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.
What is universal credit?
Universal credit is the supposed flagship reform of the benefits system, rolling together six benefits (including unemployment benefit, tax credits and housing benefit) into one, online-only system. The theoretical aim, for which there was general support across the political spectrum, was to simplify the benefits system and increase the incentives for people to work, rather than stay on benefits.
How long has it been around?
The project was legislated for in 2011 under the auspices of its most vocal champion, Iain Duncan Smith. The plan was to roll it out by 2017. However, a series of management failures, expensive IT blunders and design faults have seen it fall at least five years behind schedule.
What is the biggest problem?
The original design set out a minimum 42-day wait for a first payment to claimants when they moved to universal credit (in practice this is often up to 60 days). After sustained pressure, the government announced in the autumn 2017 budget that the wait would be reduced to 35 days from February 2018. This will partially mitigate the impact on many claimants of having no income for six weeks. The wait has led to rent arrears (and in some cases to eviction), hunger (food banks in universal credit areas report notable increases in referrals), use of expensive credit and mental distress.
Ministers have expanded the availability of hardship loans (now repayable over a year) to help new claimants while they wait for payment. And housing benefit will now continue for an extra two weeks after the start of a universal credit claim. However, critics say the five-week waiting time is not enough and want it reduced to two or three weeks.
Are there other problems?
Plenty. Multibillion-pound cuts to work allowances imposed by the former chancellor George Osborne mean universal credit is far less generous than originally envisaged. According to the Resolution Foundation thinktank, about 2.5m low-income working households will be more than £1,000 a year worse off when they move on to universal credit, reducing work incentives. Landlords are worried that the level of rent arrears racked up by tenants on universal credit could lead to a rise in evictions. It's also not very user-friendly: claimants complain the system is complex, unreliable and difficult to manage, particularly if you have no internet access.
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.”
