Universal Credit and Self employment

Self-employment start up period

We recognise the need for claimants who are setting up a business to be given time to establish themselves and find sources of support. Therefore where a claimant has been self-employed for less than 12 months, a start up period will be granted.

This means that claimants will not be required to look for work or satisfy requirements to be available for work, and we will not assume a minimum level of income from self-employment (known as the ‘Minimum Income Floor’). This will give them time to concentrate on developing their business.

Claimants will be allowed a new start up period every 5 years rather than once in their lifetime.

John Walker - Chairman of the the Federation of Small Businesses (FSB):

'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.
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.

Furthermore, both HMRC and DWP are placing too much faith on the ability for small firms to deal with their tax affairs online. It betrays a lack of understanding about the way small businesses operates. Moreover, the UK’s digital infrastructure simply isn’t able to cope.

The Low Incomes Tax Reform Group (LITRG), supported by a number of tax, business and accountancy organisations are calling for an urgent rethink on how small businesses and the self-employed will be dealt with under Universal Credit.

These views were set out in a letter to the Welfare Reform Minister, Lord Freud.

LITRG’s chairman, Anthony Thomas, said: "'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. There will also be a significant increase in bureaucracy for small business. Both of these are the opposite of what the Government want.'

The LITRG say that the mechanics of Working Tax Credit have so far worked well for small businesses in that they recognise the same profits and losses as for tax purposes. This means that where the tax system supports self-employed people 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. Businesses will have to draw up two sets of accounts – one for HM Revenue and Customs (HMRC), the other for the Department for Work and Pensions (DWP) – and the latter will have to be done monthly, thereby massively increasing bureaucratic burdens. The basis of accounting favoured by DWP will not give full recognition to large items of expenditure in any one month, potentially heavily distorting the economic reality of how a business is doing.'

letter to Government