Report on Universal Credit for self-employed people

By agency reporter
May 10, 2018

The Work and Pensions Committee has produced a report which says Universal Credit is “designed with little regard for the reality of self-employed work” and, contrary to the Government’s aspiration to support entrepreneurship and economic dynamism, actually poses a “very real risk” to both. 

Around 5 million people—15 per cent of the workforce—are now self-employed. But the Committee says the new UC rules for self-employment do not reflect the realities of starting and running a business and risk crushing potentially viable businesses and the contribution they make to the economy.

Minimum Income Floor

To continue to qualify for UC while they are getting their business off the ground, entrepreneurs must show they are earning a minimum amount – the Minimum Income Floor or MIF  – after one year. If they cannot, they cease to qualify as “employed” for benefits assessment purposes – so that the taxpayer does not indefinitely subsidise unsustainable, low-paid self-employment.

But while the Department asserts that this one year start up period “makes sense”, it has no actual evidence to back that, and no plans 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. This appears contrary to its much vaunted “test and learn” approach.

In fact, the existing evidence suggests viable, ultimately successful businesses frequently take more than a year to get going - the short Start-up Period could create an insurmountable barrier to entrepreneurs getting their business up and running, and getting off benefits.

Extend the Start-up Period

This risks forcing potentially viable businesses to close before they have the chance to get off the ground, also wasting the significant investment Government will have made in those businesses by that point. The Committee says Government should extend the Start-up Period to up to three years, with more tailored checks for evidence of progression and viability, including for example achieving expected increases in earnings each year.

Realities of startups

Luke Johnstone, founder of the now highly successful smoothie company “Pack’d” illustrated the realities of startups in evidence to the Committee: “…it took me two years of working tax credits to get my business to the point where I was running a successful company. Prior to that, I also spent one year getting myself into personal debt to even get the business off the ground. In total, I think it took me two and a half years before I was earning national minimum wage and it took me four and a half years before I turned a profit… moving to Universal Credit would give me too short a window in which to create a viable business.”

Commenting in response to the report, Mr Johnstone added, “The current design of Universal Credit is a false economy that compromises long term benefits for short-term savings and discourages social mobility. A one year deadline does not reflect the many nights it takes to become an overnight success and the odds in business remain firmly stacked against those that cannot afford to start. The recommendation to extend Universal Credit to three years is a positive move towards providing a genuine foundation for success. Rather than stifling entrepreneurs with get rich quick pressure that can encourage recklessness, it gives them a platform to demonstrate progress over a more realistic period and should provide the government with a greater return on their investment.”

Way the MIF is applied

The way the MIF is applied, based on monthly reported income, also penalises the self-employed with their fluctuating income. This can mean they miss out on important support potentially to the tune of over £2500 a year. Farmers’ payment schedules, for example, 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, or a late payment can cause variation. But these factors are far from reliable indicators of the viability of a business. 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 Committee says Government should:

  • Extend the current one year Start-up Period to up to three years, at the discretion of Work Coaches
  • Allow reporting periods of up to one year for self-employed claimants who receive irregular monthly pay, also at the discretion of Work Coaches
  • Produce ongoing evaluations of the effect of the new self-employment rules on UC claimants
  • Ensure front-line JCP staff have sufficient expertise in self-employment – especially in the context of the discretion Work Coaches would have over the MIF rules under the Committee’s recommendations – and that claimants have access to dedicated, specialist mentors

* Read the report Universal Credit: supporting self-employment here

* Work and Pensions Committee https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/

[Ekk/6]

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