Opinion Former Article

Campaigners back MPs’ recommendations for changes to universal credit for the self-employed

The Low Incomes Tax Reform Group (LITRG) has welcomed today’s House of Commons Work and Pensions Committee report which makes a number of recommendations on how universal credit could better support self-employed claimants, including calling for greater flexibility in income reporting periods and for better alignment with the tax system.

Robin Williamson, LITRG Technical Director, said:

“Existing universal credit rules very clearly do not work for most self-employed people, penalising those who have fluctuating incomes and expenses. The Government should heed the Work and Pensions Committee’s sensible recommendations, as well as those in LITRG’s earlier report, which would at least go some way towards improving the situation.

“The Committee’s recommendations, which echo some previous suggestions made by LITRG, would also allow for a better balance between supporting entrepreneurship and protecting the public purse, as well as bringing greater parity between the employed and self-employed in the system.

“We particularly welcome the Committee’s recommendations in relation to the need for flexibility in income reporting period for each business and for better alignment with the tax system. LITRG would go further and encourage the Government to re-define the Minimum Income Floor (MIF)1 so as to allow for the deduction of pension contributions. There is little justification for permitting the deduction of pension contributions without any limits from earnings when assessing the universal credit of employed earners, but not making a similar adjustment when setting the MIF for self-employed claimants.”

LITRG has been raising some serious concerns with both Parliament and Government about the treatment of self-employed claimants under universal credit since 2010. In its 2017 report Self-employed claimants of universal credit: lifting the burdens3 LITRG summarised the main shortcomings of the current system in respect of the self-employed and suggested positive reforms that would achieve a better balance between encouraging entrepreneurial activity and protecting the public purse while also at the same time ensuring greater parity with employed people earning similar amounts. Without these changes, LITRG said, there is a very real possibility that people will be discouraged from starting self-employment and existing claimants will be forced to give up their work – a possibility also highlighted in today’s report and surely this cannot be right.

The current rules in universal credit, especially the MIF, take a very broad-brush approach in an attempt to deal with a minority of people who may not be genuinely carrying on self-employment. However, the rules penalise those who have fluctuating incomes and those who have big business expenses that fall in any one month rather than being spread over the year. This is something which the Committee recognise as a normal part of self-employment and rightly point out is far from a reliable indicator of the viability of a business.

Robin Williamson said:

“It cannot be right that a self-employed claimant who earns the same amount as an employed claimant over a 12-month period should receive significantly less in universal credit support, nor can it be right that low income self-employed claimants may not have their pension contributions fully reflected in their award in the same way as employed claimants do.

“To deal with these two problems, in our 2017 report we recommended that averaging be allowed over a period of up to one year and we are pleased to see that the Committee has repeated this recommendation which will go some way in ensuring the system treats the self-employed more fairly when compared to employees. However, unless the MIF is also amended to reflect pension contributions paid, some unfairness will remain.”

Under the current rules, claimants have a one-year start-up period4 before the MIF is applied to them. However, many businesses take much longer than this to get established and LITRG has previously recommended that the start-up period be extended to at least two years, preferably three years. Today’s report by the Committee highlights the lack of evidence held by the DWP for setting the period as one year and recommends that it should be increased to three years at the discretion of work coaches where there is evidence of progression, viability and achievement of expected increases in earnings each year. This would be accompanied by a tapered introduction of the MIF at the end of year one, increasing to the full MIF at the end of year three.

Robin Williamson said:

“While we are fully supportive of the extension of the start-up period, we think that doing it in this way is likely to place additional burdens onto work coaches and create complexity for claimants and DWP with the tapering of the MIF.

“We strongly welcome the Committee’s exploration of the links between the tax system and the universal credit system. This is something which is often overlooked. In our 2017 report, we called for better alignment between universal credit and the tax system in respect of defining income and reporting requirements in order to relieve the heavy administrative burden on claimants that monthly reporting in universal credit brings. Encouraging work coaches to discuss the links between tax and universal credit, as recommended by the Committee, is a good first step to achieving better alignment.

“The Committee’s report recognises the importance of self-employment in the economy and the seriousness of the issues facing self-employed claimants. It also acknowledges that getting this balance right will be a key determinant of the success of universal credit. It highlights that, as yet, the Department do not know how the MIF and other self-employed rules will impact on claimants and their behaviour and we support the recommendation that this evidence should be gathered as soon as there are a sufficient number of claimants in the system. However, even without this formal research, it is clear that the existing rules are not fit for purpose for the majority of self-employed claimants who do not have a steady, consistent monthly income. We therefore urge the Government to consider the Committee’s recommendations, in addition to those made in our earlier report, carefully and make the necessary changes to the existing rules.”

More Articles by Chartered Institute of Taxation (CIOT) ...

Disclaimer: Press releases published on this page are from key opinion formers who promote their organisation's activities by subscribing to a campaign site within politics.co.uk. politics.co.uk does not endorse, edit, or attempt to balance the opinions expressed on this page. The content of press releases are wholly the responsibility of the originating company or organisation.


Load in comments