Universal Credit and Self Employment
The Universal Credit White Paper argues in annex 3, point 5 that:
“Some self-employed people under Tax Credits report very low levels of income. We know that in starting up a business that it can take some time before it becomes profitable. But once established we would expect to see a reasonable income from the business activity. So for Universal Credit we are considering introducing a floor of assumed income from self-employment for those registering as such. The floor will be set at the National Minimum wage for the reported hours; clearly profits above this limit may be received and reported. For those self-employed people who engage in only a few hours of activity, and do no other form of paid employment then we will expect them to engage with the conditionality requirements as set out in Chapter 4.”
This paragraph has raised concerns and been criticised by a range of organisations, including Community Links, the Federation of Small Businesses and groups representing the self-employed. They argue that this approach is at odds with efforts to boost self-employment in the claimant population through the New Enterprise Allowance and the Work Programme.
Self employment can be favoured option for many job seekers, particularly for groups that find traditional employment difficult to access. Universal Credit offers an opportunity to integrate self employment with the benefit system. Traditionally, self-employment has struggled to integrate with the benefit system. Self-reported earnings increase the opportunity for fraud and raise the suspicions of government and business people often prefer to avoid the bureaucracy of making a benefit claim when that time could potentially be better invested in their business – sometimes leading to informal employment.
Universal Credit is expected to increase take-up of benefits from the self-employed as the bureaucracy involved in making a claim falls. At the same time, the government aims to enforce conditionality on people moving into self employment in the same way as those going on to work for an employer.
The statement in the white paper acknowledges that:
- Benefit claimants moving into self-employment should have the same access to benefits as those moving into traditional employment.
- Self-employed people claiming support should be earning at least the minimum wage, at least in the medium and long term.
Under the current system, moving into self-employment from JSA is a real challenge. The need not greed campaign find that many claimants avoid the hassle of making a claim entirely and often choose to work informally, putting themselves at risk of prosecution and restricting their ability to develop the business.
The self-employed use existing in work support (Tax Credits) to supplement their income, as an example, this thread shows the concerns of self-employed couriers working in variable-hours employment, often reporting low levels of income, but arguing genuinely that though a few under-report earnings, they often earn less than the minimum wage in self-employment once their costs are accounted for. However, this suggests in turn that self-employment can be used by firms as a way to avoid having to pay the national minimum wage, with the risk that they use this advantage to unfairly undercut rivals, something that the government are understandably keen to avoid.
Those concerned about using a floor of reported hours at the national minimum wage argue based on their experience of supporting people into self-employment that:
- The state should allow time for a business to reach profitability.
- Self-employment should have different conditionality requirements because of the effort required to start a business – with people often working more hours for less income in the early stages.
- It is unlikely to prevent deliberate fraud as those that under-report income just as easily could under-report hours if both are self-reported.
I was surprised when I first read about using reported hours instead of reported earnings. Universal Credit clearly operates on the basis of income, eliminating hours rules and minimising the amount of information that would need to be collected. While the temptation to underreport earnings exists, there is no suggestion that it is anymore widespread among self-employed claimants as compared to self-employed more generally. This is really a matter for HMRC however their resources would arguably be better directed toward reducing higher value tax evasion. It is unclear whether DWP will have the resources to pursue this type of fraud effectively, but self-reported hours, revenues, costs and profits should provide sufficient information to distinguish between businesses that are genuinely struggling to be sufficiently profitable and those that are deliberately under-reporting.
The DWP should ideally align Universal Credit with efforts to support self-employment as a route off welfare into work. For example, the NEAS allows six-months for a business to reach profitability (though campaigners argue that it can sometimes take two to three years). I would guess that six months is probably just about sufficient to identify whether the self-employment route is sustainable and whether the support offer should be extended. CSJ research found that the costs of starting in entry level self-employment were often less than originally expected, and the ability to raise revenue quickly was (unsurprisingly) critical to business success. Conditionality during this initial period at least could take the form of support to grow the business.
Fundamentally, it is unfair if companies are using self-employment as a way of paying their workforce less than the national minimum wage. Those couriers earning less than the minimum wage may ultimately have to charge their employing company more to account for the full costs of work, including the administration, petrol and additional travel time if required. This leads inevitably to a debate about the practicality of a national minimum wage and the trade-offs this involves, an interesting question that is outside of the scope of Universal Credit.