Welfare Reform and Work Bill

Baroness Donaghy Excerpts

Monday 14th December 2015 Lords Chamber

Moved by

[Baroness Donaghy]

61: After Clause 15, insert the following new Clause—
“Self-employment and minimum income floor
In Schedule 1 to the Welfare Reform Act 2012 (universal credit: supplementary regulation-making powers), in paragraph 4, at end of sub-paragraph (4) insert “, and may prescribe modifications of such provisions in respect of particular persons or classes of persons”.”

[Baroness Donaghy (Lab)]

In moving Amendment 61, I shall speak also to Amendment 66 in my name. The detailed amendment comes before the general one, but it is about the self-employed—and the Minister will not be surprised by that because I raised this in the Welfare Reform Bill discussions. I am coming back to haunt him.

With approximately 4.8 million self-employed people, this is an important area for growth in our economy, which makes it even more surprising that this Bill makes no reference to the particular and varied needs of the self-employed at such time that they might need some support from the social security system. I am grateful to the Low Incomes Tax Reform Group for its briefing.

Amendment 66 would add a new reporting obligation on the Government about self-employment and the impact of the minimum income floor in particular. The self-employed are a very diverse group which includes freelancers, farmers, seasonal traders and workers in construction and IT. Their needs will be different if their businesses are start-ups or are ongoing business. We need an annual government assessment. Some will take up to five years before their business is viable, and some will experience extremes of volatility in their income depending on their profession. We do not know enough about how this diversity fits into the social security system. The self-employed might be flexible, but their experience of the system is anything but.

I am arguing for a different system for the self-employed and for groups within the self-employed, particularly bearing in mind the Chancellor’s announcement that the minimum income floor will be the equivalent of the national living wage from next April, when it was originally the statutory national minimum wage. That is comparatively good news for the employed, but is bad news for the self-employed. To require the self-employed claimant to achieve an earnings pattern similar to that of the employed claimant is fundamentally to misunderstand the nature of profit and to ignore the fact that a business has to meet its costs and expenses before it can declare a profit. They include rent, heating, lighting, office equipment, vans, tools et cetera.

Reporting to Parliament would help to reveal what work is organised and regular under the new, much more stringent test to qualify for working tax credit. It would help to reveal how monthly reporting to DWP for universal credit purposes adds to the difficulty in the lives of the self-employed. This also has to be seen in the context of the Chancellor’s recent announcement that small businesses will have to report quarterly from 2020 instead of annually, just as our largest companies are dropping quarterly reports to their shareholders. Apparently, it is going to be made easy because the Government are,

“going to build one of the most digitally advanced tax administrations in the world”.—[Official Report, Commons, 25/11/15; col. 1361.]

Does that statement not fill you with terror?

The assumption is that more frequent reporting will improve accuracy, but that is far from the case. It does not take account of annual reconciliation, disputes about holidays or sickness, seasonal working or long periods of not working for freelancers, particularly writers and actors. We have the best actors in the world, but it is important that they do not all come from Eton. Equity recently conducted a survey of its members and found that 20% had claimed some form of benefit in the previous 12 months and more than half of them had claimed tax credits. When asked about their earnings, 25% of Equity members said that they earned between £5,000 and £10,000 from their self-employed work in the previous 12 months, and just over 23% earned between £10,000 and £20,000. Equity has said that when you factor in net profit figures, it is clear that many will hit the problem of the minimum income floor. I hope I will be forgiven for repeating what I said at Second Reading, which is that is that a minimum income floor is set for the self-employed who are deemed to be earning the national minimum wage—recently changed to the national living wage—whether or not they earn it.

You could argue that at least this is equal misery for all under the new system, but it is worse for those self-employed people with fluctuating earnings. If earnings in any month from April 2016 onwards are high enough to disentitle the claimant from universal credit, the surplus earnings regulations will apply to bring the surplus earnings in that month into account as earnings for universal credit purposes in each of the next five months. To summarise, actors will be worse off because of the application of the minimum income floor. That is why I ask in Amendment 61 for more flexibility to be applied to certain work groups because of their fluctuating earnings. It may seem an obscure amendment because it refers to the Welfare Reform Act 2012. However, the purpose is the same as it was when we discussed the self-employed during the debates on that Act. There is no evidence that a flexible approach has been adopted since the Act, and I do not believe it is impossible to prescribe the modifications that I have asked for.

To be self-employed, activity needs to be undertaken on a commercial basis, with a view to making a profit, and, as I said earlier, it must be organised and regular. With effect from April 2016, a self-employed claimant must register as self-employed with HMRC for self-assessment and provide their unique taxpayer reference with their working tax credit claim. It remains uncertain how HMRC will determine whether an activity is undertaken on a commercial basis; whether there will be different interpretations of whether someone is employed or self-employed for tax and tax credit purposes; and how claimants and prospective claimants will be helped to ensure that they claim on the correct basis to avoid unwittingly incurring an overpayment. HMRC is still developing its guidance, apparently.

The Minister’s letter to Peers of 25 November 2015 says that the same tests for determining the commerciality of a trade will be applied to tax credits as to income tax. However, the Minister goes on to say that if HMRC decides that the test is not met for tax credit purposes, the income from the activity will still be subject to income tax. It would be interesting to know on what basis that income would be taxed; if it were taxed as profits of a trade, it would be an indication that the tests of commerciality are not the same.

The minimum income floor will be particularly problematic—a word that I cannot say—for seasonal trades and trades that take more than 12 months to move into profit; newly established businesses taking on their first employee; businesses experiencing a downturn, a bad debt or the bankruptcy of a key customer; businesses depending on the weather; and businesses that incur large expenses in certain months. I have already mentioned entertainers and those in other unpredictable trades, but there are also bed and breakfast owners in the winter season; arable farmers who earn all their profit at or around harvest time; and livestock farmers, who face the cost of rearing and getting their livestock to market.

The fundamental objection to the monthly minimum income floor is that it opens up a gap in the treatment of employed as opposed to self-employed claimants. For example, a livestock farmer who has had his universal credit restricted by the minimum income floor in the seven months of the year when he makes little or no profit, and who receives no universal credit at all in the five months in which his business becomes profitable, will be entitled to considerably less universal credit over the course of the year than an employed claimant who may earn the same over the whole year but whose earnings are spread evenly over 12 months. It is wholly wrong that the amount of welfare support that a worker receives should depend so much on cash flow rather than earnings. The position is made worse by carrying forward surplus income and expenditure with a view to total annual profits being assessed over the course of the year, as the minimum income floor will continue to be applied on a monthly basis.

Many self-employed claimants will be disadvantaged by the minimum income floor even when their annual profits exceed it. Given that the intention of universal credit is to assist claimants at the point when they most need help, it seems perverse to restrict entitlement when cash flow is at its lowest and to exclude from entitlement when profit from that expenditure is finally received.

For claimants whose income and expenditure arise unevenly, would the Minister consider accepting Amendment 61 so that they may opt for appropriate and tailored conditionality instead of the minimum income floor? This would limit the risk to the DWP while addressing an otherwise unfair anomaly. Assuming that a statistical framework is already in place for self-employed and the minimum income floor, why should it not be made publicly available and sector-specific so that we can see who is most disadvantaged?

--- Later in debate ---

[Baroness Donaghy]

I thank the Minister for his response, which I will read carefully in Hansard. I thank noble Lords who have taken part in the debate. In view of the time, I shall be brief. The point of this group of amendments to this important part of the Bill was to indicate that some of us do not think there is sufficient focus on these areas when the issue of social security comes into consideration. These are not add-ons. Like the Minister, we sometimes think we live in a parallel universe. It is not a question of propping up failing businesses; it is a question of some seasonal and fluctuating businesses wanting their annual income to be taken into consideration, so there is some fairness when they claim for social security. The Minister says that there is some flexibility already and the powers already exist, but I have to say there is very little evidence for that, apart from the grand announcement that those in the first year of business will be exempt.

Yes, the number of self-employed on universal credit is low, but if you see an articulated lorry thundering down the middle of the road towards you, you probably have an idea that you might get run over if you stay in the same place. All I am trying to say is that the establishment of a minimum income floor will cause trouble with universal credit in future—and it would be well to heed that warning. In view of the time, though, I beg leave to withdraw my amendment.

Amendment 61 withdrawn.