Written evidence from The Association of Independent Professionals and the Self-Employed (IPSE) (UCR0174)
About IPSE
The Association of Independent Professionals and the Self-Employed (IPSE) is the largest association of independent professionals in the EU, representing over 67,000 freelancers, contractors and consultants from every sector of the economy. It's a not-for-profit organisation owned and run by its members.
We believe that flexibility in the labour market is crucial to Britain’s economic success, and dedicate our work to improving the landscape for the freelance way of working through our active and influential voice in government and industry.
IPSE welcomes this timely inquiry into the rollout of Universal Credit and self-employment. Government urgently needs to reconsider how UC is affecting the self-employed, particularly around the operation of the Minimum Income Floor.
1.What effect has UC had on self-employed people?
There is strong evidence that Universal Credit (UC) is putting a severe strain on the finances of the self-employed, and in many instances is leading to significant hardship. Rather than incentivising work, the punitive nature of UC is pushing people into unemployment.
There are many examples and personal stories that demonstrate the problems UC is creating for self-employed people, but below is highlighted just one case as reported in the Huffington Post.[1]
IPSE recognises the principle that government wants to simplify the benefits system while incentivising work, but UC as it currently operates unfairly hits the self-employed, as well as pushing people into unemployment. This is because the Minimum Income Floor (MIF) does not take account the fact that self-employed earnings are very likely to be volatile. The MIF typically assumes a level of earnings equivalent to a full time employee earning the national minimum wage. Where earnings fall below this level in any given month, an individual’s UC entitlement is not topped up to reach the MIF. However in months where they earn over the MIF, for each pound they earn over the MIF, 63 pence will be deducted from their entitlement.
By not topping up their entitlement in months where earnings are low, and reducing their entitlement in months where earnings are above the MIF, the self-employed are not being treated fairly. This system of monthly assessment simply does not work for the self-employed who often have uneven income across a year. For example, a farmer will sell their crops or produce at a particular time in the year and will be penalised by the system. Similarly, self-employed businesses will face large one-off costs such as an insurance premium or storm damage that will skew the profit figures for any given month. There must be greater flexibility in the system if it is to work for the self-employed.
On top of the financial hardship many self-employed people are facing, the accounting rules under UC are creating significant administrative burdens. This is because the self-employed are forced to account 12 times a year to DWP on one basis, and once a year to HMRC on a different basis.
The government urgently needs to review the impact that UC is having on the self-employed, particularly around the MIF and whether the system can be made to work more fairly for the self-employed. IPSE sets out some options for reform in Q5.
2. How can the Department best balance protecting public funds with supporting self-employed people in UC?
DWP must ensure the Gainfully Self-Employed (GSE) test is applied fairly. IPSE believes JobCentre Plus staff must realistically assess each case on its merits – if it is clear an individual has little chance of creating a profitable business, then it is right that the state should not be subsidising such a loss-making venture. Jobcentre Plus Work Coaches do need more preparation for supporting self-employed UC claimants though, and guidance around the Gainfully Self Employed (GSE) tests. As recommended in the Mone Review, effective communication products for Work Coaches must be developed. This will help prepare staff to administer the GSE tests. [2]
However Job Centre Plus do need to do far more to support and advise new self-employed UC recipients on ways to grow their business income, including by signposting them to appropriate business support schemes in their area. Alternative options should be explored however for existing UC recipients, who will not necessarily come into contact with JCP staff, to enable them to boost their income – and ultimately move off UC.
IPSE believes it would also be wise for the Department to take a longer term view of what will be best for the public finances. As we outline in question 6, it often takes some time for a business to become profitable. By imposing the MIF after just 12 months, many self-employed businesses can no longer afford to operate. If the start-up period was extended to 24 months, it is highly likely that more businesses would survive and indeed go on to thrive, no longer needing to rely on UC and contributing additional tax revenue to the public coffers.
Although not directly related to the department’s work, the government needs to do more to better police the boundary between employment and self-employment. As the Taylor Review highlighted, there is a great deal of uncertainty around employment status in the UK.[3] IPSE believes this is largely due to the fact that self-employment is not defined in law, and therefore companies are more easily able to push people into self-employment against their will. This allows these unscrupulous companies to avoid being liable for certain taxes such as national insurance contributions, or to be exempt from providing them with employee or workers’ rights – ultimately hitting the public purse. This is an endemic problem in certain industries – for example it has been found that in the care sector ‘agencies were designating care workers self-employed, despite the fact that the workers were completely reliant on the agency for work’.[4]
3. Does the Minimum Income Floor (MIF) achieve this balance?
No. As outlined in Q1 and Q4, the MIF unfairly penalises the self-employed for not having a steady income stream leading to financial hardship and stress. Similarly, in many cases it has done the opposite of incentivising work – pushing people into unemployment.
4. Are any groups of self-employed people particularly likely to be affected by the MIF?
As outlined in Q1, the MIF penalises those with fluctuating incomes and therefore hits seasonal businesses and all self-employed businesses that may experience large one-off costs. As the Resolution Foundation has demonstrated, an employee and a self-employed person can earn the same over the course of a year, but because of the way the MIF works, the self-employed person could be £3,000 worse off under UC.[5]
On top of this, low earning self-employed people will of course suffer more from the unfairness of this system. This particularly hits women, 51% of whom earn less than £1,000 per month, compared with 36% of men. The UK’s 750,000 self-employed disabled people will also be disproportionally affected, as their earnings are 23% lower than those without disabilities.[6]
5.What are the options for reforming the MIF, and what are their cost implications?
IPSE strongly believes the MIF must be reformed to take account of the fact that self-employed earnings are volatile. Not just seasonal businesses, but also those many self-employed businesses that face large one-off costs are penalised by the system as it currently operates. Government should undertake a review into how UC is working for the self-employed, with a strong focus on the MIF.
In terms of reforming the MIF, IPSE believes as a principle that self-employed earnings should be considered on an annual basis rather than month-to-month, in order to properly consider the uneven nature of many self-employed people’s incomes. Government should explore whether this could be linked to self-assessment, with the additional benefit of simplified accounting for claimants. With the introduction of Making Tax Digital, it would make sense for this to move to a quarterly basis.
There are other ways in which government could look to introduce greater flexibility in the system. For example, in a given twelve month period (after the Start-up Period) a self-employed person could be allowed three separate months below the MIF without being penalised. The MIF could then be applied in the fourth month, as this would suggest a pattern of low earnings rather than simply volatility. DWP could also at this stage apply the GSE test again or offer greater business support to the individual.
Consideration also needs to be given over the “cliff-edge” from the Start-up Period to applying the MIF. There is a strong argument, given the data set out in our answer to Q6, that expecting self-employed businesses to be earning well over £1,000 a month after just one year of trading is unfeasible. The self-employed will on average be earning £665 a month in their second year of trading. There is therefore a strong argument for tapering the MIF so that for example, it is set at this level in year two before reaching its current level in year three.
6. Is the existing Start-up Period for newly self-employed UC claimants appropriate? If not, what changes should be made and how much would these cost?
No. The existing Start-up Period of twelve months does not accurately reflect the reality of how long it takes to create a profitable business. The MIF assumes that after a year a self-employed business will be earning £1,092 a month. This just does not square with reality– the Mone Review found just 29% of businesses would be earning over £1,000 after the first year of trading.[7] The findings of the RSA back this up – the average monthly earnings for the self-employed are £308 in the first year of trading and £665 in the second.[8]
Expecting self-employed claimants to hit the MIF after just one year of trading is therefore unrealistic, and will kill off many businesses before they have the chance to become profitable. Government urgently needs to revisit both the operation of the Start-up Period and MIF if UC is to properly help the self-employed.
The Start-up Period should be extended to two years, or it should be appropriately tapered so it more accurately reflects the typical level of self-employed earnings after one year of trading.
7. How should “gainful self-employment” be defined under UC? For example, should “gig economy” workers be eligible to claim UC as self-employed?
If an individual is gainfully self-employed, they will have existing clients or clear evidence of the likelihood of having future clients (eg orders). The GSE test also needs to consider the costs incurred by the individual, and the likelihood of the business generating a profit in the long-term.
It is not within the remit of JobCentrePlus staff to consider the employment status of individuals, and therefore it would be strange and inappropriate for ill-defined terms such as the “gig economy” to be considered ineligible for UC.
December 2017