This post was originally written in March 2013 and has been updated incrementally since. The Advice for Decision Makers on the DWP's website, published after Universal Credit was introduced on 30th April has clarified various matters regarding the implementation of the scheme. Whilst the information below is essentially accurate, there is now much more detail, which I is included in my Universal Credit and the Self-Employed briefing paper. Please click below to download a free copy.
NOTE 26th February 2015 Today amendments to the Universal Credit Regulations 2013 were laid before Parliament that will, from 6th April 2016, allow carrying over of self-employed losses from one assessment period to another. Please note my briefing paper has not yet been updated to reflect this. (See the Universal Credit (Surpluses and Self-employed Losses) (Digital Service) Amendment Regulations 2015.)
Actually I think we do have to do something. We have to have a look at the proposals, work out how they will affect us, ask a lot of questions about how they are going to be implemented in practice and make an unprecedented fuss about it to anyone who'll listen.
How is it going to work?
- New claims. When you make a new claim and declare that you are self-employed, you will be invited to a 'work-focused interview' to ascertain whether you are in 'gainful self employment' or meet start-up conditions. Your business activity will be assessed in view of deciding whether you are in fact self-employed, and if so whether self-employment is the best way for you to earn your living or whether you would be better off getting a job. It is unclear whether this will be a mere formality if you are earning the equivalent of the minimum wage, or whether you will still be encouraged to try to earn more so that you can be self-supporting without benefits. UCR 2013 Reg.93(f) (Purposes of a work-focused interview). Evidence of self-employment “may include diaries of appointments, lists of customers and suppliers, proof of tax registration with HMRC, marketing materials…, a business plan, receipts for stock purchased, order and sales records and bank statements” - see DWP 2012 para.163. DWP H4013 has a list of factors the Decision Maker (DM) should have regard to in order to recognise a 'trade'.
- Starting a new business. New businesses will have to be assessed as viable by advisers (who may or may not know anything about your particular industry). Presumably you will need to be able to predict and convince the adviser that, after a year, you are likely to be making enough to take drawings of (up to) 35 hrs x minimum wage. This is likely to put off many people from starting a business at all and penalises small, slow-growth businesses in favour of fast, money-making schemes (albeit that they might be a flash-in-the-pan that ends up insolvent in a short while). It is inevitable that potential businesses will be assessed by bottom line only rather than any other social or ecological benefit that may be derived from the business. It is unclear whether you will be 'allowed' to start a business if it is not considered viable. Presumably you will (I have seen no express intention to curtail freedom to start a business) but will have to do so in your 'spare' time (i.e. after 35 hours work and looking after your 5-18 year-olds...).
- Gainful self-employment. The main issue affecting your work status is whether you are assessed to be in gainful self-employment - i.e. running your business as your ‘main employment’, with ‘self-employed earnings’ and a “organised, developed, regular and carried on in expectation of profit.” see Reg.64 (Gainful self-employment). The ‘main employment’ test will be applied both to those on low hours or low pay, and those who are also doing employed work. A good indicator is if self-employment takes up “the majority (i.e. at least half) of the claimant’s work week – this would be 18 hours a week for claimants with no limits on their working time.” – see DWP 2012 para.163. Number of hours spent is considered both in relation to ‘expected hours’ (see below) and to any employed activity. The ‘claimant’s intention’ and amount of earnings are also considered - see H4023-4034. Fewer hours are possible if a higher proportion of earnings are from self-employment; conversely, marginally more hours but limited income may fail the test. Self-employed earnings - as opposed to employed earnings - are clarified by the factors in DWP H4016, and are similar to the criteria used in employment law. ‘Organised, developed, regular and carried on in expectation of profit’ is clarified in H4050. In addition to the above, matters such as steps to increase income, how HMRC regard the activity, work in the pipeline, and marketing and advertising will be considered.
- Business structure. If you have a limited company but your position is analogous to that of a sole trader (or partnership) you will be treated as if you are a 'sole owner'. This doesn't appear to be defined and presumably applies if you are the only director/s and shareholder/s, but it does not rule it applying to other models. It then applies in relation to the company's possession of capital, to company income and to the minimum income floor rules, even if you are technically employed. Any such self-employed income will be in addition to earnings from being a director or employee. See Reg.77 (Company analogous to partnership or one person business). The affect of this needs careful thought.
- Capital. Personal capital will be taken into consideration for both entitlement and awards. If your capital is above £16,000 you will fail the financial conditions and lose entitlement altogether. Between £6,000 and £16,000 you will be deemed to make income from your capital (£4.35 for each £250). Business assets are exempt, as is your home (and other related capital) - see Regs.46-50 (Capital) Sch.10 (Capital to be disregarded) and Reg.72 (Assumed yield from capital).
- Students. You will not be entitled to Universal Credit if you are a full time student in advanced education, unless you are responsible for a child or 'qualifying young person' (usually 16-18 year old in full time education) - see Reg.12(2) (Receiving education) and Reg.14. (Exceptions). If you are one of the exceptions, any student income will be treated as unearned income, and this includes any student loan, or student loan that could have been applied for - Regs.68-71 (Student income). You will also have to report your self-employed income. On the plus side, students are not subject to work-related requirements - see Reg.89(1)(e)(ii) (No work-related requirements).
- Temporary absence from Great Britain. Currently, on tax credits, you can leave Britain for a year, the first 8 weeks of which you will still receive payment. Under Universal Credit, if you leave for more than one month you will no longer satisfy the 'habitual residence' rule and will lose entitlement altogether, for yourself and your children, even if you, your family and your business still have all the same obligations and expenses whilst you are away. This curtails ability to make extended trips overseas for acquiring new business, sales, stock purchasing, research, journalism, gaining work experience - and assumes people only go away on holiday - see Reg.11(1)(b)(i) (Temporary absence).
- Self-employed earnings. Once entitlement is established, payment will be based on your earnings in an assessment period of one calendar month. You report your income for that month (including any payments received for past, present and future work - DWP H4004) less any expenses you have paid out that month. The remainder will be treated as your 'income'. You cannot carry forward any business revenue, even if you have regular, foreseeable expenditure coming up in the future. Seasonal fluctuations in income are not taken into account for the purpose of calculating self-employed earnings. If your expenses that month are greater than your income, the loss cannot be carried forward to a future month. So although the Regulations refer to 'gross profit', this effectively means that self employed income is assessed on the basis of business revenue rather than profit. This ludicrous notion is completely devoid of logic or fairness. How can a business be expected to treat all income as being available to live on, just because it isn't spent that month? This is incompatible with annual accounting, and militates against ensuring that your business holds even small reserves to see you through market fluctuations let alone any notion of re-investment. See Reg.21 (Assessment periods) and Reg.57 (Self employed earnings). Note you may have self-employed earnings even if you are not 'gainfully self-employed'- DWP H4011.
- Monthly reporting. The Claims and Payments Regulations state that of monthly reporting will require you to supply such ‘information or evidence’ as the Secretary of State ‘considers appropriate’ “in such manner’ as [s/he]determines” – see Reg.37(2)&(3) (Evidence and information in connection with a claim). The DWP state “you will have to supply monthly cash-in and cash-out figures [the] system will be closely aligned to … (HMRC) proposed new cash basis accounting system for tax self-assessment.” – see p.3 DWP quick guide (Moving to Universal Credit). It is not clear exactly how detailed this will need to be or if it must be in a particular form but this administrative requirement will be in addition to the annual Tax Return, periodical Council Tax Benefit review and quarterly VAT return. A number of taxation and accounting organisations have expressed concern over monthly reporting and online reporting. An extract from the online self employed earnings form is available in the DWP Research report p.78.
- Permitted expenses. Expenses incurred that month in the course of the business may be deducted provided they are not 'incurred unreasonably'. 'Reasonable' is not defined. Repayment of capital or interest on a loan is not a permitted expense, and nor are payments for non-depreciating assets such as property. It is not clear how purchase of depreciating assets is to be treated. Strangely it appears that VAT and income tax may only be deducted from the month you actually pay them to HMRC. In other words you will be expected to treat as income (and live on?) money which is not yours. This makes even less sense when you consider that self assessment income tax is paid in respect of the previous financial year, and actual payment bears no relation whatsoever to the month in which it is paid. See Reg.57 (Self-employed earnings) and Reg.58 (Permitted expenses). It is possible that this provision will only work with the new cash basis accounting, although there is no mention of this and cash basis is voluntary at present - see HMRC Simpler Income Tax.
- Vehicle expenses. If you have a car or motorcycle, you will have to deduct a flat rate for mileage. You will no longer have the choice of deducting the actual costs of acquisition and use - although it appears you can still do so if you have a 'van or other motor vehicle'. This is bad news for anyone who does short journeys and has low mileage yet still has to pay for parking, road tax, insurance. MoT and repair bills - you can only get your money back by driving a long way! This is not good news for carbon reduction. See Reg.59 (Flat rate deductions for mileage).
- Home used for business purposes. There will be flat rates for use of your home for business purposes (based on hours use) and for use of business premises as your home (based on number of persons occupying the premises). These may not necessarily reflect the actual costs and will presumably be prejudicial to anyone paying high rent, Council Tax or water rates, or in hard to heat properties, etc Reg.59 (Flat rate deductions for use of home).
- Notional income. If you provide services for someone free of charge or at a reduced rate, and they can afford to pay you, you will be deemed to have earned reasonable remuneration for that work. In other words, you need to be careful of doing work experience or internship, offering discounted or free services (perhaps as introductory offers or trial periods), or of working for nothing because you believe in a cause. 'Charitable or voluntary' organisations are excluded, but beware community interest companies, limited companies or co-operatives etc whose aims may be laudable but are still run as a business. It is not clear how 'means sufficient to pay' is ascertained. A skint festival like the Big Green Gathering may clearly not have the means, but Glastonbury Festival arguably has, albeit that they plan to give the proceeds to charity - see Reg.60 (Notional earned income).
- Awards. Everyone starts with a theoretical 'maximum amount'. Any unearned income is deducted from this, and also 65% of any earned income (including self-employed earnings) in excess of a theoretical 'work allowance' (i.e. an amount that is disregarded) - see Reg.22 (Work allowance table) . These amounts depend on whether you are single, whether you have children, whether you have 'housing costs' and whether you have 'limited capability for work' - see Reg.22(1) (Deduction of income). There are then a number of 'elements', depending on your circumstances, for which payment may be made - see Regs.23-31 (The elements). It's quite complicated to get your head around - the CAB have done some model calculations (somewhere) but it would be good if someone with a mathematical bent would do one for self-employed income. But as general principles: everyone eligible should get something (their work allowance), and those with the most children or highest housing costs etc will have more left after their deductions.
- Minimum income floor. BUT...claimants in 'gainful self-employment' but not making much money will be deemed to be earning the equivalent of the minimum wage for the 'expected number of hours'- see Reg.62 (Minimum income floor). The number of hours depends on circumstances but is normally 35 hours per week. If you have a ‘physical or mental impairment’ it may be fewer, if you have a child under 5 it is 16 hours, and if you have children between 5 and 12 (under 13) it is meant to fit in with school hours - see Reg.88 (Expected hours). The rationale seems to be that if you are doing fewer hours you are not working hard enough or are making tax payers subsidise your hobby, and if you are doing more hours for minimal pay, you are flogging a dead horse. The only people who will be OK are the ones making lots of money (whether or not they are working hard). The recession, or other factors affecting the market in a particular sector, will not be considered good reason not to be earning more. If you are not working full time on your business you will not be considered to be in 'gainful self-employment', but although the minimum income floor will not apply you will be be subject to work related requirements. It is possible that this will be preferable for some claimants if your business is one that almost runs itself and you would prefer to jump through hoops than to lose benefit.
- Start-up period. New businesses will be allowed a period of one year to reach a required level of income before the 'minimum income floor' rules are applied. No further start-up period will be allowed for 5 years, and then it has to be a different trade, profession or vocation. See Reg.63 (Start-up period).
- Deductions. If you fall below the minimum income floor, deductions will be made from your benefit as if you had earned that income - less the tax and NICs you would have paid. This is a bitter application of the increase in personal allowance to £9,440, since you will have less notional tax deducted from your deemed income than if the allowance had remained lower. Similarly the minimum wage will now be a bane rather than a boon, if it increases we'll simply lose more. It is manifestly unfair to treat as the same people who in fact have an income in excess of £11,000, and people who have not - because they haven't got it. You can't live on deemed income. At present, with tax credits, failure to meet the work requirements only jeopardises your Working Tax Credit but these deductions will affect every element including the child element, and housing element. This means the poorer you are and the more dependent on benefits, the more you will lose and the more it could affect you.
- No work-related requirement Workers - including the self-employed - who meet their individual earning threshold, or are deemed to by the minimum income floor, are not subject to work-related requirements. Deemed earnings are worked out as an average which is normally weekly but, if income fluctuates, may be over an 'identifiable cycle' or three months if not identifiable - see Reg.90 (Earning thresholds). In other words, seasonal or other variations may be evened out - the affect of which needs careful thought as this may work for or against you. Some other categories, including pensioners and students and some other limited groups also have no work-related requirements- see Reg.89 (No work-related requirements). It appears that the self-employed will effectively be divided into three camps:
(a) those earning below the minimum income floor, who will be deemed to be working 35 [16, ?] hours per week and will lose benefit accordingly but have no work related requirements,
(b) those with no work-related requirements, either because they are earning enough or because they fit other 'no work-related requirement' criteria, and
(c) those who work too few hours who will not lose any benefit but will be subject to work-related requirements.
- Work-related requirements. The precise requirements vary according to various factors - too complex to go into here, but are basically of two types. If you've got a child under 5 the requirement is 'work focused interview only' - see Reg.91 (work-focused interview requirement). Otherwise the requirement is 'all work-related requirements', i.e. to take "all reasonable action for the purpose of obtaining paid work" by spending your 'expected number of hours' looking for paid (or more paid, or higher paid) work - see Reg.87 (References to paid work). There are some 'deductions' including paid work (it does not state whether this includes self-employed work), work preparation ('workfare') and voluntary work - although you cannot spend more than half your time doing this - see Reg. 95 (all reasonable action). The actual activities are varied and potentially onerous, including the obligation immediately to attend interviews or take up paid work within 90 minutes journey of your home. Although having a contract of service is a reason not to take up paid work, a contractor's contract for services is not - see Reg.96 (Able and willing immediately to take up paid work).
- Sanctions. If you don't comply, sanctions are applied in the form of reductions of so many days benefit, up to and including as many as 1095 days (3 years) – see Regs.101-105 (Reduction periods).
Who is it most likely to affect?
- Single parents (i.e. mostly mothers) who can tuck in a bit of self-employment around childcare and home-care responsibilities, maybe sitting at your computer at 1am selling stuff on eBay. Single self-employed people living in their own home on Working Tax Credit currently receiving £36.92 per week may decide to just give up claiming, but people with dependents and/or in rented accommodation can't afford to.
- Sole traders - your income is inextricably linked to your business, and you will be expected to live off the money that comes in rather than spend it on the business, even if you can predict in advance that you will need to spend it.
- Farmers - characteristically work long hours irrespective of income per hour, who cannot 'choose' hours when welfare of livestock and husbandry of crops are factors, who cannot simply abandon the farm if an advisor finds them a job.
- Freelance writers and journalists - who work for long periods of time without getting paid at all, then get it all in one lump.
- Performers - Actors who have the expenses of attending multiple auditions get paid months later if they get a part; performers and theatre companies who rehearse for months with box office revenue only coming later.
- eBay and Amazon sellers - whose income is dependent on the market not on the hours they put in, and who have other obligations that mean fitting in their work intermittently here and there, or who have disabilities and benefit from setting their own hours.
- Contractors - whose work might be seasonal, whose income may come spasmodically in a large lump, who have contractual obligations that must be fulfilled.
- Tourism industry - hotel proprietors and seasonal workers whose expenditure may occur in the winter and income in the summer.
- Seasonal industries - growers, horticulturists, bee-keepers, festival workers - where season and weather both play a great part.
- Importers of Fair Trade and artisan products who go on extended 'shopping' trips in winter for sale at markets and festivals in summer.
- Home educators - Who will no longer be able to afford to work self-employed from home, and will not have time to educate their children whilst working or doing work related activities all week.
- Economically deprived areas - the lower the wages are in your area, the less realistic it is to earn more per hour and the more you will have to sell or hours you will have to work to reach the minimum income floor.
- The economy - all the money deducted from the lowest earners (who normally have to spend all their money) will not be spent, will not go into the economy and will in turn reduce the income of other businesses, making even fewer businesses viable, forcing them to earn less or cease trading, and so the vicious spiral continues.
- The unemployed - with so many people previously satisfied to be on a minimal income now being expected to enter the workforce, pressure will be put on the (lack of) existing vacancies, preventing others - who may not have a self-employment/entrepreneurial bent and therefore need a job - from getting one.
- The unemployable - people like me, who who piss people off, don't pick up on social signals, don't subscribe to cultural mores and don't value 'niceness' as highly as openness and efficiency.
Implementation and Transitional Protection
Timetable (borrowed from the CPAG Universal Credit page)
- April 2013 - UC early roll-out in pathfinder areas ... (new claimants)
- October 2013 - UC introduced in one district per region across Britain (new claimants)
- October 2013 – April 2014 - UC rolled out nationally (new claimants, migration of current benefit/tax credit claimants with ‘natural change’ of circumstance)
- April/June 2014 – end 2017 - Migration of remaining current benefit/ tax credit claimants (‘managed change’)
The DWP have laid out in policy briefing notes the intention to ensure that claimants moving from what they call 'legacy benefits' to Universal Credit will not lose out financially. This only applies where claimants "circumstances have otherwise remained the same - see Para.1
Transitional Protection will apply:
- When claimants are "moved over in a process wholly managed by DWP", not when they make a claim due to change of circumstances.
- "Where the total household Universal Credit entitlement would otherwise be lower than their total existing award of benefit and tax credit" Para.2
- Claimants will receive "...an extra amount to make up the difference between the old and the new.
- [C]ash protection will continue to be paid until the value of the award under the new system overtakes the levels of the pre-Universal Credit entitlement." see Para. 3
Minimum Income Floor
Transitional Protection is not available to self-employed claimants against the effects of the Minimum Income Floor. The TP calculation will be carried out first, and if you qualify for an amount you will retain this extra amount once the MIF has been applied. This should protect payments not related to earnings - for children, housing, etc.- see Para. 4.
However, the DWP states that the self-employed 'moved onto Universal Credit' will not be subject to the minimum income floor for the first six months - see p.3 DWP quick guide
Significant circumstances that will end Transitional Protection - see Para. 7
- a partner leaving/joining the household;
- a sustained (3 month) earnings drop beneath the level of work that is expected of them according to their claimant commitment;
- the Universal Credit award ending; and/or
- one (or both) members of the household stopping work.
Questions it raises
- What constitutes a 'change in circumstances' for the purposes of having to claim Universal Credit rather than continue on Tax Credits? Will a child leaving full time education prompt the change?
- Will existing self-employed be asked to attend a work-focused interview even if they are earning more than their individual threshold?
- How will new businesses be assessed as viable? What is the process? Who will undertake the assessment? What training will they have? Will they be expert in that particular industry or sector, or in business generally? Will claimants be 'allowed' to start their business and claim UC as self-employed during any appeal process, or will they be expected to put their business plans on hold and look for a job? Is there a minimum figure for the projected revenue/profit a new business will be expected to generate? If so, what it is? Will it be the same for every business? If not, what are differences based on?
- What sort of companies will be deemed to be analogous to that of a sole owner?
- What is the definition of 'main employment' for assessing gainful self-employment under Reg.64? Is there a minimum number of hours the 'gainfully self-employed' are required to be working?
- If claimant's business is not considered viable, yet they start it anyway, in their spare time, whilst also looking for (or doing) a job, will there be scope to report self-employed income/expenditure? Can the digital reporting system cope with anomalies like this?
- How will the minimum income floor 'expected hours' be determined when, for the purposes of paid work they would have fit in with school hours? How will this be calculated when the hours are notional and there is no actual place of work to be travelled to and from as a reference for calculation? Will parents be deemed to travel a notional 90 minutes each way between school hours?
- Will minimum income floor rules be applied during any appeal against the application of the minimum income floor?
- How do we report our income and expenditure? Are we able to make a declaration (as we do now) or do we have to show evidence of expenditure? Will I have get receipts for every 20p I spend at the car boot sale? Will I have to scan in receipts? Will I still have to report my income monthly, even if I know that I am in any case below the minimum income floor?
- If work declines and we go below a certain level, will we be forced to abandon self-employment in favour of a full-time job, even if this job is only temporary? If so, will this be triggered the week we go below 35 hours, or will there be a period of grace to see if work increases again?
- Will the Transitional Protection extend to claimants who are currently on Tax Credits but have savings in excess of £16,000?
- Does disregard of business assets under Sch.10 Para.7 include cash assets?
- Will cash basis accounting for income tax be obligatory for those on Universal Credit? Are all the accounting requirements, calculations and other provisions compatible?
Please let me know if you have any additional questions. I will be sending these to the DWP for clarification.
- The Welfare Reform Act 2012 This is the primary source of the legislation
- Universal Credit Regulations 2013 Secondary legislation laying out the rules for implementing UC.
- Advice for Decision Making - especially Chapter H4 Earned Income - Self-employed earnings DWP.gov website
- The Universal Credit, Personal Independence Payment, Jobseeker’s Allowance and Employment and Support Allowance (Claims and Payments) Regulations 2013 - Technicalities of making a claim for UC.
- The Universal Credit (Transitional Provisions) Regulations 2013 The 'Pathfinder' rules, providing for the first tranche of applicants from 29th April 2013.
- Self employment, tax credits and the move to universal credit - DWP Research report, March 2013.
- Universal Credit and self-employment DWP quick guide, March 2013
- Explanatory Memorandum to the Universal Credit Regulations 2013 prepared by the DWP - explains the policy background
- Explanatory Memorandum for the Social Security Advisory Committee DWP 2012
- Transitional Protection and Universal Credit DWP Universal Credit Policy Briefing Note 10th December 2012
- Social Security Advisory Committee report and government responses -see pp.11-14
- Institute of Chartered Accountants Written Evidence to the Welfare and Pensions Select Committee, August 2012
- National Enterprise Network - Report from Universal Credit Workshop on Self-Employment July 2012 and update from Universal Credit workshop October 2012
- Rightsnet.org Benefits advice for advisers, training courses, 'toolkit', links to caselaw, etc.
- Lords Hansard 14 Dec 2011 : Column 1391-1394 debate of Welfare Reform Bill 2012
- Universal Credit "...an independently owned website that has been created to provide information about the new benefit reform system that is due to implemented by the coalition government in 2013."
- The Void "Narking off the state" - anarchist commentary
What can we do?
- Write to your MP and tell him/her how you think Universal Credit will affect you
- Tell your union, rights group, small business organisation, charity, etc how it will affect you
- Ask HMRC and the DWP a lot of questions
- Tweet about it, using hashtag #universalcredit and any other that will reach interested parties
- Post about it on Facebook
- Talk to your friends/customers/clients/associates/local shops
- Keep an eye on Ashton-Under-Lyne - do you or anyone you know live there?
- Start to plan your expenditure to match your income pattern. If your income is evenly spread, arrange to pay bills monthly. If it is uneven, try to arrange your bills and outgoings to match the same pattern.
- Consider changing your VAT accounting. There are schemes such as Annual Accounting, the Flat Rate Scheme and the Cash Accounting Scheme which spread the payments differently. Get professional advice.
- Intending to go into Higher Education ? Do so while you have children, or take your course part time if possible.
- Keep your business assets in the business rather than taking drawings and then treating them as personal savings.
- If you do low mileage, swap your car or motorbike for a van or 'other vehicle'.
- If you work for someone for nothing or at a reduced rate, enquire as to their legal structure and, if not a charity, ask them for a declaration that they do not have the means to pay you.
- Consider changing your circumstances now, before Universal Credit is introduced.
- If you are not claiming Tax Credits but think you might be entitled, or if you are planning to start a business, consider doing so sooner rather than later.
A focused campaign?
These are the rules that are the most unreasonable and will almost certainly have the worst affect:
- Basis of assessment - that self-employed income should be assessed on the basis of drawings from business profit not on the basis of business revenue, in particular that provision should be made for carrying forward of profits for expenditure not falling within the assessment period, and to meet liability for Income Tax and VAT incurred but not paid in an assessment period.
- Monthly assessment - that this is illogical and unworkable - and should either be scrapped in favour of an annual assessment period, or at least calculated from an average of the previous 12 months.
- Minimum income floor - is prejudicial to sustainable, slow-growth businesses particularly those in economically deprived areas and fails to recognise the inherent good of micro-businesses for workers, their families and their communities, and should either be scrapped in favour of actual earnings, or at least the start-up period should be extended to 5 years.