Welfare Reform Bill

Baroness Donaghy Excerpts

Wednesday 14th December 2011 Lords Chamber

Moved by

[Baroness Donaghy]

32: Schedule 1, page 111, line 20, at end insert “, where the Secretary of State has reason to believe that a claimant has deprived himself or herself of income for the purpose of securing entitlement to universal credit”

[Baroness Donaghy]

My Lords, the amendment was in the first grouping on the first day of Report, when we were all bright-eyed and bushy-tailed. I asked for this to be degrouped, and I therefore accept my punishment with good grace.

I asked for the amendment to be degrouped because the issue of self-employed people is extremely important and deserves a slot on its own. The purpose of the amendment is to recognise the particular needs of the self-employed. It will ensure that the power to prescribe a minimum level of income applies only to those self-employed claimants if they 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 in financial difficulty. There are some 4 million self-employed people in the UK and that number is likely to grow as employment becomes more difficult. They are an enormously varied group who face a greater degree of risk than traditional employees. Profits are affected by any number of events—the loss of a key customer, the sickness of the sole proprietor, a bad debt, the accumulation of slow payers, or even taking on a new employee.

The measurement of self-employed income for universal credit purposes should follow generally accepted accountancy principles and aim at a true and fair view of a business’s profits. The welfare system needs to support business 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. If you impose a minimum income floor for each hour worked, that in itself will open the floodgates for abuse. That view is supported by the National Farmers’ Union, the Tenant Farmers’ Association and the Federation of Small Businesses, as well as Community Link, Citizens Advice and the Child Poverty Action Group.

There are those with a disability or medical condition which makes it difficult for them to take traditional employment. Indeed, it is often difficult for the disabled to find employment. Being self-employed allows the disabled to work at their own pace and according to a pattern which suits their circumstances.

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. That 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 be increased by having 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 on reported hours, the harder a self-employed individual works to get their business on its feet, the more they could lose from their universal credit entitlement.

It would be unfortunate if the measure were to put off genuine claimants from taking the risks inherent in self-employment, when its purpose was to deter a minority from underdeclaring their profits. One real example, which I gave in Committee, was of an arable farmer whose crop was completely destroyed. I was going to give another detailed example of livestock farmers who could not move them if they were under BTB restrictions, but in view of the hour, I will not.

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

This brings me to a group who are in practically every sense of the word employees, but where individuals are treated as self-employed because the alternative is no job at all. They are often referred to as bogus self-employed. The Government's difficulty in drawing up criteria to deal with the genuine self-employed may be alleviated by proper enforcement of the tax laws by HMRC and employment laws by the BIS department, with all the resources that that implies. It also means a greatly increased level of interdepartmental co-operation in Whitehall.

As I said earlier, self-employment entails a greater risk than traditional employment. The self-employed must often choose between taking drawings for themselves or reinvesting in the business to enable it to grow. Welfare policy must reflect those different needs if it is to succeed in promoting work through self-employment. The success of working tax credit in encouraging work and, in particular, self-employment, rests on its 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. Will the Minister indicate what guidelines will be issued and when? I ask him to accept my amendment, which aims at the real target, rather than those struggling to survive in these deeply difficult times. I beg to move.

[Lord McKenzie of Luton]

My Lords, my noble friend Lady Donaghy has made a very strong case, and I look forward to the Minister's response. What she said warmed the cockles of my heart. She referred to generally accepted accounting principles—the true and fair view—and it took me back to another life, but she raises a real issue: rather than having artificial rules for assessing what people are deemed to earn, is it not better to try to capture the actual profits and to target resources on those who seek to abuse the position? That seems a very straightforward matter.

My noble friend raises once more, as she did in Committee, the matter of bogus self-employment. We all know that that is a continuing issue. I have always believed that it rests particularly with HMRC, together with BIS and other departments of government, to make progress on that. It is primarily HMRC that could begin to make a real difference. She wrote reports for the Government, as did the Minister, on the construction sector, and health and safety in particular. There is bogus self-employment in that sector, so she is an expert on that matter. We support the thrust of her amendment.

--- Later in debate ---

[Baroness Donaghy]

I thank the Minister for that response, and I look forward to seeing the regulations. However, I still have a concern and refer again to my example of a farmer who cannot move his livestock and is therefore getting no income. He is having to work harder than ever but will not be able to get a part-time job.

[Lord Freud]

My Lords, I forgot to say something. There are two areas where we need to get really smart. One is the start-up period and the other is when a business hits a problem. The questions there are how long the process should be and what one allows. That is another area that we are actively looking at.

[Baroness Donaghy]

I am reassured by that. I certainly agree with the Minister that this is a very complex area and, as I said in moving the amendment, it involves a very varied set of problems. I look forward to seeing the regulations and beg leave to withdraw the amendment.

Amendment 32 withdrawn.