Universal Credit: supporting self-employment Contents

Summary

The growth of self-employment has made an important contribution to the UK’s current record employment levels. Around 5 million people—15% of the workforce—are now self-employed. Genuine, entrepreneurial self-employment—embodied by the UK’s small business owners and sole traders—has an equally crucial role to play in boosting the UK’s economy and ensuring its future economic dynamism.

The Department for Work and Pensions (DWP/The Department) rightly wants to support low-paid people to work and to progress in work through Universal Credit (UC). In doing so for the self-employed, it must balance supporting entrepreneurship with protecting the public purse. Its key means of doing so is UC’s Minimum Income Floor (MIF): an assumed level of monthly income for calculating benefit payments. The Department hopes the MIF will incentivise business owners to increase their earnings and develop their business, while ensuring Government does not subsidise unsustainable low-paid self-employment indefinitely. Given the growing importance of self-employment, getting this balance right will be a key determinant of the success of Universal Credit.

Understanding how the self-employed respond to UC

But the MIF is uncharted territory. How claimants will respond is highly uncertain. Given this uncertainty, the new rules are an ideal opportunity to make use of the “test and learn” philosophy underpinning UC. The Department has no plans, however, to publish any significant analysis of UC’s effect on self-employment until at least Autumn 2019: four years after the full service roll-out began. If the Department does not test, it cannot hope to learn. It should produce ongoing evaluations of the effect of the new self-employment rules on UC claimants.

A more flexible approach to reporting income

UC awards are calculated monthly. This is intended to mirror how most people in employment are paid. But consistent monthly income is rare amongst the self-employed. A large majority of self-employed benefit claimants report volatile incomes. Farmers’ payment schedules are dictated by the seasons and other events, such as one-off bulk sales of livestock. Sole traders invoicing on a job-by-job basis may find those jobs take longer than a month, and do not necessarily arrive predictably. Even a late payment can cause variation. All these factors are far from reliable indicators of the viability of a business. Self-employed claimants are treated the same as employees when they are doing well, but differently when they are doing badly. Over a period of several months this could lead to a self-employed claimant and an employee with the same income ending up with significantly different UC entitlements:

The MIF, in its current form, fails to deliver parity of treatment between employees and the self-employed. Self-employed people can miss out on important support not because their income is inadequate, but because it is volatile: an entirely normal feature of self-employment. Expenses can be similarly volatile. Business spending on capital and other expenses should be driven by business need and affordability: not the need to fit in with UC and the MIF.

The Department must not let an unyielding commitment to monthly reporting undermine UC’s laudable goals of supporting claimants to progress in, and stay in work. It risks attempting to force square pegs into round holes, with little reference to the reality of self-employed work. At worst, this could lead to successful businesses collapsing—potentially costing other employees their jobs, as well as the self-employed owner. Yet a more flexible approach is possible—and is already in place in UC (such as in the Surplus Earnings Rules). The Department should extend this flexibility, permitting reporting periods of up to one year for claimants who can demonstrate irregular payment patterns. Its new specialist self-employment Work Coaches in Jobcentre Plus should be tasked with determining eligibility on a case-by-case basis.

The MIF, as it stands, could make it more difficult for self-employed people to manage and meet their tax obligations. Longer reporting periods would help, giving some claimants more money than they would otherwise have. Many more could benefit from expert, proactive advice on managing their finances and tax arrangements. The Department should require Work Coaches to discuss with claimants at the outset of their claim the relationship between tax and Universal Credit, and encourage them to refer to specialist advice on tax if necessary.

Extending the Start-up Period

Self-employed claimants in their first year in business are exempt from the MIF. This “Start-up Period” is intended to allow them time to get their business up and running. After that year, the MIF applies in full. But the Department has failed to provide any evidence to support its belief just one year is long enough. Ultimately successful businesses often take longer than a year to bring in net earnings even close to the MIF. For many claimants, too short a Start-up Period will present an insurmountable obstacle to getting a business off the ground and getting off benefits. This is not only detrimental to claimants, but a questionable use of the Departmental resources already invested in supporting those claimants. It is also the antithesis of the entrepreneurial, dynamic economy the Government wants to support, presenting a barrier to economic growth, job creation and increased tax receipts. The Department should 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. Extensions should again be discretionary. The decision should be made by Work Coaches based on evidence of business progression, such as achieving expected increases in earnings each year.

Even with changes, the introduction of the MIF is likely to increase demand for Jobcentre Plus’s support services. Work Coaches play an important role, determining eligibility and checking progression. The Department must ensure it has enough Work Coaches with specialist self-employment expertise to carry out this role effectively. But they are no substitute for specialist support and mentors with relevant self-employed business experience. The Department must ensure this support continues to be widely available when current New Enterprise Allowance contracts end in 2019. It should commit to providing access to specialist mentors with direct experience in claimants’ area of work for those assessed as having potentially viable businesses. This will help give claimants the best possible chance of making a success of their business, of consistently exceeding the MIF, and of moving off benefits entirely.

Ensuring claimants do not persist with subsidised low-paid self-employment over better options is vital. But the Department also aspires to support entrepreneurship. Getting the MIF and Start-up Period wrong threatens this aspiration, and risks denting the case for UC overall. The intentions underpinning the Department’s new self-employment rules are reasonable and fair. It must now ensure their implementation matches up.





Published: 10 May 2018