This is the first new payroll tax that is calculated at the PAYE scheme level, not at the employee level like income tax and NI, which are then aggregated to pay over to HMRC.

Will your payroll software trigger the calculation for the levy when you run the Employer Payment Summary (EPS), when it is able to aggregate all the “pay bill” figures? If the employer has several payrolls, with different pay frequencies, will all those payrolls have to run before you can give them an accurate levy figure?

Will costing reports allow clients to assign the levy to their cost centres and to the general ledger? I’m aware of one big player in the payroll software market who has told customers they have only developed the statutory functionality to send the levy figure on the EPS, and haven’t considered any costing reports that customers might need.

Connection and April’s EPS

Connected employers will need to decide how they want to apportion the £15,000 levy allowance between their PAYE schemes. This offset of £1,250 per month per scheme or connected group can, unlike the employment allowance, be apportioned between the connected schemes in any way the employer chooses. However, this apportionment must be done before the April EPS is submitted.

Example

A group of five pubs, each with a separate PAYE scheme, but with common ownership, want to share the levy allowance between the pubs. Each pub could choose to take £3,000 of levy allowance. This would mean that the levy kicks in at pay bills over £600,000 for each PAYE scheme and not £3m. Alternatively, the largest pub could decide to take no levy allowance and give the four others £3,750 each.

Whatever apportionment is chosen it must be entered on the April 2017 EPS for the PAYE scheme and cannot be altered until April 2018. Employers need to choose wisely if a PAYE scheme is likely to cease in year, which could lead to the levy allowance being wasted.

How many EPSs?

Once there is a levy to pay, or an expected levy to pay, for 2017/18, an EPS must be generated each month even if the figures on it are zero until later in the year.

If the pay bill is not expected to reach £3m, but then reaches the threshold, the reporting of the levy begins as soon as the monthly pay bill indicates the £3m threshold will be reached by year end, and then reporting continues each month.

HMRC does not want an EPS every month unless the employer has a need to send one. However, there is no legislative prohibition for sending an EPS every month. Some software developers have decided to design the sending of an EPS every month into their products so that customers don’t forget. If this approach has been taken by your software provider, this could represent significant additional work for your payroll teams each month.

Skilled migrant levy

The other levy arriving on 6 April 2017 is the immigration skills charge or ISC. Employers recruiting non-EEA Tier 2 (skilled migrants) will face a levy per year per individual certificate of sponsorship (CoS) of £1,000, reduced to £364 for sponsors who are small (defined as annual turnover of £10.2m or less and 50 employees or fewer), or charities such as universities.

The ISC is paid up front when the CoS is assigned to the individual on or after 6 April 2017. This could amount to as much as £5,000 as CoS can be assigned for a maximum five-year stay. The charge does not apply to tier 2 migrants in the UK pre-6 April 2017 who then extend their stay or change jobs.

The salary threshold for Tier 2 applicants also rises to £30,000 for new applications from 6 April 2017. There is a full exemption from the charge for PhD students swapping from Tier 4 to Tier 2 post their studies, and for intra-company transfer graduate trainees. If employers also choose to fund the immigration health surcharge, which can be as much as £200 per year, the cost of bringing non-EEA skilled workers to the UK becomes very expensive.

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By hiu612
09th Mar 2017 13:43

Kate - am I missing something on apportionment? Looking at the draft legislation s.2 imposes a charge where a paybill exceeds the levy allowance. S.4 looks at two or more connected companies where both would be entitled to an allowance. 4(2) then says only one company may have an allowance. 4(3) says the companies must decide which of them that is. I realise the HMRC guidance says that connected entities may share out the allowance, but it doesn't seem to be what the draft legislation says?

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