DWP HQ, Caxton House, London. Photo: Paul Billanie for Welfare Weekly.

The UK Government’s flagship Universal Credit reform is “designed with little regard for the reality of self-employed work” and risks damaging aspiration and entrepreneurship, according to a damning new report from the Commons Work and Pensions Select Committee.

The cross-party group of MPs say the current design of Universal Credit (UC), which replaces a number of existing social security benefits and tax credits, poses a “very real risk” to the self-employed and could dampen the enthusiasm of anyone thinking about setting up their own business.

In order to qualify for UC self-employed workers must demonstrate that their business is financially viable within a year of claiming, which the Committee says fails to recognise the difficulties and complexities of setting up a business and the time it often takes to turn a healthy profit.

Failure to meet this minimum eligibility requirement within one year would mean the claimant ceases to qualify as being “gainfully employed”, resulting in a dramatic drop in the amount of UC they are entitled to receive.

This is known as the “Minimum Income Floor“, or MIF, and is currently set at around £1,000 per month. If a person fails to meet this strict eligibility requirement within a year of becoming self-employed, or first claiming UC as a business owner, then they are no longer deemed to be “employed” and face losing some or all of the difference through lower UC payments, depending on other circumstances such as childcare costs.

The Committee states: “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 DWP says the benefit system should not exist to subsidise a failing business, but the Work and Pensions Committee says there are “no plans to publish any significant analysis of UC’s effect on self-employment until at least Autumn 2019”.

This, they claim, is contrary to Minister’s claims they are taking a “test and learn” approach in the roll-out of UC, adding that the short time limit “could create an insurmountable barrier to entrepreneurs getting their business up and running, and getting off benefits”, in spite of Government’s claims that UC is designed to “make work pay”.

MPs warned this could force “potentially viable businesses to close before they have the chance to get off the ground”, whilst “also wasting the significant investment Government will have made in those businesses by that point”.

The Committee is calling on the Government to “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”.

Other recommendations from the report include (as quoted):

  • Allow reporting periods of up to a 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

Luke Johnstone, founder of the smoothie company “Pack’d”, told the Committee it took him “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 said: “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.”

Chair of the Committee, Frank Field MP (Labour) said: “Universal Credit was not designed with self-employment in mind and it shows.

“Its current set-up for people starting and running their own business risks crushing potentially viable, productive enterprises. At the same time, it risks throwing away the significant investment of taxpayer’s money in them to that point.

“The DWP should give people longer to get going, and not punish them for the income volatility that is in the nature of self-employment. This would give a boost to the entrepreneurship that is so vital in a dynamic economy.

“It would also offer good value for taxpayers and a fillip to the Department’s beleaguered flagship policy.”

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