The House of Commons Work and Pensions Committee has launched a report titled Universal Credit: supporting the self-employed. The report draws extensively on written and oral evidence from the CIOT’s Low Incomes Tax Reform Group (LITRG).
The growth of self-employment has made an important contribution to the UK’s current record employment levels. Around five million people—15 per cent of the workforce—are now self-employed. The DWP hopes the Minimum Income Floor (MIF) will incentivise business owners to increase their earnings and develop their businesses, while ensuring the government does not subsidise unsustainable low-paid self-employment indefinitely.
Much of the report deals with the MIF. Universal credit imposes a MIF if someone is gainfully self-employed, subject to the all-work requirements conditionality and their business has been running for more than 12 months. The MIF is an assumed level of earnings. It is calculated using the National Minimum Wage for their age group, multiplied by the number of hours they are expected to look for and be available for work. For most people this will be 35 hours a week, although it may be less if the claimant has caring responsibilities, is responsible for a child under the age of 13 or the claimant has a physical or mental impairment. It also includes a notional deduction for tax and National Insurance. If the claimant’s self-employed earnings for their monthly assessment period, calculated as gross profit minus actual tax, National Insurance and pension contributions, are below the MIF that the DWP has calculated for them, it will use the MIF to work out their universal credit award instead of their actual net self-employed earnings.
After witness sessions with organisations including LITRG, the committee recommends that the DWP:
- Commission and publish ongoing evaluation of the effect of the new self-employment rules on universal credit claimants
- Allow reporting periods of up to a one year for self-employed claimants who receive irregular monthly pay on a case-by-case basis
- Require Work Coaches, during the Gainful Self-employment test, to discuss with claimants the relationship between tax and universal credit
- Continue to offer specialist support for self-employed claimants earning below the MIF when the current New Enterprise Allowance contracts end in 2019
- Extend the start-up period from 12 months to 3 years accompanied by a tapered introduction of the MIF at the end of year 1 and rising to the full amount at the end of the extended start-up period. This would be offered on a case-by-case basis.
Income volatility and the Minimum Income Floor
The committee reported LITRG’s explanation that volatile incomes can be for a number of reasons besides a self-employed person simply not trying to earn more. These range from seasonal variation, to periods of sickness or holiday, to the timing of payments from clients. The committee looked at LITRG’s example of how self-employed and employed universal credit claimants with identical annual incomes– averaging out over a year to the equivalent of full-time at NLW but varying month-to-month for the self-employed claimant – can receive very different universal credit awards, with the self-employed claimant significantly worse off due to the effect of the MIF.
The report quoted Victoria Todd, Senior Technical Manager at LITRG, explaining that the MIF ‘just cannot deal with’ any of the factors that might cause variations in income. The resulting financial loss might then render the business unviable. The report said: “LITRG told us there was a real risk MIF had tipped too far towards protecting public funds at the expense of providing support to the self-employed.”
This, along with similar evidence from other organisations, probably contributed to the committee’s conclusion that the MIF does not deliver parity of treatment between the self-employed and employees. By sticking rigidly to a monthly reporting period for self-employed universal credit claimants, the DWP risks ‘attempting to force square pegs into round holes. At worst, it could lead to viable, successful businesses collapsing’.
The committee recommends the DWP allow reporting periods of up to a one year for self-employed claimants who receive irregular monthly pay. The decision on whether to allow a longer reporting period should be made on a case-by-case basis by Jobcentre Plus’s self-employment specialist Work Coaches. It should be based on evidence of need: for example, production of universal credit records, invoices or accounts demonstrating irregular or seasonal payment schedules.
The committee also recommended the DWP commission and publish ongoing evaluation of the effect of the new self-employment rules on universal credit claimants. In light of its previous research the first such evaluation should be commissioned when there are sufficient claimant numbers to permit a sample of around 1,000. This research should examine how claimants are responding to the MIF, including whether claimants who have opted to close their business have been successful in finding other work.
On the subject of supporting the low-paid self-employed in Jobcentre Plus, the committee reported that Work Coaches—even with expertise—are no substitute for dedicated mentors with experience in the claimants’ business area. In many cases, this can be the difference between business success and failure, says the report. The DWP must continue to offer specialist support for self-employed claimants earning below the MIF when the current NEA contracts end in 2019. As part of this, it should commit to providing access to specialist mentors with direct experience in their area of work for claimants assessed as having potentially viable businesses who are earning below the MIF. It should also commit to expanding its own internal nucleus of expertise in Jobcentre Plus, ensuring it has sufficient numbers of self-employed Work Coaches to meet the demand for their skills.
The committee reported on LITRG’s view that for some claimants, opting for a Budget Payment Plan (BPP) with HMRC could be beneficial. BPPs allow self-employed people to manage their finances by making smaller, regular payments towards their tax bills: for example, paying on a monthly basis. For UC claimants, signing up to a plan could help them spread their tax payments to avoid dipping below the MIF in particular months. LITRG explained, however, that whether this is an appropriate choice will vary from claimant to claimant and be highly dependent on individual circumstances. Self-employed people, like employees, pay tax on their annual incomes. Longer reporting periods will give some claimants more money than they would otherwise have (as it would effectively allow averaging of income which could reduce the impact of the MIF). This will help them manage and meet their tax obligations. It is no surprise that the committee asked DWP and HMRC should take a joined-up approach to ensure tax and reporting arrangements do not become unduly complex for claimants.
The length of the Start-up Period
Witnesses overwhelmingly told the committee that the DWP should extend the Startup Period. This would give claimants a reasonable chance to get their business off the ground. LITRG favoured an extension for all claimants: pushing the point at which the MIF applies back to two or three years after starting a business. The committee has taken account of LITRG’s advice that the DWP should consider carefully the amount saved by introducing the MIF at one year, against the ‘sunk’ costs of support to people who give up self-employment that could, after another year or two, be profitable The committee said the evidence underpinning the DWP’s belief that just one year is long enough is inadequate because viable, ultimately successful businesses frequently take more than a year to get going. “For many claimants the short Start-up Period could create an insurmountable barrier to getting up and running, and getting off benefits,” the report states. This led the committee to recommend the DWP permit extensions to the Start-up Period of up to three years. This should be accompanied by a tapered introduction of the MIF beginning at the end of year one and rising to the full amount at the end of the extended start-up period. As with extensions to MIF reporting periods, this should be offered on a case-by-case basis. In making the decision, Work Coaches should check for evidence of progression and viability, including achieving expected increases in earnings each year. Work Coaches should then ensure during each reporting period that the claimant is continuing to demonstrate business growth and progress.
If a universal credit award is terminated (for example as income goes up) a calculation will be done to work out surplus earnings for that month and potentially the following five months. Surplus earnings are essentially the amount of income someone has above the point at which their universal credit would reduce to nil plus a £300 (temporarily increased to £2,500) de minimis. If the claimant reclaims universal credit within 6 months of that termination, the surplus earnings will be added to any actual income when calculating their award. LITRG noted that these are some of the most complex rules they have ever seen.
The DWP claims this Surplus Earnings Rules address the problem of volatile income. LITRG told the committee that the MIF already acts as a disincentive for self-employed claimants to manipulate their incomes to receive more universal credit. The report highlights that Victoria Todd noted that the surplus earnings rules also allow self-employed claimants to carry forward losses over the subsequent eleven periods to help ensure they are not disadvantaged – but this only applies to business losses and only down to the level of the MIF. For claimants who simply have low incomes in some months that provision does not help. In fact, Todd said the surplus earnings added to the MIF can make the self-employed even worse off when compared to an employee with similar annual income. The committee is interested in LITRG’s suggestion that another alternative solution is to tweak the gainful self-employment test to ensure people who are not running viable businesses do not pass the test and so removing the need for the MIF. This would necessitate a greater discretionary role for Jobcentre Plus’s Work Coaches in determining who is gainfully self-employed and understanding what a viable self-employed business looks like.