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

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.

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.

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