Rethink self-employed universal credit rules, ministers told

The government needs an “urgent rethink” on how freelancers and the self-employed will be dealt with under universal credit – the new benefit that is to replace tax credits and most other working age benefits from October next year.

Sounding the call, advisors to the smallest business sector said that, rather than universal credit ensuring that “work always pays”, the self-employed will fall short of the mantra by actually facing disincentives to taking on self-employed work.

In addition to foisting extra bureaucracy on business owners, which the government has vowed to avoid, the proposals will see an income dip for many self-employed people so significant that it will make their independent careers prohibitive.

The Low Incomes Tax Reform Group added: “The proposed minimum income floor will further distort the picture and will mean that the self-employed will receive less benefit than employed claimants even though their income may be the same.”

The recent growth in the UK's self-employed army is therefore at risk, the Federation of Small Businesses warns, as is its seemingly welcome but disputed impact on joblessness.

“The reason why the recession hasn’t proved as devastating on employment as first feared is because huge numbers of people laid off from their regular jobs have turned to self-employment,” the FSB said.

“However, the government needs to be clear these proposed changes to Universal Credit could reverse this trend and remove a valuable route back into the labour market through self-employment. Entrepreneurs and small firms already find tax complicated to deal with and these proposed changes are completely at odds with ministers’ wishes to simplify the tax system.”

Under the current framework, the LITRG said working tax credits, due to be replaced by universal credit from 2013 for four years, have generally “worked well” for the self-employed, for recognising the same profits and losses as for tax purposes.

This means that where the tax system supports the self-employed through start-up or loss-making periods, or times when they are investing heavily to grow their business, tax credits do likewise.

“Under the universal credit rules as currently proposed those advantages will be lost,” LITRG objected. “Businesses will have to draw up two sets of accounts – one for HMRC, the other for DWP – and the latter will have to be done monthly, thereby massively increasing bureaucratic burdens.”

Mr Thomas scoffed: “The government say that universal credit will ensure that work always pays. That will not be the case for many self-employed.

“There will be disincentives to taking up self-employed work, leaving some people unnecessarily trapped on welfare.”


24th July 2012

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