Lord McKenzie of Luton
My Lords, I will speak briefly in support of the thrust of the amendment. It raises issues about the right age at which full conditionality should apply, and perhaps takes us back to debates we had on another Bill. Perhaps today is not the occasion to revisit them. However, I am not sure that we have debated thus far in the Bill the basic conditions for accessing universal credit. This is predicated on the fact that somebody is within the system and subject to full conditionality. This is what the amendment seeks to ameliorate. One basic condition for accessing universal credit is that somebody should not be receiving education. I presume that that is meant to cover broadly the same arrangements as exist under JSA. Perhaps the Minister will clarify that.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, we recognise the value of further education and training. In England, the Department for Education is committed to fully funding education and training for all young people up to the age of 19. Everyone aged 19 and over is eligible for fully funded provision to achieve basic literacy and numeracy as a minimum to the equivalent of five GCSEs at grades A* to C. This is funded by the Department for Business, Innovation and Skills.
Higher education, as noble Lords will be well aware, is funded through a system of loans and grants intended to cover the cost not just of courses but of living expenses. Typically, the benefit system does not allow students in full-time education to claim benefits. That is in recognition that such individuals have access to other forms of financial support, either through the education system itself or because they are living at home with their parents. However, the existing system recognises that there are some circumstances where additional financial support is necessary. In particular, in income support, certain young people, for example, those who are estranged from their parents or lone parents with a child under seven, may be entitled to benefit while studying. Students who are themselves parents can also claim child tax credits.
Under universal credit, we are looking to maintain the status quo. I hope that that gives some reassurance to the noble Lord.
Baroness Hollis of Heigham
I am sorry to intervene so early, but unless I am badly out of date, there are two further circumstances in which you can continue to be on benefit while having education which have not been enumerated by the noble Lord. One of these is if you are a young person in FE and your FE contact hours are less than 16 hours a week and that is therefore thought not to impede your search for work, although your study time at home may be a multiple of that time. That is a key group, because most FE courses do not involve more than 16 hours a week of face-to-face contact, which therefore exempts quite a lot of the people my noble friend was talking about. The second exemption, as I recall, is that if you are more than halfway through a period of training—if it is an 18-week period of training and you have done at least nine sessions—you are allowed to continue even if you still receive JSA. Will the Minister confirm that those other two exemptions also apply to people on JSA or IS?
Lord Freud
Yes, my Lords, I am pleased to confirm that it is our intention to maintain those exemptions.
Baroness Hollis of Heigham
Forgive me. Would not the first of those neatly fit my noble friend's concerns?
Lord Freud
Yes, I am trying to drive to that point, if I am allowed to give the full picture. I was trying to do so formally so that it was on the record. I am trying to give a general level of reassurance. I am very sympathetic to the points that the noble Baronesses, Lady Lister and Lady Meacher, are making. I am not a “work first” devotee; I think that human capital is of value. In the work programme and the design of universal credit, we are trying to pull those two things, which have been very far apart in the system, back together. I understand the points being made and I am trying to describe how, in what is a difficult balancing act, we are trying to optimise the position.
Let me continue. As I was, I hope, reassuring noble Lords, we are aiming to maintain the status quo, and that includes carefully considering transitional protection for students currently entitled to claim income support as the age of the youngest child is brought down to five. Exceptions to the general rule will be set out in regulations in due course. Where a claimant is in full-time education and entitled to universal credit, they will fall into the group subject to no work-related requirements and, of course, not be required to search for or be available for work.
Beyond that group, we have made it clear that, in the absence of any other barriers, claimants with youngest children aged over five are expected to search for and be available for work. They can access any of the free training to which they may be eligible, but will need to fit that around compliance with the work-related requirements, so, typically, any training will be done part-time or through evening classes. I emphasise that they may be eligible for support with their childcare costs, because work and training are not mutually exclusive activities.
On the human capital point made by the noble Baroness, Lady Meacher, we are committed to improving skills at all levels. The new next steps service, the careers advice service and Jobcentre Plus are there to help people both in and out of work with their choices of jobs, careers and training. Funding for workplace training in England will be prioritised on small to medium-sized enterprises, to help employers with small workforces train lower-skilled staff.
Where training is required to address a skills gap that prevents an individual from entering work, work-related requirements will be adjusted or lifted as appropriate. This matches the current system in JSA, where claimants can be referred to qualifying full-time training to help them move into work, and are treated as having met work search and availability requirements. I hope that this makes our position clear, and on that basis I urge the noble Baroness to withdraw her amendment.
Lord Boswell of Aynho
Further to that intervention, will the Minister also comment on the thought that occurs to me? It is that the test should be the value added from the education sought, at whatever level that happens to be.
Lord Freud
There is a lot of change going on in this area, as noble Lords will know. We are committed to picking up the recommendations of Professor Wolf, who wrote a stunningly important report—one of the best reports in this area that I have ever read. There are some principles in there about funding following the individual which have not been fully worked out. I am not discussing a static situation here. On the question of the check-out counter and fitting it around A-levels, as things currently stand the position is that the person would have to take the check-out job and fit the A-level around that. However—I hope that noble Lords can read between the lines—this situation has movement in it in the years to come, given what the Department for Education is determining to do around the Wolf report. I do not think that this is the last word on the matter but it is the last word as far as this Bill is concerned at this particular time.
Baroness Meacher
Would the Minister take this away and think about how to word the legislation here and at DWP in order to allow for flexibility in, one hopes, not too many years’ time in response to the education ministry?
Lord Freud
I will take that on board. This is a very important point. It is not one that I would cavalierly dismiss at all. How we raise human capital among people who have perhaps not had as good a start in life as we would want them to have is a central point. I will think about it and try to make sure that the way we design the structure will allow the flexibility to incorporate future developments. I am grateful for this particular amendment.
Baroness Hollis of Heigham
My Lords, I would like to add a further comment to the noble Lord’s open-mindedness on this, which is appreciated very much. A lot of research shows that work is the best form of training in the first 12 months or so at an entry point. If you roll forward, six or seven years down the line, those who have invested earlier in education at the expense of early access to work find they are able to float themselves off the bottom and get off universal credit. The key question is not whether the best education or training either follows or precedes work but over what time scale this is judged. All the research shows that, if you are patient enough and give it about six years, it is the amount of education you have had, rather than work-based training, that allows you to lift yourself off the benefit track.
Lord Freud
My Lords, we are getting into philosophy here. I accept the point and have always been uncomfortable with the “work first” philosophy. It worked in the short term, as the noble Baroness has said, but the evidence is that, in relative terms, we have a poor workforce because we have too many people with no skills and too few with intermediate skills by comparison with our main competitors. We have to think about the balance between “work first”—which does get people a job—and the risk that training is sometimes used as an excuse to do nothing. There is a difficult balance here. We have not got it right. We had a welfare-to-work system that got it completely wrong. We are trying to pull it together. I do not think that this is going to be a rapid process but everyone in this room knows that it is very important to get this right. It will take some years to get it right but we are beginning to travel in the right direction.
Baroness Lister of Burtersett
My Lords, I thank all the noble Lords who have spoken in support of this amendment and who have helped to push the Minister slightly further than he had intended to go when originally reading from his brief. I am pleased to know the Minister is not a “work first” devotee. I was going to say, “You could have fooled me”, but his response to the noble Baroness, Lady Meacher, has confirmed that is the case and I welcome the spirit in which the Minister has responded. Even I am beginning to pick up the ministerial nuances to understand that was a helpful response.
My noble friend Lady Hollis helpfully reminded the Committee of some of the exemptions that exist and it is helpful to have on record that those exemptions will continue. The noble Lord said that it is always possible to do training in the evening. If you are a lone mother, trying to bring up children, trying to do your job and support them in their education, and to keep them off the streets, is it realistic to think that you are also going to do training as well? It is asking too much of lone mothers when we already ask too much of them. We expect them to be responsible, in paid work, in education, keeping their kids off the street and so forth. I hope the noble Lord will come back at Report with some response to what the noble Baroness, Lady Meacher, suggested in terms of opening up the potential for the future in the flexibility of this clause.
The noble Baroness also raised a question about the context of government expenditure cuts. It is not clear that this is going to cost very much to extend beyond the exemptions that already exist for this group. It would be helpful to know what the cost would be of doing it now rather than at some future date. Perhaps the noble Lord could let the Committee know. I suspect it would not be very much at all. In the spirit of the human capital approach, I am not sure what the stumbling block is to doing it sooner rather than later. I beg leave to withdraw the amendment.
The Lord Bishop of Bath and Wells
My Lords, I enter the debate with a little trepidation. Like other Members of this Committee, I am sure, a number of letters have been sent to me and various cases put. I have had a particularly heart-rending one, running to several pages as so often these letters do, from someone who has fairly severe mental disabilities, according to the letter, and who has responsibilities at the same time, it seems, for a disabled mother. My understanding of the principle of conditionality at the moment in relation to unemployment benefit is that she could be penalised under this process. I would like some assurance that where severe disability is in place, as it were, we will be sure to safeguard the well-being of such people and that they should not be penalised in these circumstances.
Lord Freud
My Lords, currently when a single JSA claimant is sanctioned we stop payment of the entire benefit, which is usually around £67 a week. Under the universal credit, sanctions will reduce the award rather than stop payment. The amount of the reduction will be set with reference to the standard allowance.
Lord McKenzie of Luton
If the Minister will permit me, is that not simply because the housing component is added in as part of the universal credit? The sanction would not apply to housing benefit currently, it is the core standard amount which is equivalent to the JSA amount.
Lord Freud
Yes, the noble Lord has got it precisely right and I am grateful to him for summarising it for me. Where a claimant is in receipt of the maximum amount of universal credit, that universal credit will not be reduced below any amount included in their maximum amount for housing, children, disability and so forth. However, where a claimant is earning money and has other earnings over the disregard levels, the sanctionable amount will be a fixed amount not dependent on the level of the award. In circumstances where a claimant’s award is less than their maximum amount because of earnings, a sanction could reduce universal credit to less than the additional amounts for children and housing included in it. That, I hope, is obvious from the numerical examples I shared with noble Lords yesterday. Claimants’ other income will offset such reductions.
Fundamentally, the sanctions regime is designed to do what it does currently, albeit within the universal credit structure. We want to create a clearer and stronger system which provides clarity about the consequences of non-compliance and a more effective deterrent against repeated non-compliance. I can confirm to the noble Lord, Lord McKenzie, that the sanction regime and a sanction decision will not be contracted out. Clause 29, headed, “Delegation and contracting out”, does not include sanctions.
Clause 26 provides for higher-level sanctions of up to three years for claimants subject to all work-related requirements who fail to meet their most important requirements such as accepting a job offer. Failures sanctionable under Clause 26 clearly damage a claimant’s employment prospects and it is right that we have strong sanctions in place to deter such behaviour. Amendment 51FZD seeks to limit the duration of higher-level sanctions to one year. I can assure the Committee that we expect that three-year sanctions will apply only to a very small proportion of claimants who have repeatedly breached their most important requirements and where earlier sanctions have not worked to change behaviour.
Lord Boswell of Aynho
If there is repeat offending and therefore a series of sanctions is imposed, can that extend beyond the three-year period as one shades into another or is there a maximum term of three years?
Lord Freud
In the way it is structured, there is a maximum if you are on a particular level. It absorbs the other sanctions, if you like. As to why we have an escalating sanctions regime, the reason is very simple. The current sanctions regime is difficult for claimants to understand. It is important that there is a real escalation so that behaviour is changed. That is why we have created this structure, and why it is different. Also, as people see very evidently what the repercussions of not complying are, as they start to see the costs quite plainly, we do see a change in behaviour. That is why we expect only a small number of people actually to hit the higher level of sanctions.
Baroness Hollis of Heigham
May I add to that? I was going to wait until the Minister finished, but I wish to add two points which are germane to this discussion. First, the noble Lord is assuming—I absolutely understand why he would—that people respond rationally to sanctions. However, the group with whom he may well be dealing are those whose lives are feckless, chaotic and without much shape. In my experience, those people are semi-literate and probably do not understand what is going on when the sanction is imposed. It is just one of those things that happen to them in a passive way, which means that a high obligation is placed on staff, with the aid of easy-to-read literature and all the rest of it, to make very clear what is going on and what the nature of those sanctions are. My experience of people who have been sanctioned is that they do not know why they have been sanctioned.
Secondly—I was waiting to hear the noble Lord refer to this but he has not done so, so perhaps he will go on to do so, in which case I apologise for anticipating him—we have always had a hardship category in relation to sanctions. For example, if you have dependent children the level of sanctions is limited so that, because of your hardship, you are not sanctioned all the way. Disabled people and those with a mental health problem would in my view come into the category of vulnerable people entitled to a hardship adjustment so that their benefit is not completely wiped out. Again, this requires high levels of training and support from the very people who the noble Baroness, Lady Thomas, identified; namely, the disability employment advisers in Jobcentre Plus offices. Perhaps the noble Lord can reassure us on those two points. First, can he assume that people with such chaotic lives will understand the rationality of a sanctions system? Secondly, will the hardship regime apply to some of the people who were identified by previous contributors to this debate?
Lord Freud
My Lords, let me deal with the questions asked by the noble Baroness, Lady Hollis, straight away. Claimants who fail to meet their responsibilities will have an opportunity to explain why they have done so and show good reason before a decision to sanction is made. After a decision to reduce the claimant’s award amount is made and processed we expect that, as now, a letter will automatically be sent to claimants setting out their appeal rights and details of how to request information on why they have been sanctioned. We will also communicate the amount and duration of the award reduction and, in the case of lower-level failures, what the claimant can do to re-engage and bring the open-ended part of the sanction to an end. We will not sanction claimants with limited capability for work, or those who have learning difficulties or mental health conditions, without first making every effort to contact them, their carer or healthcare professional to ensure that they have fully understood the requirement placed on them and had no good reason for failing to meet it.
On hardship, we are addressing the hardship arrangements in a later group but we are looking to maintain a hardship regime which will act in a similar way, although we will probably make some adjustments to it. However, we can discuss that a little later. I should clarify the point about the overlapping of different sanctions. Where a claimant subject to one sanction receives another, both sanctions run concurrently with one reduction suppressed. This means that for the period in which two sanctions overlap, the second sanction has no impact, as I said earlier. Under universal credit, where a claimant subject to one sanction receives another, the period of the second sanction would be added to the total outstanding reduction period. A claimant’s award amounts would be reduced for the entire duration of both sanctions. This ensures that claimants will always face the full consequences of failing to meet their responsibilities. There will be a change from the current system to the universal credit system. I apologise if I slightly misled the Committee on that.
Amendment 51FZZA seeks to prevent the imposition of higher-level sanctions on disabled claimants until such time as a disability employment adviser has been consulted. First, I assure noble Lords that we recognise that high-level sanctions of up to three years are not appropriate for all failures. Disabled claimants with limited capability for work will not be subject to requirements that are sanctionable at the higher level. Clause 27 provides for appropriate sanctions for failures that should not be subject to high-level sanctions, such as failures to attend a work-focus interview or a training course.
Disability employment advisers play an important role. I will pick up on the point made by my noble friend Lady Thomas. I hope that my answer will get to the nub of her acute question. The role of disability employment advisers is to assist claimants with a disability or health condition who need extra support to gain or retain employment. It is decision-makers who will look at all the available evidence and consider whether a sanction should be imposed. It is right that we should retain the clarity of roles in the system. I will not talk about the training of disability employment advisers because it is not strictly relevant in this context. If the noble Baroness would like a letter describing it, I will write to her, but it is not the point here. What matters is the training of the decision-makers. They will receive in-depth training. This will include how to assess evidence and determine whether a claimant has demonstrated good reason. Where necessary, decision-makers may seek additional advice from specialists, including medical professionals, with the consent of claimants.
Lord Boswell of Aynho
As I read my noble friend, he is saying that if a decision-maker were considering the case of a person subject to a sanction, the representations made by that person about the problems they had in complying with their programme would automatically be taken into account, even if they were rejected on their merits by the decision-maker.
Lord Freud
I thank my noble friend for looking for clarity. There is a layer of protections here. We have a highly trained decision-maker with a specific job of making the decision. Also, the claimant can look for reconsideration within that office. Beyond that, they can look to reduce a sanction by going to an independent tribunal. There are layers of protection. The objective is that claimants who demonstrate good reason will not be sanctioned.
We will also maintain other protections. One is that we will continue to visit the homes of claimants with limited capability for work and a mental health condition or learning disability, to help us understand why they did not meet their requirement.
Baroness Howe of Idlicote
My Lords, I remain worried by the point that was raised about a basic understanding of what I call the coalface: in other words, when you are in a face-to-face situation. It is important to have some training and understanding, not least in the example that the Minister gave of a well known and common complaint. It worries me that this will be dealt with by experts at various levels of appeal rather than being sorted out much earlier in the process.
Lord Freud
My Lords, it is important that the coalface does not do the sanctioning. It is important that there are really well trained people doing this. This is a complicated area that needs to be got right. These are some of the most highly skilled people in Jobcentre Plus aiming to do that with all these supports.
In response to the concerns raised by the noble Lord, Lord McKenzie, on Amendment 51FB, I want to make it absolutely clear that there are no benchmarks and no targets for sanctions referrals. Jobcentre Plus gathers a range of management information to support its work, as you would expect us to do. On the issue of numbers, over the last year, the number of sanctions and disentitlements rose by around 270,000 from approximately 490,000 in 2009-10 to around 760,000 in 2010-11. There are a complex range of reasons for this increase, including the introduction of new requirements, a slight increase in the average claim duration and a refreshed approach to monitoring compliance with requirements designed to maximise claimants’ chances of finding work. A particular reason is due to the 2010 rule change that led to a sanction rather than disentitlement for failing to attend an employment interview. The number of sanction referrals to decision-makers is a key piece of management information. It helps local mangers assess how consistently JSA conditionality and sanctions are being administered in their area. Managers may compare rates of referrals across different areas when analysing the data, but there is no benchmark and certainly no right or wrong level of referrals. The collection of management information also allows the department to monitor and evaluate the impact of sanctions. I urge the noble Lord, Lord McKenzie, to withdraw the amendments.
Baroness Lister of Burtersett
My Lords, my attention may have strayed, but did the Minister answer the question of the noble Lord, Lord Boswell, about the reports over the weekend that fines deducted from benefits are going up to £25, which seems to be a draconian response in the context of the riots in which we read about it? Is this something that can be done by regulation, or will it be an amendment to this piece of legislation? It is an issue about which some of us are very concerned.
Lord Freud
My Lords, the press reports were about the level of deductions to pay fines and whether the current limit was right for people who had committed a crime and been fined. Although this is breaking news, this is not an area I am confident we will consider in this particular Bill because it is about fines. It is not a matter today that we will need to consider.
Baroness Sherlock
My Lords, I want to ask the Minister two questions. The first is related to the questions asked by my noble friend Lady Lister and the noble Lord, Lord Boswell. I remind the Committee that I am a member of the Communities and Victims Panel looking at the impact of the riots, although my question is not specifically about the riots.
On the question of fines, what account can be taken of any fines the claimant may be committed to paying when making a decision to sanction the benefit. For example, it may be the intention to only sanction or remove the standard element but if the household is already committed to paying fines, inevitably that is going to be taken out of elements that are intended for children or housing, so the effect will be to eat into those. Could the Minister explain how that will be taken into account?
The second question returns to what I think I heard him saying in response to my noble friend Lord McKenzie in relation to the final amendment in this group. I believe that he said there would be no targets or benchmarks for sanctions. Could he reassure the Committee a little further? Are there any targets, performance indicators, measures or benchmarks that would have the effect of incentivising an increase in the number of sanctions? I would be happy to repeat that if it would be helpful.
Baroness Sherlock
I am not sure I can, frankly, but maybe Hansard can. I talk too quickly even for myself sometimes.
The Minister was kind enough to say in response to my noble friend that there were no targets that were designed to incentivise an increase in the number of sanctions. Are there any targets, performance indicators, measures or benchmarks—he will know the language better—that would have the effect of creating an incentive to increase the number of sanctions? The Minister probably knows what I am getting at; one does not have to be directly incentivised to sanction people. If, for example, there were pressure on the department to reduce either the number of people claiming certain benefits or the cost of the programme element of the budget and therefore the cost of those benefits, one way to achieve that might be sanctions. I am not suggesting that they would do so but inevitably, once there are measures, someone responds. There might be other ways of doing that. Could he answer that for us?
Lord Freud
I shall deal with the second point from the noble Baroness, Lady Sherlock, first. The point that noble Lords are concerned about is whether we are going to have any more private traffic-warden incentive systems—that is the issue. That is why noble Lords are concerned that we do not incentivise people to “clamp” claimants. I make an absolute assurance that we understand how unacceptable that is or would be, and we are determined that there will be no incentivisation in Jobcentre Plus to sanction. We have trained our advisers—the decision-makers, rather—to make these decisions in as neutral and considered a way as possible, in the interests of changing the behaviour of the individuals to make them do something that in the end will be of benefit to them. Getting them into a job is vital, and we are keeping the regime of conditionality. I make that assurance to noble Lords.
On the noble Baroness’s second question—or rather the first one, if I learn to count—we are able to vary the rate of recovery depending on personal circumstances so we would be able to take that into account and, conversely, courts would be able to take that into account.
Lord McKenzie of Luton
My Lords, I thank the Minister for his detailed response. I am comforted—indeed, I recognise some of the script—about the protections that are in the system to support disabled people, people with mental health problems and particularly those with fluctuating conditions; that has been a long-running theme in our debates over a number of years. I accept that the disability employment advisers are not necessarily the right people to do this, for so long as there is capacity in the system, it is part of the process.
I also accept what the Minister says about no targets or any other incentives to encourage sanctions, but we are entitled to a better explanation of what I understood the figures to be: last year the number of people sanctioned was 490,000, while now it is 760,000. Something is happening out there, is it not? The schedule that I have, which was a Parliamentary Answer that looked at the 40 per cent increase over that period—March 2010 to September 2010—is headed “Sanctions and Disallowance Decisions”, so the switch between sanctions and disallowance that the Minister prayed in aid does not seem to have affected that outcome. It is, in anyone’s language, quite a dramatic increase. We should remain very worried about that. I accept the point that my amendment in relation to people with disabilities was focused on Clause 26 but it is within Clause 27 that their work-related activity falls.
Could the Minister also take us through the various sanctions and say in respect of each what happens to conditionality while the sanction is being applied? Is there an ongoing obligation to comply? What is the sanction if you do not? In what circumstances can those sanctions be switched off—and which of them can be—by re-engagement and rejoining conditionality by individuals? Particularly for the longer sanctions, if there were no obligation to engage in conditionality over that period, what ramifications would that have for, for example, on the job programme? Could the Minister let us have his views on that?
I was going to raise the issue of the £25 additional possible deduction in relation to the next amendment on hardship payments and may revisit that. The Minister made reference to people’s rights of reconsideration and appeal. How would he judge the impact of the impending changes to legal aid cuts, where there will no support to go to an independent tribunal because legal aid for help in welfare benefits is being removed entirely? What compensating arrangements are proposed to address that quite vital withdrawal?
Lord Freud
First, one of the drivers of the increase in sanctions was the introduction and phased roll-out first of the jobseeker’s regime and then of flexible New Deal. In one way, we are looking at the history of some of the changes made by the last Government. Secondly, conditionality still applies through the sanctions regime.
Next, the noble Lord asked for a breakdown of the different sanctions regimes. That is rather complicated. I can send him a table of that, rather than going through it in great detail. The summary is that the lower-level sanctions switch off on compliance. Those are one-week to three-week sanctions—rather short by comparison with the higher-level sanctions. Those are essentially grouped around the more vulnerable people. They take those and when they start to comply the sanction comes off and there is a short period. I should remind your Lordships that the table I suggested is sitting there in front of the noble Lord. It is beautiful that he is so far ahead of me. I will not go through that in entire detail. I remember that it took a long time to assemble that table. I spent a lot of time on it.
On legal aid, the point is that one does not need legal issues to be debated here with all the paraphernalia of a legal case. These are practical, fact-finding tribunals where, in our view, one does not need that paraphernalia. It is not particularly helpful.
Lord McKenzie of Luton
Will the noble Lord accept that people in those circumstances may need advocacy, which is being withdrawn?
Lord Freud
My Lords, they may need advocacy but they can find supporters and bring them along. However, it is not a legal process; it is a fact-finding process.
Baroness Hollis of Heigham
Did the noble Lord say that for somebody who was sanctioned, for example by the removal of benefit for three years, conditionality will still apply while the sanction operates? How will it apply if there are no benefits left to sanction?
Lord Freud
We would still expect them to comply with the conditionality regime.
Baroness Hollis of Heigham
That might be the expectation, but how would they be sanctioned?
Lord Freud
This is an extraordinarily small group. In extremes, we would look to run to more sanctions on top. I described how sanctions would work concurrently. We are looking at a sanctions regime that will replace the current regime, which states that people are not entitled to JSA because they are not complying at all with their conditions. In some ways it is a rather lighter regime than the current one.
Baroness Hollis of Heigham
Perhaps I could suggest to the Minister that the most successful use of sanctions is when there is a very close connection between behaviour, the sanction and the ability to lift the sanction by changing behaviour. I urge him to think again about running sanctions for very long periods and still expecting conditionality to apply. Frankly, that is in the clouds. If you are going to change behaviour, you need sanctions that will get switched off if there is compliance for a certain period of time. That is the way to get changes in behaviour to stick, which is what we all want. If it seems that nothing you can do can make any difference for at least two years, nothing will happen.
Lord Freud
My Lords, we are talking about a sanction that, to put it bluntly, is there as a deterrent. We are not anticipating that more than a handful of people will move into that position. One can get overinvolved in what it means. The point of having a regime that builds up is to act as a very powerful deterrent.
Baroness Hollis of Heigham
Will the noble Lord not accept the principle that if you want to change behaviour, you want that behaviour to have some positive effect—namely, to switch off the sanction?
Lord Freud
Clearly, I am interested in behaviour change. However, I would hope that before we get into these regions we will have had the behaviour change. There will have to have been a very bad failure in circumstances where we impose a three-year sanction.
Baroness Sherlock
Perhaps I may try to understand this. I apologise if I have not grasped it until now. Let us assume that someone has refused to co-operate and perhaps has a drug problem that has not been identified until this point. Something happens, possibly even as a result of the shock of the sanction, and they get themselves into a position where they are enabled finally to begin the process of engaging and searching. At that point, will the adviser simply stop the sanction and put them back into compliance? Even at its simplest, if somebody has no income they cannot look for a job, unless it is next door.
Lord Freud
My Lords, we are moving now into the area of ill health. That is where decision-makers come in and look very hard at what is happening. This is aimed at the person who has not got a mental health problem or a chronic illness. We are looking at someone who simply refuses to become part of the regime.
Lord Boswell of Aynho
I am sorry for the Minister being put under, I think, unreasonable sanctions or pressure himself, but I suggest that it might be unwise to get into a situation either where we were softies and were not prepared to take these things seriously or where, in circumstances where someone had been sanctioned, if they were to get into the frame of mind of saying, “There is nothing to be lost; I shall carry on because it’s going to happen to me anyway”. There ought to be at least an opportunity for at least a negotiation on a restart of compliance.
Lord Freud
I think that I can give good news and bad news. There are two issues here. The first is the person who had a disguised problem which then emerges. We have a solution to that: if it emerges that there was good reason, the decision-maker can reverse the position. The bad news is that we do not have a position where, once someone recants, they are forgiven instantly.
Lord McKenzie of Luton
I thank my noble friends for raising additional issues, following on from our earlier debate. My noble friend Lady Hollis seems to have posed a fundamental question which, with respect, the Minister has not fully dealt with. The question was posed to be helpful to the Government, not to try to undermine what they are seeking to achieve.
To the noble Lord, Lord Boswell, I say that no one is talking about being a “softie” in all this. We are upfront; we recognise that sanctions have a role to play in reinforcing conditionality.
The issue about a small group of people who might be sanctioned for three years, with the withdrawal of their benefit unaffected whatever they do in terms of recanting, puts them in a desperate situation. It means that they will be further away from the workplace. I do not know whether they can volunteer or would be involved in the work programme—these are issues that we can pick up in due course—but I urge the Minister to reconsider around this issue because there is something that could benefit the Government in what they are trying to achieve.
Having said that to the Minister and suggested that he might frame his diagram and put it alongside the Pensions Bill that he got last night, I beg leave to withdraw the amendment.
Baroness Meacher
I rise very briefly to add my support to this. Many years ago, I wrote a book about the withdrawal of benefits after four weeks from people who had been in difficulty. The book clearly showed that 90 per cent of them or more went straight into more crime. This is just another obvious, simple situation where that is all that the Government will do. I know that the Minister will not wish that to happen. I plead for him to take this away and think about it.
Lord Freud
We are looking carefully at the system of hardship payments we want to put in place under universal credit. We want to ensure that there remains a financial safety net for claimants who have been sanctioned—that is what hardship payments are about. However, we want to avoid the existence of such a safety net undermining the deterrent effect of sanctions. It is clearly a rather delicate balancing act. I should make the point that, under universal credit, hardship is only available following a sanction, not at the start of a claim. It will no longer be necessary within the structure of universal credit. We are looking at a payment for people who have been sanctioned.
We are still considering how best to achieve this but believe that the ability to make some payments recoverable is one way of continuing to support those most in need while ensuring hardship payments are not seen as a simple replacement for sanctioned benefit. In other words, we want to make sure that sanctions continue to keep having an impact. We are still considering our approach to recovery that will ensure adequate safeguards are in place. This includes the arrangements in more complex situations of the kind the noble Lord, Lord McKenzie, pointed out, such as when a couple has separated. Regrettably, I can not give hard answers to his, as usual, specific and beautifully placed questions. Those are issues that we need to address and are addressing.
Lord Freud
At the risk of being a little repetitious, I will try to summarise. Obviously, hardship payments are there to ensure that claimants and their dependants are not left in hardship as a consequence of a sanction. We do not want the existence of those payments to make people feel that they can ignore their responsibilities. That is why we are looking at what reform we can make to the current system. We will continue to provide the safety net for claimants and their children.
Lord McKenzie of Luton
My Lords, I welcome the Minister's response. I think it indicates some going slow on the issue, and that is the right course of action. The Minister said that there had to be a financial safety net for individuals. I certainly agree with that. If the financial safety net is 60 per cent of the basic amount, just under £40, I suggest that there is really no room to pursue any repayments of the hardship payment. The noble Lord's assertion that they would not start until after the sanction period had ended is to be welcomed, but that rather reinforces the point made by the noble Lord, Lord Kirkwood. It is all very well for the Prime Minister out in Australia to make great pronouncements about docking £25 from people's benefits. That is another example—we see too much of it from some members of this Government; although I certainly do not include the noble Lord in this—of using those sort of issues to get headlines and to berate people on benefits. That is deeply unpalatable.
Lord Freud
I cannot let the Prime Minister go undefended. He was emphasising the fact that unless a financial penalty for a crime actually hurts the person and has the impact of a punishment, it is not doing its job. He is concerned that the very modest rate of £5 a week is hardly an impact. Although I glow with delight at the separation that the noble Lord is trying to put between me and notional hard statements, I must say that the Prime Minister is clearly right in this matter.
Lord McKenzie of Luton
The noble Lord is secure in his position but, to be honest, he is anyway, given all the good work that he has done on the universal credit. Five pounds may not seem very much, but if, because you have been sanctioned, you are down to 40 quid a week or less, £5 will be very difficult to find; £25 impossible. We ought to have this debate at a much more mature level. Having said that, I beg leave to withdraw the amendment.
Lord Kennedy of Southwark
My Lords, when I spoke at Second Reading, one point that I made was my deep concern that there could be considerable problems, considerable hardship caused to people if changes were made that were not thought through properly. Many noble Lords who spoke at Second Reading and who have spoken during Grand Committee have been clear about their support for the principle of universal credit, and I am one of them.
The noble Lord, Lord Freud, will be aware that I have asked a number of Written Questions on these matters. My amendments in this group are intended to ensure that there is some form of piloting of the proposals, so that we can assess their effect and make informed decisions having looked at the reality of what is happening on the ground.
I still have considerable concerns, but I was very pleased to see, first, the Minister himself opposing the question that Clause 30 stand part of the Bill and then the amendments he has tabled; Amendments 56A and 69A. It would be very sensible if we moved on to consider those and probed the Minister's proposals in this group. They are a welcome step in the right direction. I thank him for that and I am very pleased. They may need further refinement, and I am sure that we will have more to say about that in Grand Committee and at Report on the Floor of the House.
I leave it there with a view to quickly getting on to the Minister’s proposals. I am sure that that is what the Grand Committee wants. I beg to move.
Lord Freud
My Lords, we will ensure that the full universal credit system is extensively tested with claimants before the new benefit is introduced. However, this will not take the form of a pilot scheme as this would add extra costs and delays to the introduction of universal credit. It is vital that we are able continuously to test, improve and evolve the universal credit system after it is introduced. It is key element that we should have the flexibility to respond to change and ensure that the system does not stagnate while the world develops around it. The amendments I tabled will achieve this constant evolution.
The original wording of Clause 30 provided for piloting measures only to see if they would improve a claimant's chances of entering work, or of finding more or better-paid work. While this is a key objective, universal credit will also simplify the benefits system, improve work incentives and change behaviour. Amendments 56A and 69A will ensure that we are able to test approaches that cover these wider principles.
If we are to ensure that we have the flexibility to develop and continuously improve universal credit, we must ensure that piloting can also include the testing of changes to the structure, design and delivery of the benefit. The ability to run controlled pilots of tests—for example, of whether advances in technology could improve the structure or delivery of universal credit—will be a fundamental part of the evolution of the benefit and of its ability to remain responsive to claimants' needs.
I will add that the inspiration for this measure came from thinking about what happened to NHS hospitals when they were brought into state control in 1948. Their service levels were almost frozen. It is vital, with a big state system, constantly to move, change and evolve it. This is the mechanism to ensure that we have a responsive system. If we do not have this kind of power, we could find ourselves with a system that is perfectly in tune with what we require in 2011 but by 2030 is absolutely out of touch with what society needs.
I recognise that any pilot must be transparent and timely, which is why the clause includes a number of safeguards. For example, we have time-limited each future pilot scheme to three years. Through Amendment 69A we will ensure that any pilot regulations will be subject to the affirmative resolution procedure. I hope that noble Lords on all sides will support this enthusiastically, and I urge the noble Lord to withdraw his amendment.
Lord Boswell of Aynho
My Lords, I warmly support the arguments of the Minister. Might I have an assurance from him that as the past record of the department—no names, no pack drill: I suspect that it is a political sharing of honours, or dishonours—shows that it has sometimes anticipated the results of pilots by introducing substantive schemes before their conclusion, he will at least start with the working assumption that the pilot will come first, then the evidence, and the decision thereafter?
Baroness Hayter of Kentish Town
My Lords, the Committee will know that my noble friend Lord McKenzie and I have added our names to this amendment, but we are delighted that it has been overtaken by the Minister’s own amendments. I am getting a bit of a record for doing this. Last night I commended the Government on their move on the Housing Ombudsman, and I am doing the same today. However, I have a couple of questions. Whether this is to be piloting or testing throws up exactly what I wanted to ask: what is the purpose of each of these pilots? Are they to test whether the principle of a particular part of the Bill is right—in other words, that the aim of each part of the Bill is being met—or are they simply to determine how best to implement each proposal?
We always welcome piloting and testing of whatever it may be, but the exact purpose of a pilot needs to be absolutely clear at the start, particularly for those who have to design and implement it, as well as for all the participants and evaluators. What is the pilot meant to achieve, and therefore how should it be monitored and evaluated? That is because whether it is simply to find the best way of making something happen or to see if the idea behind it is right is quite an important distinction.
We hope that the Government will be confident enough not to assume automatically that what they think will work, will work—whether to incentivise people or to simplify systems—and that they will use these pilots in order to test the assumptions underpinning particular proposals in the Bill. That means being confident enough to design the pilots accordingly to see whether the particular objectives behind the proposals in what will by then be the Act are being met. That is asking quite a lot of a Government. We are saying, “Are you confident enough and in a sense big enough to be able to call it a day if the end results of any particular pilot call for a big re-engineering?”. I believe that pilots of this sort will be worth their weight in gold to the Government in financial and administrative terms and to claimants, landlords, employers, carers and providers, all of whom are going to be affected by different parts of the legislation. The pilots can play a role in creating the sort of welfare system that is able to meet the demands made of it. We would ask the Government to be as adventurous as they can with these pilots by putting the difficult questions. Also, following up on what my noble friend Lady Hollis said, the results should be transparent.
Who is going to oversee the design and delivery of the pilots? Who will decide, under subsection (5)(b) of the proposed new clause, that pilots may be replaced or extended, and on what grounds? To whom will the evaluators report? That is more or less the same question as that posed by my noble friend Lady Hollis. How will Parliament be able to ensure that the lessons from such pilots are learnt?
Lord Freud
I thank noble Lords for their support. At this stage we are taking legislative powers in order to be able to do this. How it is done is something that we will actively develop. I will tell noble Lords what I think we should be doing without necessarily locking down that that is to be the process, because we have not developed it.
Universal credit is the most amazing social science laboratory that I suspect we have ever seen, and I wonder how many other people will see it. Under universal credit you can change different aspects of people’s support.
As such, it needs a unit built in which is constantly looking at how to improve it and optimise it or to adapt it to different circumstances. I anticipate, in answer to the question from the noble Baroness, Lady Hayter, that we would have a series of real questions. Many of the questions raised by noble Lords in the Committee—should we have a second earner disregard; should we have a lower taper; what happens when you move disregards up or down?—are real, basic questions. They are all being put in the form of amendments, but here, we can have a series of tests of different aspects, or tests in combination, to find out what really optimises the system. Clearly, it is impossible to get it absolutely right first time. No one would claim to do that, but this is an architecture which would allow us to optimise it.
The Deputy Chairman of Committees
My Lords, I think that all the important people are back.
Lord Freud
I think that I had completed everything I need to say about these piloting powers and ask the noble Lord to withdraw his amendment.
Lord Kennedy of Southwark
I thank the Minister for his response. As he says, it is important that we are able to respond to changed situations—that certainly is progress—but we still have some way to go. I agree with the comments made by my noble friends Lady Hollis and Lady Hayter, and by the noble Lord, Lord Boswell. The integrity and transparency of the process is paramount. As noble Lords have said, it is possible that what comes back will not support the aims or proposals of the Government. With that, I beg leave to withdraw the amendment.
Lord Freud
My Lords, we learn more every Sitting. We learn that the mother of the noble Baroness, Lady Hayter, is really a Conservative, and therefore that she is. We had the admission the other day from the noble Baroness, Lady Lister, that she actually was a Conservative. I can only say: “You are very welcome back any time; I would prefer you to come back very soon”.
I know that the noble Baroness was mathematically challenged over the past week. I can offer only my noble friend Lord German, whose ability to sort out the sums of Labour politicians is now famous; I am sure that he will help her sort everything out.
I have to be absolutely clear about the date when October happens. October happens when the Committee gets towards the PIP clauses. That is the definition. The fact that that has moved is due only to the extraordinary assiduity of Members of the Committee, for which I know that we are all grateful.
I should just deal with the council tax, which strayed into this. It is not possible to analyse how different tapers will work because we do not know how the council tax will work. We will find that out. One issue behind any restructuring is that we are determined that it will not undermine work incentives; in the universal credit, we are dealing with that by enlarging the disregards.
I must pay tribute to carers. I want to put on the record that they do a terrific job. We know that, and we have been very conscious of it as we develop the universal credit. Taking Amendment 52B first, we have looked at how we support carers. Rather than going through the complexity of the separate disregard route, we have provided an additional element that is included in the gross amount of the universal credit for carers. That is a change from carer’s allowance. This additional element will not be withdrawn when the claimant’s working hours pass a particular threshold, which is what happens now. Instead, the claimant’s award will reduce gradually as earnings increase due to the effect of the single earnings taper.
The structure of earnings disregards in universal credit is not the same as that in current out-of-work benefits. We do not propose to carry forward the weekly £20 disregard that applies to carers in income support currently. In practice, many carers will receive an earnings disregard that is higher than £20 because they are lone parents or members of couples or if they or their partner are disabled. All carers will have the earnings taper applied to earnings beyond the relevant disregard. These measures will significantly enhance work incentives for carers in the vast majority of circumstances. We have taken the decision to standardise the provision for single non-disabled people in universal credit so that all claimants in this group will have £700 of their annual earnings disregarded. Simplifying measures such as this are essential if universal credit is not to replicate the complications of the current system, which breeds confusion and error for both claimants and administrators.
Baroness Hollis of Heigham
My Lords, I am following the Minister with as much attention as I can muster on a very complex subject. We share and appreciate his remarks about carers, of course, but does he not recognise the difference between a single person who may, for example, be a young man going into the labour market with an earnings disregard on his universal credit and the situation of a carer who may be caring for 40 hours a week and therefore has limited opportunities for work? If she does not have a disregard, it will actually not be worth her working at all, but the level of her caring responsibilities, although they do not qualify her for CA, will mean that she is unable to meet the work conditions and earn a living. What would the Minister have her do?
Lord Freud
My Lords, I turn to the example raised by the noble Baroness, Lady Lister. With great skill she has found precisely an area of loss within a general position of substantial improvement. Let us take a single non-disabled carer. If they work between roughly two and five hours at the national minimum wage, they may have a marginally lower net income as a result of this structure. The maximum possible reduction in those circumstances is around £4.25 a week, which is in line with the noble Baroness’s example. But at only marginally higher earnings, work incentives increase significantly under universal credit. For example, at only eight hours a week, such carers would be over £5 a week better off, and at 12 hours a week they would gain nearly £15. So there is a stronger incentive to get back into work than the flat £20 flat disregard in income support.
I shall pick up the point made by the noble Baroness, Lady Hayter—
Baroness Hollis of Heigham
I still do not understand how she could be expected to add those hours of work to her hours of caring, even though the hours of caring do not qualify her for CA. Therefore you invoke not just four, six or eight hours, but full conditionality.
Lord Freud
You do not when there are caring responsibilities. We have discussed this. There is a responsive set of conditionalities for people who have other obligations. If you exclude people with very few hours—many will do those few hours for rather more than the minimum wage—they are actually much better off than under the current circumstances because we have done it through addition rather than as an extra disregard.
The noble Baroness, Lady Hayter, said that an estimated 50,000 carers will be worse off under the universal credit. That is not correct. That figure was an estimate of the number of single and non-disabled benefit claimants who are carers. Only those whose earnings fall within the very narrow band of two to five hours at the national minimum wage could experience a very slightly lower income under universal credit.
I turn to Amendment 52DB. The universal credit is designed to help improve work incentives to break cycles of worklessness. A couple will jointly benefit from a single earnings disregard set at the highest amount to which either person is entitled. In practice, this may mean that only the earnings of the first earner are disregarded. Given the financial constraints within which we are delivering universal credit, it is best to focus on the clear aim of reducing worklessness for the household as a whole rather than spreading the available resources among different earners in one household.
To revert back to an earlier amendment on piloting, this is clearly something that we can test. If that gets a better result, it can be changed when a Government have adequate money. This is not a matter of principle but of affordability. We estimate that if couples who were both in work were entitled to—
Baroness Meacher
Again, will there be flexibility within the legislation? As the Minister said, if the Government pilot this and find that the taxpayer is losing more money because fewer of these second earners go out to work, he will want to introduce a second disregard. Will there be the flexibility within the legislation to enable the Government to do that?
Lord Freud
Absolutely. We are discussing a framework piece of legislation that will allow us to bring in the regulations. I am sure that next year many of us will discuss the detail of this for many months. It is an introductory, not a locked-in proposition. I have tried to explain, and hope that I have explained, that this system is an architecture and it can roll and improve. We may find in many areas that a change will pay for itself in its own terms, both in what the benefit system costs and the benefit to the economy. We will be able to test those propositions. A lot of what I talk about when we lay out the structures is simply what is affordable within a very difficult financial environment where we have had to put a proposition that we can float and that works. I have made the point before that that is within a context where we are injecting £4 billion into the pockets of the poorest people. Every time someone says, “Do that” or “Do the next thing”, they are adding to that figure. We can either take something else away or provide that. That is where we have come out. Later on, when the financial situation is more suitable or we establish that changing something pays for itself in its own terms, we can make changes and improvements. I labour the point only because we can spend a lot of time arguing whether this is better than a disregard or addition. The answer is that none of us knows but I hope that in the medium term we will.
In the example, we estimate that if couples who are both in work were entitled to an additional disregard of £700 a year, the cost would be £240 million. If the disregard was £1,000 a year, the cost would be £350 million. This is real money. We took the decision that it would be better spent, for instance, on childcare, where we had to find an extra £300 million. In current out-of-work benefits, there are no additional disregards for second earners. Similarly, working tax credit makes no additional provision for second earners. It is true that members of a couple may qualify for the disability elements of working tax credit if both are working and disabled. Equally, when a disabled person is not in work, no disability element can be paid. Indeed, working tax credit may not be payable at all.
I turn to the proposal that lone parents, disabled people and second earners should receive the sum of two earnings disregards if their circumstances entitle them to each, rather than the higher of the two as we propose. Many people on low incomes will have substantially more support under universal credit because of the earnings disregards that we propose. The standard weekly disregard in current out-of-work benefits for these groups is only £20, after which benefit is withdrawn pound for pound. Some people on employment and support allowance may benefit from the permitted work rule with a disregard of up to £95 per week. However, this provision is available only for one year, after which the disregard returns to £20 for most claimants. Crucially, earnings disregards are not added together in current out-of-work benefits.
In working tax credits, various elements can be added together. However, that does not differ from the way elements in universal credit build up to a total award. The earnings disregards in universal credit are more generous than those in the current system for lone parents and disabled people, helping in particular those working a small number of hours. For instance, a disabled person working 12 hours a week at the national minimum wage will be more than £50 a week better off, and a lone parent will be more than £60 a week better off in work because of the disregards in universal credit. This will provide a stronger incentive to work than exists in the current system.
For most people claiming universal credit, the main financial incentive to work will be provided by the taper. Our proposals for a structure of disregards are intended to provide an additional incentive for those who need it most. If additional funding were available, we would need to consider the taper as well as the disregards. Adding together two or more disregards simply because the claimant falls into a number of categories would be inconsistent with the approach that we have adopted. If the earnings disregards worked in this way, we would not have the funding to set each at the level that we have. Universal credit must be delivered within the financial envelope we have available. I hope that this explanation will persuade the noble Baroness to withdraw her amendment.
Baroness Hayter of Kentish Town
My Lords, I will raise a couple of points—and not simply to defend my aunt. I said that she worked at the Conservative club. She was the barmaid and cleaner. The noble Lord is very lucky that she is no longer with us.
Lord Freud
I shall try to answer the questions. To pick up the point from the noble Baroness, Lady Hayter, there is not an impact assessment on carers, but if we are talking about an entire universe of 50,000 and then we have to narrow it down to this very small group who are working two to five hours at national minimum wage, we are talking about a very small number. Do not forget that there is an element of the system that people change behaviour to fit around. You can see the encouragement here, as I was showing noble Lords, to start earning a little more than the five hours. The reality is that this is a very small impact. There are winners and losers all the way through the universal credit because we are putting in a new system.
To pick up the question from my noble friend Lady Thomas, the tax credits will no longer exist once the universal credit is introduced. As we stated in the revised policy briefing note—she has spotted this with her eagle eye—we aim to have a single assessment as the gateway to limited capability for work elements and the earnings disregard for disabled people. This assessment will be based on the work capability assessment and we are considering that this process may need to be modified in the context of the universal credit. We will have a chance at a later stage of the Bill to discuss the WCA in a little more detail.
Baroness Hollis of Heigham
The Minister has been very full in his efforts to answer our questions. Could he have his staff prepare for us one of the very helpful briefing notes that we have had on the situation of carers in the various scenarios that have been outlined over the past few Committee days—carers who are one of a couple, single carers, carers who may be able to work a few hours, carers who are not on CA and are therefore exposed to work conditionality, and carers who are on CA? That is eight or 10 possible permutations, and that would be helpful. This is before we get to council tax benefit and its screwy effects on the whole system. It would be very helpful if the Minister did us a briefing paper as soon as was practicable on the situations that carers could find themselves in.
Lord Freud
I cannot absolutely commit to that, mainly because I have a department working at full tilt. However, I will look at whether that is the kind of work we can do without disturbing all the other demands on people’s time.
Baroness Hollis of Heigham
I am grateful to the noble Lord because it is an issue that is dear to their Lordships’ hearts.
Lord McKenzie of Luton
My Lords, I support the very powerful case that my noble friend Lady Donaghy made, and what the noble Lord, Lord Wigley, said. The case of self-employment is clearly very substantial. My noble friend Lady Donaghy spoke about two issues: how the self-employed should be treated, and the problems of those who are not technically self-employed but who are treated as such. I confirm that my noble friend wrote a very important and powerful report that she presented to the DWP. It gave the Minister at the time a lot of food for thought, from which he has not totally recovered.
I will press the Minister on a couple of points that my noble friend raised. What will the process be for self-employment? Will it be based on the accounting profits of the business or on the tax profits? The noble Lord will be aware that they do not necessarily amount to the same thing in the same time period: for example, because of depreciation allowances for plant and machinery. How will that work? For example, if a start-up records a loss in year 1, that will be a zero rather than a minus for universal credit purposes—but does the minus get carried forward to year 2 to reduce year 2 profits? Generally it would be for tax purposes, but will it for universal credit purposes?
The period of assessment that will be taken into account—the reporting process for self-employment—clearly is a significant issue. I am very unclear about the plans, and in particular whether they will specify tax profits or profits computed for tax purposes. Obviously over time the two ought to align, but they will not necessarily align in the same period. How they are treated for universal credit purposes will be of significance.
Lord Freud
My Lords, after spending four years writing the Lex column, I am absolutely aware that I cannot answer the question of the noble Lord, Lord McKenzie, off the top of my head. The definition of profits is a knotty and complicated issue that he is absolutely right to focus on. We need to get it right after detailed consideration. Of course it is a long-standing policy that people should be treated as having income or capital in cases of deliberate deprivation. This will continue under universal credit. However, we also think that it is right in principle to apply a minimum income floor to claimants who choose to be self-employed but whose earnings do not make them financially self-sufficient. Because universal credit is a benefit for people in and out of work, the issues around self-employment are different from the issues faced in the current system.
The Deputy Chairman of Committees (Viscount Ullswater)
My Lords, there is a Division in the House. The Committee will adjourn for 10 minutes.
Lord Freud
My Lords, because universal credit is a benefit for people in and out of work, the issues of self-employment are different from those faced under the current system. We need to have clear rules—in particular, on when conditionality requirements do or do not apply to people who are working for themselves and so have a degree of control over their hours and earnings.
Clearly, we need to avoid requirements that will add unnecessary burdens, especially for people who are starting out in business, but we cannot have a situation where people can be treated as being in full-time work for the conditionality purpose but, because they declare no earnings, receive as much benefit as if they were not working at all.
I appreciate that noble Lords have many questions about the detailed rules on the treatment of self-employment income. This is a complex area and we are still working through all the details. The experts in this field are in HMRC and we are working closely with them to develop our proposals. I can confirm that the level of assumed earnings will not be based on the number of hours that the claimant works. Instead, we would assume that a claimant’s earnings are at the level we would expect of claimants with similar circumstances in employed work. In response to the question by the noble Baroness, Lady Donaghy, and the observation of the noble Lord, Lord Wigley, this includes whether they are disabled. As part of our work with HMRC we are considering the assessment of self-employed earnings. It will be important to determine which rules from the current benefit and tax credit systems give the most appropriate framework for universal credit.
The rules on the treatment of self-employed claimants will be set out in regulations and the Bill provides expressly that the regulations on the minimum income floor will be subject to the affirmative procedure in the first instance. The House will have the opportunity to scrutinise the details in this area at a future date.
With regard to the noble Baroness’s amendment, the wider application of notional income capital rules rightly considers whether the claimant has manipulated their income in order to become eligible for universal credit. We believe that different issues arise in relation to self-employment and it would not be right to limit the scope to assume a minimum income in this way. I hope this explanation will allow the noble Baroness to withdraw the amendment.
Lord McKenzie of Luton
My Lords, I wonder if the Minister can help us further. In a situation where you have a start-up, where an individual sole trader is working all the hours there are to make a success of the business, doing all sorts of groundwork that often needs to be done, how is an assessment going to be made by the department that this is insufficient? What judgments are going to be made and how is that going to proceed?
Lord Freud
My Lords, the noble Lord makes a very important point and it is related to the point of the noble Baroness, Lady Donaghy. There are two areas where we will have to have specific rules. First, in the start-up phase, what are the rules for that and how long does one allow for it? Secondly, in the period when something goes badly wrong, when you have had a business going very well with profits and then you have a sudden collapse, what do you do about that period? That was the example that the noble Baroness, Lady Donaghy, raised. Those are two of the issues that we are looking at very closely and how to get that right.
One of the things we want to get out of this is the most business-friendly suite of support that we can put together. In this sense, working tax credit for the self-employed does become a support for entrepreneurial endeavour, tied with other support for new business such as the new enterprise allowance.
Lord McAvoy
My Lords, on the small businesses aspect—and I declare an interest as I am “lucky” to own a public house although I am a teetotaller and they are closing down all over the place in Scotland—
Lord Freud
My Lords, I am looking forward to my invitation to the McAvoy public house. I hope that it is called “The Lord McAvoy” with a nice—
Lord Freud
And I hope that it has a nice picture of him. I look forward to going there.
Lord Freud
The basic way to get information from the self-employed is this: they will put in the information in the universal credit system, or an equivalent system, which will potentially match up later with the information that they provide either to the VAT authorities or to HMRC. There is a process of reporting.
To get back to the point, there is an opportunity to provide real support for entrepreneurial business, but as the noble Baroness, Lady Donaghy, so shrewdly said, we must not be an open cheque book for people who are not running genuine businesses. We need to get that right.
Baroness Hollis of Heigham
Something has been puzzling me. We are talking about self-employed as if it were a self-employed single person. What happens if you have a small family business—not quite the corner shop—where the income from that self-employed business in which the partner, say the wife, is doing some part-time book-keeping, answering the telephone, and so on and contributing to fairly low profits? How will you assess whether conditionality applies to her?
Lord Freud
My Lords, universal credit is particularly well suited to that situation because it is a household income. We will have rules on the two benefit recipients in a two-person household, so we should be able to adapt to that reasonably straightforwardly. Clearly there will be circumstances when one person is in paid employment and the other is self-employed, and we need to mix that. We are working on defining all those situations so that we can make universal credit work appropriately.
Lord Wigley
To follow that point through a little, I understood that the intention was not to take the circumstances when one was in paid employment, but when both might be employed or self-employed in their business and both getting their income. Presumably there would need to be some attention to those rules as well.
Lord Freud
My Lords, I am sorry. I probably broadened the point that should have remained narrow. When two people are working on one endeavour, because universal credit is a household payment, it can accommodate that without any distortion.
Lord McKenzie of Luton
I do not usually come to the Minister’s aid but if you have two people in business together, that would be a partnership and you would typically look at each person’s share of the profits and presumably aggregate those if they are part of the same household, not if they are in different households.
Lord Freud
My Lords, this is one area where a single earner disregard makes life rather easy. I hope that we will be congratulated on that structure.
Lord McKenzie of Luton
Can I just make one other point? It is wrong of us to press the Minister as I know that this is embryonic and a lot of work is going on. If the process is to be some early report in that has to be assessed against what is eventually a tax assessment or consistent with VAT accounts, that sort of presupposes that there has to be some look-back or process of adjustment—in a sense the tax credit-type arrangement, which is quite different from the real-time earnings for employed people. Does the noble Lord envisage that as part of the system?
Lord Freud
It is clear that we cannot use real-time information for the self-employed. It is another system. It will be much closer to the kind of reporting systems for tax credits in this area—and for that reason.
Lord Wigley
A disabled person might have feared going self-employed in the past because of the possibility of losing benefits and not being able to get them back at some future date. That would have been a psychological barrier. Could the Minister confirm—I am sure that he can and will be eager to—that that problem should be overcome by this system? It should be sympathetic to, and encouraging of, people becoming self-employed.
Lord Freud
Yes, the system is absolutely straightforward for a disabled person who goes into employment, where it is unequivocally much safer. There is a difference in self-employment in that, in cases of low earnings, we will look for an element of potential conditionality and a relationship with that person when they do not want to observe the minimum income floor. You have a choice: either have a minimum income floor and then there is not conditionality; or you come below it and there is a conditionality regime. That does not mean there is an instruction saying, “It is out to work. Stop what you are doing”. It absolutely does not mean that. It means that we know what people are doing and, after discussing it with them, can reach an assessment of what they should be doing. In many cases we will be absolutely happy for them to continue that regime. It offers us an opportunity to know what is really happening out there—I suspect in a way that we do not know now.
Baroness Donaghy
I am extremely grateful to the noble Lords who took part in this discussion—the noble Lord, Lord Wigley, and my noble friends Lord McKenzie, Lord McAvoy and Lady Hollis. I have learnt something today. I did not know that my noble friend Lord McAvoy owned a pub. I do not know if that makes him a licensee. I thought that I was the only licensee in the House of Lords. I was one for 16 years. We must obviously now compare notes.
I am also extremely grateful to the Minister. I take assurances from some of the things that he said. He accepted that the self-employed are different and that their situation is complex in relation to this subject. He is determined to produce clear rules—I have written that down: “clear rules”. I do not know if those rules will be as clear as those in Amendment 52B from the noble Baroness, Lady Howe, and my noble friend Lady Lister, which was just debated. Let us hope that they are really clear.
I take assurance from the Minister saying that we cannot use real-time information. I am aware that this is work in progress. I have some worries about the when. In my contribution I asked when this information was going to be available. I am pleased that we will have the opportunity to look at this in terms of the affirmative situation to which he referred. We will have another chance to look at the regulations. He acknowledged that specific rules will try to cope with things like the start dates and what happens when things go badly wrong. Again, I welcome the fact that he has tried to cover the entire patch.
I understand why he baulked at mentioning the issue of bogus self-employment. It is a big subject but I must come back to the comment that some of the real abuses are around the edges of the twilight zone of informal economy, bogus self-employment and people who abuse the system—sometimes all three. The sooner we can get some co-ordination in our systems, the better for everyone. I may come back to haunt the Minister about this whole area on another occasion but in the light of those positions, although still with some question marks, I beg leave to withdraw the amendment.