Welfare Reform Bill

Baroness Donaghy Excerpts

Tuesday 13th September 2011 Lords Chamber

[Baroness Donaghy]

My Lords, I shall concentrate on the potential impact of the Bill on self-employed people, with perhaps a few words on kinship carers, referred to earlier by the noble Baroness, Lady Tyler.

The coalition has acknowledged that the self-employed are a group which “is often difficult to map”. We still have no clear indication of how they will be treated by the universal credit system. The 4 million self-employed people who contribute £21 billion in added value to the UK economy and the Federation of Small Businesses are concerned that self-employed people will be considered to be earning a set wage, calculated at the national minimum wage for reported hours worked. This is not only unrealistic, it is likely to discourage self-employment and is itself open to abuse by underreporting working hours. Small business owners starting up for the first time often do not start earning until much later. Most start-ups fail within the first three years of operation and it is essential that we support those willing, as the Federation of Small Businesses put it,

“to take that plunge into entrepreneurship”.

The coalition Government have previously stated that they encourage a more dynamic private sector. Encouraging more people to go into self-employment will help to guarantee the long-term economic growth of the UK economy and offers opportunities to reverse the current high levels of unemployment. How will the universal credit affect self-employed people and what measures will be taken to ensure that it does not act as a disincentive to set up a business? Under the current system, someone who starts up as self-employed will be entitled to full working tax credit as long as the work that they are doing is seen to be in expectation of payment—the business has to be reasonably viable. The universal credit will deem people to earn the minimum wage even if they have been unable to take a wage out of the business during the starting-up period. That means that people will lose money if they start their own business.

The only incentive here is to give up or slip into the informal economy. How often will the self-employed be expected to fill in tax returns in order to receive the universal credit, as their working hours will be outside the PAYE system? How will the Government minimise any extra work for small businesses? The Government will know that various organisations have raised concerns about the proposals for the self-employed. Citizens Advice has said that,

“this is clearly the difference between being able or not to set up in business”.

It has outlined a telling case study where one woman would be £61 a week worse off under the new system. The National Association of Welfare Rights Advisers and the Low Incomes Tax Reform Group believe that the Government should use a similar model to that already used for working tax credit which, by using a measurement of self-employed profit within the tax system, takes account of loss-making periods and investment in premises, equipment and machinery for business.

I am aware that the coalition has indicated that the rules on the treatment of the self-employed will be set out in regulations and that they are still,

“looking for the best way of doing it”.

I have some appreciation that putting this on the face of the Bill might hinder flexibility. However, when the regulations are eventually produced and if they do not tackle the issues that I have raised—namely, avoiding disincentives to self-employment, reconsidering the proposal of the minimum wage as an income floor and facilitating the collection of information about income which is easily adjustable as circumstances change—an important principle will have been lost: the Welfare Reform Bill was supposed to improve things. The new system will be worse than the current system and self-employment will have additional burdens placed on it by a supposedly red-tape-cutting Government.

We need an indication at least of intentions towards this group of people—an outline of what the regulations might say, an assurance that the definition of income from self-employment in universal credit is aligned with that used in the tax and credits system, and an absolute assurance from the Government that they are on the side of entrepreneurs.

As the noble Baroness, Lady Drake, is committed to the other parliamentary business at this time, I want to say something about kinship carers—a subject that she would have covered in more detail. There are around 200,000 kinship carers in the UK and an estimated 300,000 children who would otherwise be in care being raised by family members. Many such carers will be affected by the conditionality requirements and the cap on benefits. This will unintentionally undermine many kinship carers’ capacity to care for the children by requiring them to look for work, increase the hours that they work or cap the benefits that they can claim. If only 5 per cent of the children in kinship care were to enter the care system, it would cost the taxpayer £500 million every year. It costs £40,000 a year per child to be placed in independent foster care.

Kinship carers should be exempted from conditionality requirements under universal credit for 12 months after the children move in. The increase in the state pension age for women from 60 to 66 will mean that an increasing number of older grandmother carers will be expected to be available for work under the conditionality requirements. These people are taking on responsibility, not avoiding it. The Bill should present an opportunity to support kinship carers not add new barriers. Thank you.