LITRG Press Release: Government’s response to Work and Pensions Committee’s recommendations ‘extremely disappointing’, say campaigners
The Low Incomes Tax Reform Group (LITRG) has expressed disappointment at the Government’s response to the recommendations made by the Work and Pensions Committee’s ‘Universal Credit: supporting self-employment’ report.
LITRG is concerned that unless the current rules are changed to better reflect the realities of self-employment and bring greater parity between self-employed and employed universal credit claimants with similar earnings and circumstances, some self-employed claimants may be forced to give up their self-employment before reaching their full potential and others may be discouraged from taking up self-employment in the first place.
In May, the House of Commons Work and Pensions Committee published its report which made a number of recommendations on how universal credit could better support self-employed claimants, including calling for greater flexibility in income reporting periods and for better alignment with the tax system. LITRG urged the Government to carefully consider the Committee’s recommendations, as well as those in the campaign group’s own October 2017 report on self-employment. This would go some way towards improving the system for the self-employed and ensure greater parity between self-employed and employed claimants with similar income levels and circumstances.
LITRG Chair Anne Fairpo said:
“LITRG has been raising some serious concerns about the treatment of self-employed claimants under universal credit since 2010. In our October 2017 report we suggested positive reforms that would achieve a better balance between encouraging entrepreneurial activity and protecting public finances while also ensuring greater parity with employed people earning similar amounts.
“The Work and Pensions Committee’s report recognised the importance of self-employment in the economy and the seriousness of the issues facing self-employed universal credit claimants and made some sensible recommendations to address some of the current flaws. We particularly welcomed the Committee’s recommendation in relation to the need for flexibility in the income reporting period for each business and for better alignment with the tax system.”
The current rules in universal credit, especially the Minimum Income Floor (MIF),1 take a very broad-brush approach in an attempt to deal with a minority of people who may not be genuinely carrying on sustainable self-employment. However, the rules penalise those who have fluctuating incomes and those who have large business expenses that fall in any one month rather than being spread over the year. This is something the Committee recognised as a normal part of self-employment and rightly point out is far from a reliable indicator of the viability of a business.
Commenting on the Government's response, Anne Fairpo said:
“It is extremely disappointing that the Government has taken the view that ‘fluctuating earnings are something self-employed universal credit claimants need to plan for, just as other self-employed earners do’. Even if a self-employed claimant was able to put some money aside in a month where they made a higher profit in order to boost their household income in a month where their profit falls, the Government’s approach ignores completely the many examples provided by LITRG and other organisations showing that a self-employed claimant can receive significantly less universal credit support than an employed claimant earning exactly the same amount over a 12-month period – this cannot be right or fair.
“We note that the Government has dismissed the benefits of joint reporting with HMRC for tax purposes as they are concerned about adding further complexity to the system. However, we think that there would be benefit in further aligning the calculation of self-employed earnings with those used by HMRC for the cash basis in the tax system.”
The Government also rejected the Committee’s recommendation to extend the start-up period,2 which is a 12 month period where the minimum income floor does not apply even if earnings fall below it, on the basis that it was never intended that it should match a notional average time taken to grow a business and instead is intended to give claimants time to work out how to support themselves while growing their business. Many businesses take longer than 12 months to get established and reach a level of profit equal to the full minimum income floor, says LITRG. Although LITRG welcomes the Government’s commitment to keep this aspect of the policy under review, it remains firmly of the view that the period should be extended to at least two years, preferably three.
Anne Fairpo added:
“The Government must address the fact that the current rules do not reflect the realities of self-employment and as a result create a disparity between self-employed and employed claimants with similar earnings and circumstances.3 While we acknowledge that there has to be a balance between protecting public funds on the one hand and supporting self-employed universal credit on the other, the current rules do not achieve this balance. Without changes, some self-employed claimants may be forced to give up their self-employment before reaching their full potential and others may be discouraged from taking up self-employment in the first place.”
The Government's response can be found on the Parliament website.
- The Minimum Income Floor (MIF) applies to those who are in the ‘all work’ requirements conditionality group only. Outside of the start-up period, any month in which the self-employed claimant’s profits fall below the MIF, the claimant’s universal credit award is assessed as if he/she had profits at least equal to the MIF. The level of the MIF is equal to the National Minimum Wage for the claimant’s age group, assuming they work their expected number of hours each week. For most people, the expected number of hours will be 35 hours a week, although it may be less for example if the claimant has caring responsibilities, is responsible for a child under the age of 13, or has a physical or mental impairment. The MIF is calculated after deductions of notional tax and national insurance.
- Broadly, the start-up period is the period beginning 12 months from the start of the assessment period in which the claimant is determined to be gainfully self-employed. Claimants can only have one start-up period every five years and any further start-up period must be in relation to a different trade, profession or vocation. During the start-up period, the MIF will not apply.
- When viewed over a 12 month period, see the example in Appendix 2, Page 31 of LITRG’s report on self-employment published in October 2017.