Foreword

Ensuring small employers are able to recruit and retain a skilled workforce is critical to unlocking enhanced productivity and growth in small businesses. Along with T Levels, apprenticeships are the key intervention through which the Government is seeking to achieve long overdue parity of esteem between technical and higher education. Apprenticeships are also an essential plank of Government policy to promote social mobility, and smaller businesses play a critical role in achieving this ambition.

Smaller firms have been champions of apprenticeships. However, if this is to continue, change is needed in the short, medium and long-term. The 2017 apprenticeship reforms were intended to improve the technical education system and provide the UK with a world-class workforce. However, FSB research shows that the reforms have created a dual apprenticeship system for larger and smaller business employers, with the latter not benefiting from the measures to improve quality. Of deep concern is the sharp decline in Level 2 (intermediate) and Level 3 (advanced) apprenticeships since the introduction of the 2017 reforms. Our research shows that, of those apprenticeships offered by smaller businesses, the vast majority are Level 2 or Level 3.

Anthony Impey MBE FSB Apprenticeships and Skills Policy Chair
Anthony Impey MBE
FSB Apprenticeships and Skills Policy Chair

The 2017 reforms have created a dual apprenticeship system for larger and smaller business employers.

FSB welcomed the Spring Statement announcement that the co-investment requirement for nonlevy paying smaller businesses would be reduced from 10 per cent to five per cent from April 2019, and that the percentage of unspent levy funds that can be shared with non-levy paying smaller businesses (for example, in their supply chains) would increase from 10 per cent to 25 per cent. The provision of a further £5 million for the Institute for Apprenticeships and Technical Education to introduce new standards and update existing ones is also a step in the right direction. However, far more needs to be done.

Smaller businesses need immediate support to meet the explicit requirement for a minimum of 20 per cent off-the-job training and to ensure they are not disadvantaged by the transition from frameworks to standards. Equally important is ensuring small businesses can access good quality training in their locality and benefit from incentives currently allowed for within the system. Establishing equilibrium in the relationships between businesses as consumers and suppliers is essential. Currently, smaller businesses simply cannot wield the same buying power as larger private sector employers to influence training provision.

While FSB does not want to see radical reform to the apprenticeship system, there are now serious questions to be answered in relation to the future sustainability of funding for apprenticeships. As levy funds are exhausted, policy makers must find solutions that are fair and equitable, and which do not lead to apprenticeships becoming unaffordable for smaller businesses. Both the Review of the Apprenticeship Levy and the Spending Review 2019 are important opportunities to make a true success of apprenticeship policy in England.

Apprentice reforms

Over a quarter of apprentice employers say reforms have had a negative impact.

Top challenges - 1

Difficulty recruiting an apprentice

Top challenges- 2

Management time

Top challenges - 3

Off the job training

Age of apprentice

Majority of apprenticeships held by 16-24 year olds

Skill level

Majority of apprenticeships are intermediate to advanced

Government incentive

Many eligible smaller businesses have not received the £1000 incentive for hiring 16-18 year olds.

Increasing costs

Costs have increased.

Executive summary

This report shines a light on the impact of the apprenticeship reforms on small businesses in England. It should inform Government decision-making to improve the system, feeding into the ongoing Review of the Apprenticeship Levy and the upcoming Spending Review. This report is based on quantitative and qualitative data collated from FSB members. It is structured into four sections: post-reforms state of apprenticeships in small businesses in England; impact of May 2017 reforms on small businesses; training and assessment provision; and the future of apprenticeships.

The vast majority of smaller firms do not pay the Apprenticeship Levy, instead contributing towards training and assessment costs through co-investment. The apprenticeship system creates opportunities for smaller businesses to expand their workforce and upskill their existing employees. Apprenticeships help small firms to boost their productivity and address skills shortages and gaps. Therefore, a robust and fair apprenticeships system is critical if smaller businesses are to fully maximise the opportunities of the Fourth Industrial Revolution.

Equally important is the contribution of smaller businesses to social mobility. Small firms are found everywhere across England, including in rural areas, fringe towns and less favoured areas. They play a vital role in offering pathways for school-leavers into employment. FSB research shows that 92 per cent of all apprenticeships offered by smaller businesses in England are held by 16-24 year olds. Of those small firms that provide apprenticeships, 30 per cent have employed apprentices whose highest educational achievement is GCSE Maths / English grade C or lower (or equivalent), i.e. those with low educational attainment. Therefore, any Government policy which limits the ability of small businesses to offer apprenticeships will impact on smaller business ability to drive forward social mobility.

FSB research shows that the 2017 apprenticeship reforms have had unintended, negative consequences for smaller businesses. This report focuses on those reforms which have had most impact on smaller businesses:

a.       Explicit requirement for a minimum of 20 per cent off-the-job training;
b.       Change in training and assessment provision geared at improving quality;
c.       Introduction of co-investment of 10 per cent of training and assessment costs.

Of those smaller firms that employed apprentices both before and after the 2017 reforms, over a quarter (27%) say the 2017 reforms have had a negative impact on their business. FSB evidence suggests that the changes to the apprenticeship system – intended to significantly increase the number of apprenticeships by March 2020 and achieve the Government target of three million apprentices in England – have not, to date, worked for smaller businesses. Government statistics show that, compared to 2015/16, the proportion of Level 2 (intermediate) and Level 3 (advanced) apprenticeship starts fell sharply in 2017/2018, by 45 per cent and 13 per cent, respectively.[1]  The vast majority (87%) of apprenticeships offered by smaller businesses are at Level 2 and Level 3. Smaller businesses are more likely to employ new apprentices (i.e. new to their workforce) than larger businesses.

Small firms have welcomed Government interventions on co-investment and transfer of unspent levy funding to non-levy paying firms. However, more must be done in the short-term to:

a.       support smaller businesses in the operation of the explicit requirement for a minimum of 20 per cent off-the-job training;
b.       improve the quality and availability of training provision for smaller businesses,especially where the most common apprenticeships levels utilised are Levels 2  and 3, and;
c.       ensure existing incentives, especially those that are currently passed down by training providers, are delivered to eligible smaller businesses.

In the medium to longer-term, FSB continues to have serious concerns about the likely exhaustion of the levy budget and the consequences for non-levy paying employers. Government expects the apprenticeship programme to overspend in the future given that the average cost of training an apprentice on a standard is around double what was expected.[2]  The 2019 Spending Review and the Review of the Apprenticeship Levy present a vital opportunity to address these difficulties.


[1] Department for Education (2019) Apprenticeships and traineeships data. Accessed on 8 April 2019. 

[2] National Audit Office (2019) The apprenticeships programme

Key findings

Post- 2017 reforms state of apprenticeships in small businesses in England

  • 87 per cent of all apprenticeships offered by FSB small firms are at Level 2 ‘Intermediate’ (49%) and Level 3 ‘Advanced’ (38%).
  • 10 per cent of all apprenticeships offered by FSB small firms are at Level 4-7. Four per cent are at Level 6-7.
  • 92 per cent of all apprenticeships offered by FSB small firms are held by 16-24 year olds, which is significantly higher than the national average of 56 per cent for all apprenticeship achievements in England (2017/18).
  • 47 per cent of all apprenticeships offered by small businesses are held by 16-18-year olds. 44 per cent of all apprenticeships offered by small businesses are held by 19-24 year olds.
  • Of those small businesses that have employed apprentices, many say they have hired from the following disadvantaged groups:
    • Highest educational achievement GCSE Maths/English grade C or lower (30%)
    • Long-term unemployed (9%)
    • BAME background (9%)
    • Mental health condition (7%)
    • Returning to work after a career break (4%)
    • Disability (4%)
  • 48 per cent of smaller businesses that employ or employed apprentices, or wish to employ apprentices in the future, would be interested in offering part-time apprenticeships.
  • 43 per cent of small businesses that employ or employed apprentices, or wish to employ apprentices in the future, are also interested in more flexible bespoke apprenticeships that can be adjusted to their needs, even if this requires more administrative time and effort on their part.

Impact of 2017 reforms on small businesses and apprenticeships

  • Of those small firms that employed apprentices both before and after the 2017 reforms, over a quarter (27%) say the reforms have had a negative impact.
  • The three biggest challenges for smaller firms when engaging with apprenticeships are:
  • Recruiting an apprentice (42%)
  • Management time (29%)
  • 20 per cent off-the-job training (24%)
  • Only 40 per cent of eligible smaller businesses have received the £1000 incentive for hiring 16-18 year olds. A third (34%) say they are not even aware of the incentive.
  • 41 per cent of small businesses that employ apprentices report that their costs related to recruiting and training apprentices have increased.
  • Small businesses based in rural areas (46%) were more likely to report increased costs associated with apprenticeships than those in urban areas (40%).
  • Around one fifth (21%) of smaller firms that have employed apprentices after the 2017 reforms say they have had difficulty contributing 10 per cent towards training and assessment costs of apprentices.
  • One fifth (20%) of smaller firms that have employed apprentices after the 2017 reforms have upskilled their existing employees or themselves using apprenticeships. The biggest barriers to this are the requirement for 20 per cent off-the-job training and finding funds for co-investment.
  • Of those small firms that have employed apprentices or are seeking to employ, apprentices, almost half (48%) say they want control over the recruitment and administration process.
  • Around a third (30%) of small businesses that have employed apprentices say they are dissatisfied with the ability of training providers to accommodate their needs. Over a third (35%) are dissatisfied with providers’ communications.
  • Just over a quarter (27%) of small businesses that have employed apprentices rate the quality of training as poor. The same proportion do not think it was a good experience for the apprentice.
  • 49 per cent of small businesses that have employed apprentices after the reforms say ‘quality of the training provider in my area’ is the main reason for the difficulties with finding a training provider.

Recommendations

1.  Supporting the operation of explicit, minimum 20 per cent  off-the-job training

The Department for Education (and the Education and Skills Funding Agency) should:

  • Establish a set of standards to address the inconsistencies in the delivery of 20 per cent off-the-job training by training providers and ensure that the rules are communicated properly, accurately and consistently. While the Apprenticeship Commitment Statement produced by the Education and Skills Funding Agency is a step in the right direction, it is not mandatory and there is a need to ensure providers are consistent in their delivery and measurement of this requirement.[3] Many employers are simply encouraged to release their employees from work one day a week, regardless of whether they receive quality training. There is also a common misconception that 20 per cent off-the-job training needs to be time spent outside the workplace. This is not actually the case.
  • Develop a toolkit for small businesses to monitor and track 20 per cent off-the-job training that is undertaken in the workplace. The effective administration of off-the-job training prejudices smaller employers who lack the monitoring and work-flow management systems to track the amount of training that is categorised as off-the-job, while the apprentice is in the workplace.
  • Inform employers about the possibility of waiving their national insurance contribution for apprentices under 25 years old, amounting to a 13.8 per cent saving in employee costs. Not all small businesses are aware that they can waive their national insurance contribution for apprentices under the age of 25.
  • Make training-related travel free for all young (16-24 year old) apprentices working for employers with less than 50 staff to ensure small business employers, particularly those located in rural areas, are not disadvantaged by prohibitive travel costs. Small businesses often incur extra costs as a result of the travel apprentices must undertake in order to access training providers. Although there are some areas with travel support for apprentices,[4] we want to see the Government act on the Conservative Party Manifesto commitment to introduce significantly discounted bus and train travel for apprentices across England. Travel costs for apprentices are also likely to be particularly acute for smaller businesses in rural areas.
  • In the medium to long-term give serious consideration to allowing flexibility in the amount and structure of the off-the-job training required by different sectors. Most sectors have varying training needs and some occupations benefit from more practical learning than others. Different sectors should be able to identify and influence the amount of training required.

2.  Ensuring that training and assessment provision does not disadvantage smaller businesses and improves the quality of apprenticeships for businesses of all sizes

The Department for Education (and the members of the Quality Alliance where  applicable) should:

  • Play a greater stewardship role, working with the Institute for Apprenticeships and Technical Education in promoting the development of a healthy and sustainable provider market. There should be a stable funding environment for good quality training and assessment provision that is easily accessible to smaller employers, as well as larger ones. Accessing a provider with good quality training has become difficult for many smaller employers as a result of changes in funding policies. Government must steward the development of the provider market to allow all businesses to access good quality training and assessment.
  • Commission analysis of the geographical distribution of sector-specific training and assessment provision. The distribution of small firms throughout England – including rural communities, fringe towns (where larger businesses are less well represented) and less favoured areas – make them indispensable to the delivery of apprenticeships and the promotion of social mobility. These small firms need access to sector-specific training and assessment, distributed across the whole of England. While Skills Advisory Panels will play a major role in delivering this work locally, feeding into Local Industrial Strategies, there must also be a nationally coherent picture, linking up training and assessment provision in different areas and addressing any gaps.
  • Migrate smaller businesses onto the Apprenticeship Service (whilst allowing for a suitable transition period and offering support for those that lack the digital skills to manage the transition themselves5). The Apprenticeship Service should make the process of finding a training provider easier – particularly for those located in rural communities, fringe towns and less favoured areas. They could do this by listing nearest providers (by subject expertise, methods of teaching and rating of quality) once they migrate to the service. FSB research shows that small employers lack buying power and are unable to negotiate prices with providers. The Apprenticeship Service could empower small businesses to increase their buying power by aggregating together and negotiating more advantageous offers.
  • Develop a functionality within the Apprenticeship Service to support those non-levy paying smaller businesses who are recruiting an apprentice for the first time. This could include providing general information and signposting on employment law issues.
  • Make the Institute for Apprenticeships and Technical Education the central body responsible for managing a sustainable provider market. The Institute should develop a clear and vigorous oversight of the apprenticeship training and assessment provision that measures and reports on performance through publicly available data. The Institute should develop strong expertise in all aspects of vocational education as well as having a formalised role in contributing to the design of future apprenticeship policy. The work of the Institute for Apprenticeships and Technical Education should be supported by the Quality Alliance6, the members of which, in turn, should work together in a collaborative and coordinated way. FSB welcomed the Institute’s decision to establish a sub-group dedicated to understanding the cross-sectoral horizontal issues that generally affect smaller businesses in response to its recommendation.
  • Prevent anticipated difficulties in the delivery of end-point assessment activities and establish consistency in the external quality assurance for assessments. Difficulties with endpoint assessment add to the perceived complexity of the apprenticeship system. Government must ensure that smaller employers are not burdened with the challenges arising from these assessments, including where there are no end-point assessment organisations registered for standards. There is also a lack of consistency in quality assurance provided by External Quality Assurance Organisations. Consistency can be achieved by enabling a single organisation to quality assure all end-point assessments. FSB believes this role should go to Ofqual.

3. Supporting smaller businesses to take on new apprentices

The Department for Education (and the Education and Skills Funding Agency) should:

  • Ensure through the Institute for Apprenticeships and Technical Education that there are suitable substitutes available for the frameworks that were popular with small businesses (e.g. Level 2 Business Administration Framework). FSB research shows that small businesses are heavy users of Level 2 and 3 frameworks. Where standards are being developed, or are due to be developed, the Institute for Apprenticeships and Technical Education must speed up the process to ensure these are ready to be used by August 2020. Where this is not possible, the deadline for withdrawal of these frameworks should be extended beyond 31 July 2020.
  • Put small businesses (the vast majority of whom are not levy-payers) in control of non-levy apprenticeship funding through the Apprenticeship Service after their migration to the Service. Permitting small businesses to manage apprenticeship funding, including claiming the incentives for hiring particular age groups for eligible employers, will enable them to take greater ownership and engage with the system in a more efficient manner. Government should allow for an adequate transition period and provide appropriate support to non-levy paying smaller businesses as they are transitioned onto the Apprenticeship Service.
  • Develop a ‘matching service’, hosted via the Apprenticeship Service, to support levypaying employers to pass on unused funds to non-levy-paying employers. This could help businesses to find each other through the Service to transfer or receive funds in the appropriate locality and/or sector and/or supply chain. More generally, larger employers should be able to use functionality within the Apprenticeship Service to support smaller businesses within their supply chains, for example around queries on employment law or contractual issues. This would be a particularly useful service for those that have not recruited an apprentice before.
  • Extend the current £1000 incentive to those businesses with less than 50 employees who take on a new apprentice aged between 19-24 from selected labour market disadvantaged groups including people with a chronic mental health condition and ex-offenders. Even with minimal support small businesses are drivers for social mobility and diversity in their communities. Government should support small businesses to enable them to build on the existing level of inclusivity. It should financially assist smaller firms in recruiting disadvantaged individuals and maximise their impact on local communities.
  • Consider the feasibility of an incentive for start-ups who have never taken on an apprentice. Start-ups have a large amount of potential and face higher levels of uncertainty. Supporting startups through apprenticeships, especially in the early stages when their costs tend to exceed their income, would help with the productivity and growth.
  • Monitor and evaluate the impact on non-levy payers of the reduction in the co-investment requirement for training and assessment costs (10% to 5%). This data should be publicly available and broken down by size of business. In the event that this reduction does not demonstrably increase the number of small business apprenticeship starts, Government should remove co-investment completely for microbusinesses taking on 19-24 year olds. For microbusinesses taking on apprentices, 24 per cent find it difficult to meet the 10 per cent coinvestment requirement. 
  • Inform employers of opportunities to offer part-time apprenticeships through a communications campaign. FSB research shows that 68 per cent of smaller employers who have never employed apprentices, but would consider employing one in the future, would be willing to offer part-time apprenticeships. Smaller business employers are unclear on the availability and process for part-time apprenticeships. Government should work closely with FSB to inform small businesses across England about part-time apprenticeships.

4.  Supporting the future of small business apprenticeships including specific strategic considerations for the Review of the Apprenticeship Levy and the Spending Review

Government should:

  • Put the apprenticeship funding on a sustainable footing and ensure that small businesses are not excluded from the apprenticeship system. The Department for Education predicts there will not be an underspend in 2019-20 and that, on the basis of current trends, there could be a significant overspend by 2021.7 The vast majority of small businesses are non-levy paying employers and rely on unspent funds to cover the majority of their training and assessment costs for the apprentices they take on. To better cope with fluctuations in demand, Government should explore the possibility of taking apprenticeship funding from annually managed expenditure, rather than from departmental expenditure limits. There are three red lines for smaller businesses:
    • Solutions must not result in limiting the number of apprenticeships taken up by non-levy paying employers – including Level 2 and Level 3;
    • There must be no reduction in the threshold for the applicability of the apprenticeship levy; and
    • Funding arrangements must be confirmed as soon as possible to give confidence to all stakeholders involved.
  • Clarify progression pathways within technical education across apprenticeship levels, T levels and the interaction between these two technical education options. There is a need to explicitly outline the pathways between different levels for apprentices, as well as T levels. Government should help businesses to understand how their apprentices or other employees could grow through education and develop higher level skills.

Full details on each of the above recommendations areas are provided in the downloadable report below.  

Download the full report

Download the full report