Legal Business Blogs

‘Irrelevant word-smithing’: Leading law firms to pay millions for apprenticeships payroll tax

Preliminary Law Society figures estimate more than 250 firms will be hit by the 0.5% payroll tax to supplement apprenticeships announced in last month’s Autumn Statement, as full details of the levy are delayed.

Chancellor George Osborne said the levy will come into effect in April 2017, to be paid on employers’ wage bills over £3m. He said less than 2% of UK employers are expected to pay the levy, which will raise £3bn a year by 2019-20 and fund three million apprenticeships. 

The legal lobby said more detail is needed to determine how the tax will affect its members, but at least 258 firms – about 2.7% – will be subject to the levy.

The Law Society figures are conservative, and are based on an assumption that income received as a share of profits is not counted in ‘an employers’ wage bill.’ If partners’ take home pay is included, then the amount of firms forced to pay is believed to be significantly greater.

The levy means major firms which spend about 30-40% of turnover on their wage bills would pay a further tax bill of about £1m, and follows proposals for further taxation on City firms as Justice secretary Michael Gove floated plans in October for a 1% levy on firms to pay for the abolition of a criminal court charge on guilty defendants. 

Osborne Clarke Training & Know How Lawyer Catherine Shepherd said current case law means members of an LLP, such as law firms, are not employees and presumably would not be caught.

‘Whilst businesses were hoping for more news yesterday on how the new apprenticeship levy will operate, including clarification on what will be payroll costs for these purposes, the Government has indicated that the new draft clauses on this aspect will not now be published until the New Year. Firms must therefore wait and see what costs will be included in the levy.’

The levy includes a clawback scheme where those who are committed to apprenticeship training will be able to get out more than they pay through a digital voucher, which can then be spent on training with an approved apprenticeship provider. Ironically, the clawback scheme does not include training contracts which firms pay for to bring graduates into the profession. 

Weightmans HR director Sam Airey told Legal Business the proposed levy was a ‘significant amount’ and the firm, which currently has 14 legal apprenticeships, would have to significantly boost its apprenticeship numbers to get back what it was levied under the plan.

Airey said: ‘We can do the basics on our PAYE but we need to see a bit more detail and we expect to have to significantly increase the amount of apprentices to get the return.’

While Weightmans would never exclusively adopt trainee contracts or apprenticeships, it was considering how to get the right balance as the details of the levy emerged, Airey added.

BPP Law School dean Peter Crisp said while the clawback provision was likely to work well for personal injury and insurance firms it may be difficult for those that have larger transactional businesses.

‘Interest has spiked since the announcement of the levy, because any tax is a good way of getting attention. It is crystallizing minds around the benefits and challenges of apprenticeships as well.’

EY head of tax policy, Chris Sanger, said the apprenticeship levy is simply the Chancellor using pleasant words to ‘sugar coat’ new taxes, and flows on from the new dividend tax introduced in the Summer Budget.

‘To those paying either tax, this word-smithing is irrelevant. They will still find themselves paying more tax on income they thought was protected under the manifesto commitment,’ he said.

To read more of Legal Business’ Autumn Statement coverage see: Osborne brings more gloom to the legal sector with deeper MoJ cuts and court closures.

To read more about the legal industry and Justice Secretary Gove see: ‘Comment: The moment of truth arises, will the profession stand up to Gove?