Universal credit rules risk 'crushing' self-employed and startups

The Guardian - 09 May 2018

Fledgling businesses and self-employed workers with fluctuating incomes risk being “crushed” by unrealistic rules imposed by universal credit, a cross-party group of MPs has warned.

They say entrepreneurs who fail to meet an arbitrary “minimum income” level from their business after just one year will be stripped of benefits support and, in some cases, will be forced to give up their enterprise and find other work.

In addition, people whose income changes from month to month because they work in seasonal occupations such as farming or tourism could miss out on thousands of pounds because of the way their universal credit is calculated.

The MPs on the Commons work and pensions committee said universal credit was “designed with little regard for the reality of self-employed work”, and that most new businesses will need longer than a year to become viable.

Frank Field, the Labour chair of the committee, said: “Universal credit was not designed with self-employment in mind and it shows. Its current setup for people starting and running their own business risks crushing potentially viable, productive enterprises.”

About 5 million people, or a sixth of the UK workforce, are self-employed, the report said, playing a crucial role in bolstering the UK economy.

Although MPs accept that earnings rules, known as the minimum income floor, are necessary to prevent the taxpayer effectively subsidising unviable businesses on an indefinite basis, they say the present arrangements are not flexible enough.

Self-employed people are currently allowed a one-year “start up period” under universal credit to get a business up and running, but MPs say this period should be extended to three.

The minimum income floor requires claimants who have been self-employed for a year, or more earn the equivalent of at least 35 hours at the national minimum wage each month. If they earn less than this, their universal credit payment will not make up the difference. However, if their monthly earnings exceed this level, their benefit payment is reduced accordingly.

Analysis published last month by Citizens Advice found self-employed workers whose earnings fluctuate monthly could receive hundreds of pounds less in universal credit over the course of a year than employees in “traditional” jobs who earn the same amount paid in a regular monthly salary.

A Department for Work and Pensions spokesman said: “We recognise the important role of entrepreneurs in boosting the economy, however it’s unsustainable for universal credit to prop up unviable businesses that may not be working. Universal credit strikes the right balance between helping new businesses and being fair to the taxpayer by supporting self-employed people during the first year while they establish their business.

“After the initial year, gainfully self-employed people are treated as if they are earning the minimum wage. If they are not and they want to maintain the same level of income, they will be expected to increase their earnings rather than relying on their UC payment.”

Mike Cherry, the chairman of the Federation of Small Business, said: “The minimum income floor is bad for entrepreneurialism, pure and simple. We know that it generally takes two to three years to get a viable firm off the ground. The universal credit system fails to recognise that fact and, in doing so, threatens the futures of successful firms.”

Patrick Butler, The Guardian