Welfare Reform Bill

Debate between Lord Wigley and Baroness Donaghy

Tuesday 1st November 2011 Grand Committee

[Baroness Donaghy]

My Lords, the purpose of this amendment is to recognise the particular needs of the self-employed. It would ensure that the power to prescribe a minimum level of income applies only to those self-employed claimants who under-declare their earned income with a view to maximising their entitlement to universal credit.

While it is important to prevent abuse of the system, it is equally important not to discourage the genuine self-employed claimant with a potentially viable business in the early stages of development or one that is in financial difficulty. The White Paper acknowledges that,

“in starting up a business … it can take some time before it becomes profitable”.

It proposes that the minimum income floor should be applied only when a business has become “established”.

There is at present no indication of how that is to be interpreted or what guidelines or regulations will be issued, so I ask the Minister: when will this information become available?

As I said at Second Reading, there are some 4 million self-employed people in the UK, and that number is likely to grow as employment becomes more difficult. It represents an enormously varied group which faces a greater degree of risk than is faced by those in traditional employment. Profits are affected by any number of events such as the loss of a key customer, the sickness of the sole proprietor, a bad debt or accumulation of slow payers, or even by taking on a new employee. The measurement of self-employment income for universal credit purposes should follow generally accepted accountancy principles and aim at a true and fair view of a business’s profit. The welfare system needs to support businesses through such periods, not discourage them by imposing unrealistic levels of deemed income such as the minimum income floor.

My amendment recognises that real abuse should be directly targeted, but that if you impose a minimum income floor for each hour worked, that in itself will open the floodgates for abuse. This view is supported by the National Farmers’ Union, the Tenant Farmers Association and the Federation of Small Businesses, as well as by Community Link, Citizens Advice and the Child Poverty Action Group. There are those with disability or a medical condition that makes it difficult for them to take traditional employment. We have already heard from the noble Baronesses, Lady Grey-Thompson, Lady Thomas of Winchester and Lady Wilkins, about how difficult it is for the disabled to find employment. Being self-employed often allows the disabled to work at their own pace and according to a pattern that suits their circumstances.

I have another question. What steps are the Government taking to minimise the compliance burden on the self-employed? The current system requires only one set of accounts to be prepared, which is accepted for both tax and tax credits. This allows the individual to get on with running their business. If a different measure of self-employed income were to apply for universal credit, the burden would increase because individuals would have to assess profits for tax purposes according to one measure and income for universal credit purposes according to another, quite different, measure.

If income is to be based upon reported hours, the harder a self-employed person works to get their business on its feet, the more they could lose from their universal credit entitlement. Some might spend as much time seeking paid work as actually doing it, such as taxi drivers who may work 50 to 60 hours per week or more. It would be unfortunate if this measure were to deter genuine claimants from taking the risks inherent in self-employment when its purpose is to prevent a minority under-declaring their profits.

Perhaps I may give a real example sent by the Royal Agricultural Benevolent Institution. I hope that it is not one of those examples that the Minister will say is a unique and very special man. He is a single man aged 53 on a rented 160-acre farm, farming arable/field vegetables only. He has had a disastrous winter and lost the whole crop due to bad weather and flooding. Consequently, he has made a loss this year and is very distressed. As this would be calculated by HMRC to be nil earnings, he is currently eligible for a full working tax credit of £51.87 per week. Under the proposed changes in the universal credit, he will no longer be entitled to any help. The circumstances were beyond his control, and without the safety net of the tax credits he will be unable to get back on his feet and carry on farming. What will he do? Is this an example of someone where savings are to be made? Is he to face the humiliation of getting advice from Jobcentre Plus about diversifying or going to work for the farm next door?

There are already regulatory powers to counteract moves by claimants to under-declare their income for tax credit and benefit purposes. Under the income deprivation rules, a person is deemed still to have income of which they have divested themselves in order to maximise their claim to benefit or tax credit. Where the Government perceive this abuse, surely the right course is to enforce existing powers rather than invent new ones that will discourage genuine cases.

This brings me a group of individuals who in practically every sense of the word are employees but who are treated as self-employed because the alternative is no job at all. When I was a member of the Low Pay Commission, a situation where economic circumstances took away choice was called monopsony—which is not a word that is used very often. I have met home workers who were forced to accept self-employed status in order to earn money. If they asked questions, they would be replaced with one of the hundreds of women in the area who were confined to their homes for domestic or cultural reasons and were equally desperate for work.

In the construction industry up to 90 per cent of workers in London are self-employed, and yet they are told when to turn up for work and what to do when they are at work. HMRC is responsible for the construction industry tax scheme, the CIS, where contractors submit monthly returns detailing their subcontractors and certifying that none of them is in fact an employee. However, the questions asked of a contractor to establish whether any of their subcontractors are self-employed are remarkably similar to the criteria used for identifying direct employment. Successive Governments have tried to deal with the issue of bogus self-employment with little measurable success. In my report on the construction industry I wrote that:

“It may be that successive Governments see the various schemes they have adopted as a buttress against the huge informal economy in construction—a compromise so that at least some tax is collected”.

I raise these two examples of bogus self-employment—some home workers and some construction workers—to emphasise that the Government’s proposals could penalise the genuine self-employed and fail to tackle some of the gross abuses that happen now. These abuses could be alleviated by the proper enforcement of our tax laws by HMRC and of our employment laws by the Department for Business, Innovation and Skills in conjunction with the Department for Work and Pensions—with all the resources that that implies. It would also mean a level of interdepartmental co-operation in Whitehall that would make even the Minister with his acknowledged abilities blench in terror.

In conclusion, there is a clear distinction between profits on the one hand and drawings on the other, and welfare policy must reflect that distinction if in-work support is to succeed in promoting work through self-employment. The success of working tax credits in encouraging work, in particular self-employment, rests on a recognition, in alignment with the tax system, of the economic reality of how a business is doing, particularly with regard to investment in business equipment and trading losses. How is the Minister going to treat the self-employed, and does he think that my amendment would help to emphasise the real target rather than those struggling to survive in deeply difficult financial circumstances? I beg to move.

[Lord Wigley]

My Lords, I give enthusiastic support not only to the amendment but also to the direction in which the noble Baroness is taking the Committee. The need to ensure that disabled people do not feel that they are being debarred by the system from becoming self-employed is very important indeed. Possibly it has been a greater problem in the past and I hope that it will become even less of one with the changes we are getting. However, we need certain assurances if that is to be the case. I believe not only that this is in their own interests, given that self-employment can offer a flexibility which can be very useful, but also that they have a massive contribution to make. Given support, disabled people can also become the employers of other people. Therefore I hope that it will be possible to give the assurances that have been sought in the amendment in order to move things forward on this agenda.