Business leaders are demanding a shake-up of the UK apprenticeship system, after official figures suggest the government will miss its target for new apprentices.

As National Apprenticeship Week gets underway on Monday, business groups are calling for changes to the system to give small businesses desperately-needed funding so they can take on and train more apprentices. Small firms play a critical role, as they offer nine out of 10 apprenticeships for 16- to 24-year-olds, according to the Federation of Small Businesses.

The latest government figures showed the number of people starting an apprenticeship in England fell to 125,800 between August and October, down 4.7% from 132,000 in the same quarter a year earlier (that number was up by 15.4% year-on-year).

This means that the number of people starting an apprenticeship since May 2015 has reached just over 2 million. During the general election campaign in May 2015, the Conservative party manifesto pledged to create 3m new apprenticeships by 2020, but if current trends continue, the government will miss this target.

A Department for Education spokesperson said: “We are investing significantly to level up skills and opportunity across the country and apprenticeships are playing a key role in this.

“We recognise there is more work to do and we are continuing to look at how the apprenticeship programme can best support the changing needs of businesses so more people can get ahead and all employers can benefit.”

The apprenticeship levy, introduced in April 2017, requires businesses with annual payrolls of over £3m to pay 0.5% of their wage bill into a pot each month. The funds have to be used within 24 months to fund apprentices; up to 25% of unused funds can be transferred to smaller firms, which don’t pay the levy, while the rest returns to the Treasury.

Business groups London First and the North West Business Leadership Team (NWBLT) noted that almost a fifth of larger businesses (17%) had not used all of their apprenticeship levy funds – for example, a total of £96m of unused funds expired in July and August last year alone.

The two business groups said in a new report on apprenticeships that the system is confusing for employers; in particular, transferring unused levy funds is complicated and time consuming, as they cannot be block transferred but must be transferred on a month-by-month basis.

In addition, the funds cannot be spent to cover the administrative costs of hiring apprentices, which can be significant for smaller firms; and for the most part, transfers can only fund new starts.

The report says the restrictions mean that big companies such as the construction firm Mace are struggling to transfer their unused funds. “If the levy-transfer process were to function optimally, this would result in over £400m transferred to non-levy paying SMEs in the construction industry.”

London First and NWBLT are calling for greater flexibility for businesses in how they use funds, allowing them to support a broader range of training activities, and how funds are transferred to other firms.

Jasmine Whitbread, chief executive of London First, said: “Many firms want to take on more apprentices but are hamstrung by a needlessly complex and inflexible system.”

The Federation of Small Businesses warned that the apprenticeship system and in particular small firms are “facing a crisis”. Its national chair, Mike Cherry, said: “Urgent action is needed to ensure sufficient funding for small businesses in order to be able to continue offering apprenticeships.

“Whilst we welcome the [2019 Conservative] manifesto commitment of a £3bn national skills fund for the next five years, if this is used to top up apprenticeship funding for SMEs, there will be little remaining for the equally important priority of adult retraining.”

Research by the education group City & Guilds Group found that most adults in England think apprenticeships trump university for skills development and value for money – yet the majority (50%) would still choose university rather than do an apprenticeship (30%).

Kirstie Donnelly, interim chief executive of City & Guilds, said the stigma around apprenticeships must be stamped out. “More must be done now to promote apprenticeships both within schools and, more generally, amongst the public.”