Current design of Universal Credit for self-employed risks stifling entrepreneurship, wasting public investment say MPs

The growth of self-employment has made an important contribution to the UK’s current record employment levels. Around 5 million people—15% of the workforce—are now self-employed. Genuine, entrepreneurial self-employment—embodied by the UK’s small business owners and sole traders—has an equally crucial role to play in boosting the UK’s economy and ensuring its future economic dynamism.

But the Committee says the new UC rules for self-employment do not reflect the realities of starting and running a business and risk crushing potentially viable businesses and the contribution they make to the economy.

To continue to qualify for UC while they are getting their business off the ground, entrepreneurs must show they are earning a minimum amount – the Minimum Income Floor or MIF  - after one year. If they cannot, they cease to qualify as “employed” for benefits assessment purposes – so that the taxpayer does not indefinitely subsidise unsustainable, low-paid self-employment.

But while the Department asserts that this one year start up period “makes sense”, it has no actual evidence to back that, and no plans to publish any significant analysis of UC’s effect on self-employment until at least Autumn 2019: four years after the full service roll-out began. This appears contrary to its much vaunted “test and learn” approach.

In fact, the existing evidence suggests viable, ultimately successful businesses frequently take more than a year to get going - the short Start-up Period could create an insurmountable barrier to entrepreneurs getting their business up and running, and getting off benefits.

This risks forcing potentially viable businesses to close before they have the chance to get off the ground, also wasting the significant investment Government will have made in those businesses by that point. The Committee says Government should extend the Start-up Period to up to three years, with more tailored checks for evidence of progression and viability, including for example achieving expected increases in earnings each year.  

Luke Johnstone, founder of the now highly successful smoothie company “Pack’d” illustrated the realities of startups in evidence to the Committee: “…it took me two years of working tax credits to get my business to the point where I was running a successful company. Prior to that, I also spent one year getting myself into personal debt to even get the business off the ground. In total, I think it took me two and a half years before I was earning national minimum wage and it took me four and a half years before I turned a profit… moving to Universal Credit would give me too short a window in which to create a viable business.”

Commenting in response to the report, Mr Johnstone added: “The current design of Universal Credit is a false economy that compromises long term benefits for short-term savings and discourages social mobility. A one year deadline does not reflect the many nights it takes to become an overnight success and the odds in business remain firmly stacked against those that cannot afford to start. The recommendation to extend Universal Credit to three years is a positive move towards providing a genuine foundation for success. Rather than stifling entrepreneurs with get rich quick pressure that can encourage recklessness, it gives them a platform to demonstrate progress over a more realistic period and should provide the government with a greater return on their investment.”

The way the MIF is applied, based on monthly reported income, also penalises the self-employed with their fluctuating income. This can mean they miss out on important support potentially to the tune of over £2500 a year. Farmers’ payment schedules, for example, are dictated by the seasons and other events, such as one-off bulk sales of livestock. Sole traders invoicing on a job-by-job basis may find those jobs take longer than a month, or a late payment can cause variation. But these factors are far from reliable indicators of the viability of a business. Expenses can be similarly volatile. Business spending on capital and other expenses should be driven by business need and affordability: not the need to fit in with UC and the MIF.

The Committee says Government should: 

- Extend the current one year Start-up Period to up to three years, at the discretion of Work Coaches

- Allow reporting periods of up to a one year for self-employed claimants who receive irregular monthly pay, also at the discretion of Work Coaches

- Produce ongoing evaluations of the effect of the new self-employment rules on UC claimants

- Ensure front-line JCP staff have sufficient expertise in self-employment - especially in the context of the discretion Work Coaches would have over the MIF rules under the Committee’s recommendations - and that claimants have access to dedicated, specialist mentors

Rt Hon Frank Field MPO, Chair of the Committee, said: “Universal Credit was not designed with self-employment in mind and it shows. Its current set-up for people starting and running their own business risks crushing potentially viable, productive enterprises. At the same time, it risks throwing away the significant investment of taxpayer’s money in them to that point.

“The DWP should give people longer to get going, and not punish them for the income volatility that is in the nature of self-employment. This would give a boost to the entrepreneurship that is so vital in a dynamic economy. It would also offer good value for taxpayers and a fillip to the Department’s beleaguered flagship policy.