Empowering the Freelance Economy

Apprentice levy fraud: it’s costing taxpayers millions

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If you are a contractor who works through an umbrella company, news of a recent case of Apprentice Levy fraud is a stark reminder that contractors must ensure they are not unwillingly footing this tax through their “assignment rate”

In a recent special report, The Freelance Informer spoke to experts who outlined how to navigate the complexities of a contractor’s “assignment rate” promoted by recruitment and umbrella companies.

In a nutshell, what makes the “assignment rate” complicated? It includes employer costs, such as national insurance, the Apprentice Levy (a tax that must be paid by any company that has a payroll of £3 million or higher, including umbrella companies and charities) and pension contributions, all of which are not the responsibility of the contractor. These costs are the responsibility of clients, recruitment agencies and umbrella companies. Yet, recruitment agencies include these costs the the “assignment rate”, inflating the headline rate for the job/assignment.

Even though contractors, including those Off-Payroll/IR35, are not responsible for the Apprentice Levy, there have been reports made by union Unite that some umbrella companies have managed to get contractors and temp workers to sign contracts that end up with the contractor inadvertently footing the Apprentice Levy. There have also been reports of £1 billion in Apprentice Levy funds going towards courses for executives rather than young apprentices.

Skills consultant Aidan Relf told FE Week, “Politicians are talking up apprenticeships in an almost unprecedented manner but there’s no serious attempt to join the dots in terms of the UK’s woeful track record on productivity or skills shortages. It’s no wonder that the Treasury sees a large top slice of the levy as easy pickings.”

The OBR’s forecast for Apprentice Levy funds coming in for 2024/25 is £4 billion. According to an FE Week report, this means the Department for Education’s set budget to spend on apprenticeships in England will be “just £2.7 billion, while the devolved administrations will receive around £500 million. It means the Treasury will be withholding around £800 million worth of cash generated from the apprenticeship levy in 2024-25.”

Boss banned for 6 years

Concerns over the proper use of Apprentice Levy funds have come into the spotlight following the news that Shakar Habib, 28, the sole director of a London-based training company, has been slapped with a six-year ban for failing to explain how he spent millions in public funds. Habib ran Vista Training Solutions, which provided apprenticeships through enterprise schemes, receiving most of its funding from the Education and Skills Funding Agency (ESFA), The Insolvency Service reported.

When the company collapsed in 2020, it left a gaping £3.5 million hole in its accounts, with Habib unable to explain where the money went. Over £2.5 million of that missing cash came directly from ESFA, intended for apprentice training.

Adding to the red flags, investigators found Habib had neglected his legal duty to keep proper company records. Financial paperwork from April 2019 onward was simply missing, making it impossible to verify whether the £3.5 million in outgoing payments were legitimate business expenses. The company’s assets also couldn’t be fully accounted for, with a further £525,000 unaccounted for due to the lack of records.

“Shakar Habib disregarded his legal duty to keep accounting records,” declared Marc Symons, Deputy Head of Investigations at the Insolvency Service. “But thanks to joint efforts with ESFA, he’s been banned from running companies for a significant period.”

Symons says, “His ban should be a stark warning to other rogue directors that we will act to protect the public from those who abuse taxpayers’ money.”

“This successful outcome demonstrates ESFA’s commitment to holding individuals and organisations accountable,” stated Andrew Thomas, Director of Finance and Provider Market Oversight at ESFA.

Habib’s six-year ban, effective November 21, 2023, prevents him from involvement in promoting, forming, or managing any company without court permission.

Other cases of misuse of apprentice funds have been much larger.

How is the apprentice levy spent?

The UK apprenticeship levy is spent in the same way regardless of whether their overall payroll includes direct employees or off-payroll contractors. Here’s what happens:

1. Levy collection:

  • All employers with a combined annual pay bill exceeding £3 million pay the levy at a rate of 0.5% of their payroll. This includes payments to off-payroll contractors if they are “deemed employees” under the IR35 rules.
  • The collected levy funds are pooled into a central government fund.

2. Accessing funds through Apprenticeship Service Accounts (ASAs):

  • All levy-paying employers, including those using off-payroll contractors, have access to an ASA. This is a digital account where they can see their available levy funds.
  • Funds can be used to fund apprenticeship training for their employees, regardless of whether they are direct employees or deemed employees.

3. Funding apprenticeships for smaller employers:

  • Some of the levy funds are also used to co-fund apprenticeship training for smaller employers (those with a pay bill under £3 million). This means that even though off-payroll contractors contribute to the levy, their employers might not use all the funds themselves.
  • For example, smaller employers only pay 5% of the cost of their apprenticeship training, with the government covering the remaining 95%.

4. Fund usage and expiry:

  • Levy funds expire after two years if they are not used. However, unspent funds don’t simply vanish.
  • The Department for Education (DfE) can use these unspent funds to fund apprenticeships for smaller employers, support training providers, or offer additional bursaries to apprentices.

Therefore, the source of the levy funds, goes towards the overall apprenticeship training budget, benefiting both large and small employers in the UK.

Points to ponder

  • If an employer engages off-payroll contractors who are not deemed employees under IR35, their payments won’t contribute to the apprenticeship levy.
  • There are some specific rules for calculating the levy for certain sectors, including the construction industry, which might impact how off-payroll contractor payments are treated.
  • Always ask for a Key Information Document (KIDs) document to see exactly what your recruitment agency, client and umbrella company is paying, what they are charging you for any admin services and what your take-home pay will be. If there is any hesitancy or excuses as to why the KID document cannot be supplied BEFORE you sign anything, then it could be very likely that you could be entering a dubious contract and a tax avoidance scheme. Inform HMRC if this is the case.

How to report a tax avoidance scheme to HMRC anonymously

1 Comment
  1. JackR says

    No coincidence that the levy was created during Tony Blair’s reign and his son went on to open a billion £ apprenticeship company. Such a fraud that as an inside IR35 contractor, the levy comes out of my pay before tax with employer national insurance. Not to mention the absolute fraud that goes on once the government receives their stolen funds.

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