Why the self-employed need to wake up to the threat posed by Universal Credit

September 25, 2014 by
Filed under: Uncategorized 

In theory Universal Credit is a dream policy. The idea has been to streamline the welfare system, rolling six means-tested benefits into one so that work will always pay. UC is also intended to make the transition in and out of benefits more seamless, and as such accommodate workers whose income fluctuates and who find themselves flitting between jobs. In 2012 DWP estimated that an extra 300,000 more workless households would move into employment as a result of UC, and that it would save £38bn over 12 years from its inception.

Yet as we all know, the hype has not lived up to reality. Universal Credit has proven to be something of a nightmare. Indeed, it is hard to overstate the problems that have beset this flagship welfare scheme. IT failures, civil servant departures and a lack of departmental resources are just a few of the reasons for Universal Credit’s woes. Such are the challenges facing the £2.4bn scheme that the Major Projects Authority in Whitehall decided it needed to be ‘reset’ in 2013, while £34m of new IT assets had to be written off as a result of unexpected difficulties. To top this off, a damning National Audit Office report noted that ‘throughout the programme the Department [DWP] has lacked a detailed view of how Universal Credit is meant to work’.

While these problems relate mainly to UC’s implementation, it is clear that the design of the scheme is also flawed. The Joseph Rowntree Foundation, for example, has argued that Universal Credit could trap low-income groups in poverty, particularly workers with children who are likely to be worse off in employment. Likewise, the Resolution Foundation has argued that the design of Universal Credit does little to protect the income of second earners, who stand to lose a large amount of their extra earnings once they reach the income tax threshold. Many claimants will also find it difficult to manage the complexity of the new system, which requires Internet access and monthly reporting of one’s financial circumstances.

Yet the group that arguably has the most to fear from these welfare changes are the self-employed. Under the existing system, people who work for themselves but earn low incomes have their earnings topped up by Working Tax Credits, just as the employed do. Analysis of HMRC data shows that close to 15 per cent of all self-employed people are currently in receipt of this type of benefit. Under the new UC system, however, people who work for themselves will have their benefits tied to a ‘minimum income floor’ (an assumed level of earnings). The long and short of it is that if people actually earn below this level they will not receive any more Universal Credit to make up the difference, and if they earn above it their UC entitlement will diminish rapidly. So for example, if you receive £200 a month in UC, this won’t budge whether you earn £400 or £800 from your business.

One of the reasons the government is implementing such a requirement is that they want to encourage people to grow their business rather than tick along while relying on state support. Yet the problem is that the design of the minimum income floor does not appear to have been fully thought through. For starters, it is set at the national minimum wage for 35 hours a week, which amounts to something in the order of £950 a month. It is a simple fact that a large proportion of the self-employed will never reach this income level, and as such could be pushed out of their legitimate business. Our recent analysis of the government’s Family Resources Survey suggests that a striking 36.6 per cent of all self-employed people would fall below the minimum income floor as it stands (with lone parents worst affected). Of course, not all of these individuals will actively seek benefits. But those who do will have a tougher time under Universal Credit.

universalcredit

In fairness, the government does acknowledge that it can take time for people to establish a business and find enough clients to bring in a decent income. This is why they established the ‘Start-up Period’ within Universal Credit, whereby the self-employed would effectively be exempt from reaching the minimum income floor for a period of a year. However, as most self-employed people would tell you, it can often take more than 12 months for a business to fully take root – certainly to bring in an income equivalent to the national minimum wage. It is not difficult to picture a scenario where someone – whether a graphic designer, builder or accountant – has spent 12 months getting their business into shape only to be told at the end that their welfare assistance will be cut because they haven’t reached a given earnings target.

Nor are these the only issues facing the self-employed under Universal Credit. Should they wish to be registered for benefits in the first place they will need to undergo a Gateway Interview with a Job Centre Plus adviser, whereby they will have to present invoices, business plans and various statements that show they have a clear intent to grow their business and be ‘gainfully self-employed’. If the adviser feels they are not running a serious venture then they will be forced to look for other work i.e. a typical job. As before, the rationale is to make sure that people do not languish on benefits under the auspices of a non-existent business. Yet the issue is that the decision-making is down to the subjective discretion of work advisers, many of whom will have little understanding of how businesses operate. The demands for detailed business plans, for example, is symptomatic of an outdated understanding of how people now start and run ventures.

Another of Universal Credit’s design flaws is that it assesses the circumstances of the self-employed on a monthly basis rather than an annual one. The drawback of this approach is that it assumes the income of business owners to be steady. In reality, the earnings of the self-employed are highly variable, with long periods of minimal-to-zero income punctuated by short periods where there are bursts of cash. Think of a builder who works on a project for 6 months but only receives large lump-sum payments at the beginning and the end. Under Universal Credit this person would receive only basic state support in the long periods where their income falls below the minimum income floor, and perhaps none at all during the few periods when their income is very high (because the UC tapers off quickly). In short, they are worse off than a claimant with more stable and regular earnings.

All of this presents a major headache for the self-employed. Indeed, it is highly likely that many will be pushed out of business directly because of the implementation of Universal Credit. The frustration is that this new welfare system has barely been discussed in business support circles, at least not relative to the exposure given to issues such as access to finance. My fear is that the impact of Universal Credit will serve to make self-employment a preserve of the affluent, exacerbating an existing phenomenon where people are more likely to start up in business if they are wealthier and own their own property.

Earlier this week Ed Miliband said that the self-employed deserve the same rights as wage-workers. I can think of few better places to start than by addressing the shortcomings of Universal Credit.

The RSA is exploring these issues in a new project with JRF. Find out more.

Follow me on Twitter.

 

Comments

  • JR

    Excellent article – when I worked for DWP I really struggled to conceptualise self employment and I suspect the same issues have affected policy makers here. It’s tricky though because many sole traders at the lower and upper end of the income scale actually are doing things that 5 years ago would be done as employees – e.g. cleaning jobs which are self employed. So in some ways looking at the ONS data tables I think you’re also misrepresenting self employment as running your own business.

  • Pingback: The taxless recovery | Flip Chart Fairy Tales

  • Pingback: The taxless recovery – Flip Chart Fairy Tales | Vox Political

  • Will Pickering

    Being self-employed is often a precarious situation, but it is the very definition of the risk-taking entrepreneurial free market in labour that governments of the last thirty years pretend to espouse. The decision to put the DWP in charge of policing freelancers’ earnings shows the real agenda: all personal autonomy must be crushed to maximise the reserve army of free labour available to corporations via the workfare system.

  • Pingback: Why our fears over red tape are overblown : RSA blogs

  • Pingback: Boosting protection for the self-employed is a priority. But so too is raising awareness of existing entitlements : RSA blogs

  • Andrew Minion Parker

    i myself have bean in the boat of being self employed and on benifits at the same time. i since 2008 had infact bean a self employed Entertainer working local pubs in my area this fetchd me a survivable income but it was not a big mony buisnes i was sole trader with no reasonable way to expand as the govemrent demand. what they here when you say your self employed is you own a buisnes or run a store and work full time hours on your trade. what also comes into being self employed and leagly haveing to decler your self employed is doing any work yourself this could be mowing a lawn for mony, or like myself being a entertainer i workd fri sat sun for £100 a night on a good week however as with this busines it was not EVERY week and on the school holadays thier was 0 work at all but over crimbo work would quadruple to the state i had to turn down bookings due to high demand for the time of year. however when you tell UC your self employed they automaticly asume you work 35 hours a week and bring in the NMW each week even if you dont. they also dont acount for RUNING COSTS and they take thier number from what you got paid not from what you acterly made. which is wrong as tax is only payable on PROFIT. i may be wrong but this curently results in getting less mony avradge each week then i would if i declerd the self employment as a flop and just went on full UC for unemployed. hese wuy now i no longer work self employed which i enojyed and loved but infact jump from temp job to temp job and switch from claming to not claiming as neaded. end of the day thier is not alot of work in my area that matches my skills and although i am working on betering my self via qualifications to land better paid perm work you need the cash to do this. my busines would have survived if the DWP had only helpd at the time 3 of my reguler venues closed down leaving me with 0 proffit income the 1 2 bookings a month i was doing coverd runing costs only. but that was still counted as income for uc purposes even though for tax it was clasd as expenses to run the buinses. and thiefore was exempt. basicly this made it imposable to run being left with 0 mony for rent food etc

  • Blue Day

    Hi, I am self employed and have been aware of the impending minimum income floor for 18 months or so now. My business is profitable and developed, but the very nature of being self employed with it’s 3 good weeks of sales and one bad week of sales means the same day the minimum income floor is introduced, I will have to close my business, as I won’t be able to keep a roof over my head in a bad week otherwise. I am disheartened to have to close my business after working so hard to knock it into efficiency. Tens of thousands will move onto the dole overnight when the minimum income floor starts, perhaps why the Tories have deferred it till after the election. At the moment you can claim housing benefit, council tax benefit and tax credits if self employed should you need it. If the welfare reform act was amended so that the self employed are eligible for housing benefit and council tax this would save our business. As a compromise tax credits for the self employed could be removed as a disincentive to people taking advantage of the safety net.

  • childminder

    Being a self employed child minder 40 hour week, I am tied to what I can earn as I am limited to my child minder numbers set out by Ofsted. How can I potentially earn more when I am legally not allowed to increase the number of young children I care for. Also its difficult to go out and get new clients, as its very much tied to the area, the number of other providers and yearly intakes. I am very concerned as I am a single parent (through no fault of my own) trying to run a business pay a mortgage. If this affects my already stretched income then I could potentially lose my business, home and everything I have worked for 7 years building. Sad times.

  • Pingback: Advert hoarding which doubles as a homeless shelter created by York campaigner