Written evidence from Equity Tax andWelfare Rights Team (UCR0191)
Update to the Work and Pensions Committee: inquiry on Universal Credit
Equity Trade Union is the UKs largest union for professional entertainers and creative professionals, with over 43,000 members currently. Equity is not affiliated with any political party. The most recent DCMS Economic Estimates report [1] states that the Creative Industries’ current contribution to the UK economy is £92bn per annum, and that the sector is growing at twice the rate of the economy.
We write to the Work and Pensions Committee to provide an update to our previous submission dated 29/09/17 based on a further call for evidence (deadline 09/01/18).
Equity runs a tax and welfare rights advice service for its members, including a national advice helpline. Most of the members that contact us with enquires are self-employed due to time constraints, this submission will address the questions raised by the committee on UC and self-employment only.
Self-employment questions
1. What effect has UC had on self-employed people?
Equity members have reported that the effect of claiming UC as a self-employed person has been increased stress due to the considerable bureaucracy involved in claiming and maintaining a self-employed UC claim. This, coupled with conditionality if they are not found to be Gainfully Self Employed (GSE), is making it considerably more difficult to get on with the professional self-employed work that they are trained to do.
Our members find that the rules for the self-employed in UC unfairly discriminate against their kind of unpredictable self-employed work, and that the nature of their work is not understood or appreciated as legitimate professional self-employment work by the DWP. At appendix 2 of our previous submission to the Work and Pensions committee, the then minister for employment at the DWP assumes that ‘in practise many low-earning performer with only intermittent self-employment earnings will not be found gainfully self-employed’ and that ‘such claimants are free to combine occasional work as a performer with job search or other paid work as an employee.’ This fails to recognise that entertainment work is a full time, professional enterprise and a career, which has a high value to the UK economy at whatever level you may work at - not an occasional hobby that can be easily combined with other employment.
Entertainers may have occasional periods where work is quiet, as with any self-employment, or periods of unemployment, as many of those working in mainstream PAYE jobs may experience. However this does not mean that they are “benefit dependant” and a risk to the public purse. Indeed, the DWP has not provided any evidence that this is the case (see (4) below). On this point, it should be noted that almost all Working Tax Credit self-employment claimants who have been subject to HMRC self-employment test and who have contacted Equity for advice and/or representation, have passed - meaning that their self-employment has been deemed to be a profession that is carried out on a commercial basis, organised and regular with a view to a profit. This is almost identical to the GSE test in UC.
2. How can the Department best balance protecting public funds with supporting self-employed people in UC? Does the Minimum Income Floor (MIF) achieve this balance?
We consider that UC unfairly penalises the self-employed group that we represent in comparison to the employed, does not provide effective support for self-employed entertainers and achieves no fair balance. We have carried out a series of Freedom of Information (FOI) requests to the DWP and HMRC Tax Credits Office for information on self-employed and social security claims. The information provided in response does not demonstrate that the self-employed, including self-employed entertainers in particular, are a threat to the public purse (see answer to (4) below). We urge the Work and Pensions Committee to, in the first instance, establish whether there is an actual evidence base that would justify the unfair treatment of the self-employed in UC.
Please see appendix 1 below (‘Equity Universal Credit Briefing: July 2017’) for detailed legal analysis on how previous social security law achieved a fairer assessment for the self-employment. Please also see appendix 2 (‘Impact of the MIF: real life case studies’) for real life case studies of the impact of the MIF for self-employed entertainers.
3. Are any groups of self-employed people particularly likely to be affected by the MIF?
Self-employed entertainers. Their work is characteristically unpredictable and offered at short notice requiring considerable preparation and intense focus. They are often paid several months after the work takes place. Payment rates fluctuate. The work is by nature itinerant; therefore they can incur considerable business expenditure depending on the requirements of the work, which again is unpredictable.
Unpredictable income is a key feature of self-employment. The MIF impoverishes the self-employed claimant who will not typically have regular self-employment work, but especially those who work in industries where job opportunities are unpredictable and short term, such as entertainment. This is illustrated in the case studies at appendix 2.
4. What are the options for reforming the MIF, and what are their cost implications?
We believe that the MIF should be abolished and replaced with the previous social security law approach (which has been judicially approved) for the assessment of self-employment. This approach based assessments on either an actual average of net profit from self-employment, or an adjustment, taking into account fluctuations in income in order to prevent financial hardship (see our previous submissions and appendix 1). We believe this approach both fair and flexible enough to support all kinds of self-employment.
It is not clear to us why the MIF is justified. It is applied to those who are gainfully self-employed, e.g. those who are in genuine, full time self-employment and doing all they can to work. Why then, is an anti-fraud measure applied to these legitimate cases? Why are these people being penalised? It would seem an inefficient way to prevent hobbyists from claiming state support. The DWP argue:
‘The Minimum Income Floor addresses flaws in the current system which allows self-employed claimants to receive fill State support while declaring very low earnings, often over many years. This has trapped claimants and their families in benefit dependency and this is unsustainable and unfair to the tax payer.’[2]
In a FOI request dated 11/10/17, Equity requested clarification on this statement, including the evidence base on which it relies. We have not been provided with a response.
Without clear evidence of what the actual cost of supporting self-employed claimants is and how that may or may not justify the MIF, we cannot in the first instance support the existence of neither the MIF nor any subsequent reform that could be made.
Equity has made a series of FOI requests from the DWP. We asked the DWP to provide statistics on UC SE claims since the inception of UC, however, rather worryingly, we were told that the DWP did not record this information (see reply FOI 4356 - public record).
We asked DWP to provide an explantion on on how estimated savings from the MIF for universal credit, as set out in the 2017 Budget Supplementary Tables 2.22 (‘The marginal cost of universal credit and its component parts’) has been calculated for the years 2017-18 to 2021-22. In reponse we received information based on a series of assumptions drawn from survey data rather than real life cases, to which stakeholders had apparently had no input (FOI reply 4354 - public record).
Finally, we also asked the Tax Credit Office to confirm whether they were recording how many WTC self-employed claimants were entertainers. They did not confirm this was the case (FOI reply 01862 - public record).
We are therefore left to conclude that not only is there no real evidence base for the unfair treatment of the self-employed, but that government departments are not ensuring that the impact of self-employment policies is being properly recorded and monitored. We are concerned that the self-employed are being scapegoated.
5. Is the existing Start-up Period for newly self-employed UC claimants appropriate? If not, what changes should be made and how much would this cost?
DWP have received evidence from self-employed groups, including Equity, on how the one year start up period is completely inappropriate for most businesses. Research by the RSA, referenced by Citizens Advice, shows that on average it will take three years for a self-employed person to be earning the equivalent of the NMW from their business.[3]
6. To what extent will UC Surplus Earnings Rules offset the impact of the MIF?
The Low Income Tax Reform Group have identified fundamental flaws in the UC Surplus Earnings Rules, especially in their 2014 report to the Social Security Advisory Committee,[4] which we urge this Select Committee to carefully consider given that since the publication of this report, there have been no significant changes to the regualtions in order to resolve the design issues and/or evidence provided to justify the policy.
7. How should “gainful self-employment” be defined under UC? For example, should “gig economy” workers be eligible to claim UC as self-employed?
We do not agree that the DWP guidance on how gainful self-employment can be assessed, especially for those in the entrainment industry, is either accurate or fair. It does not fully recognise fluctuations in work at all and is far too inflexible to help those in reality. We are concerned that self-employed professionals, such as entertainer, could be labelled ‘gig economy workers’ or treated as such, when it is established in tax law that they are usually self-employed due to the nature of their work in the entertainment.
We do not find that the conceptual link between the MIF and the GSE test has been established in UC. It is not clear at what point a self-employed claimant may or may not be found gainfully self-employed in the life of a claim. In addition, it is extremely disappointing that the right to pursue job search in your usual profession has been reduced to a discretionary decision.[5]
It is extremely troubling that the government have rejected the Select Committee’s previous call to suspend and review the Minimum Income Floor for self-employed universal credit claimants and will instead monitor and evaluate the impact of self-employment as it rolls out.[6] We consider this will create considerable and unnecessary hardship for the self-employed. It would appear that the government are committed to penalising the self-employed without considering the advice of the experts or the needs of the self-employed.
8. What is the relationship between the MIF and National Living Wage/National Minimum Wage? Is there a risk that removing or reforming the MIF would undermine the NLW/NMW?
This question fails to recognise that the self-employed are not subject to the NLW/NMW and that self-employment is a completely different form of work to PAYE employment, and one that is on the rise. It is evident that UC requires a re-design regarding the treatment of the self-employed and we argue that that the current systems of GSE, MIF and conditionality must be replaced with a recognition of the realities of self-employment, and an efficient and fair method of UC assessment that does not impose employment PAYE measures on a different type of work model.
We urge the Select Committee to consider the value of self-employment to the UK economy and to ensure that the government reviews its discriminatory position on the treatment of the self-employed in relation to UC which is still fundamentally the safety net for UK citizens. In its current format, UC creates a real risk that professional entertainers will be unable to access state support whilst continuing to pursue their professional work, and pushes them into mainstream employment, which could have serious social and economic consequences for our thriving UK entertainment industry.
For more information, please contact Emma Cotton (Tax and Welfare Rights Organiser) on 0207 670 0257 ecotton@equity.org.uk or Alan Lean (Tax and Welfare Officer) on 0207 670 0251 alean@equity.org.uk.
Tax and Welfare
January 2018
Appendix 1
Equity Universal Credit Briefing: July 2017
Most entertainers are self-employed. It has been established in case law[7] and accepted by HMRC that entertainers should usually be classed as self-employed for tax purposes, because the manner in which they work is characteristically freelance. For example:
- Work is mostly short term and offered at short notice.
- Entertainers undertake a significant amount of unpaid preparatory work for each incident of work in the course of their professional lives.
- The entertainer is a sole trader (and individual businesses) and engages agents and similar to promote them and look out for their business interests.
- Entertainers are responsible for their own expenses, which can be considerable given that the type of work is itinerant and can requires significant travel nationally/internationally.
Because work within the entertainment industry is short term, it is a natural consequence that work opportunities are unpredictable. The entertainment industry engages performers on a self-employment basis usually, therefore if you are not registered for self-employment, and you risk losing out on work as it can take considerable time for HMRC to process self-employment registration.
The creative industries are hugely important to the UK economy and are worth over £87bn in GVA – that is 5.2 per cent of the UK economy[8] and four times more than the UK’s automotive industry. Between 2011 and 2015, our sector created three times more jobs than the economy as a whole.
Universal Credit penalises those who are deemed to be ‘gainfully self-employed’ by treating the claimant as earning, in most cases, 35 x the national minimum wage each week, with a nominal deduction for tax and national insurance- this is called ‘Minimum Income Floor’ (MIF). You are treated as earning £1,047.50[9] per month, regardless of whether or not you actually do so. This results in either very little or no UC assistance, especially in comparison to previous benefits such as tax credits, and particularly in comparison to employed UC claimants, as the following examples demonstrate:-
Jenny - aged 36, single: lives on her own and rents a privately rented one bedroom flat for £697.00 per month in outer London. She trained professionally and has been working solely as an actress in all types of media since graduating from drama school 15 years ago. She has not had any paid work for a few months; however she is busy working on her self-employment (e.g. auditioning, learning roles, liaising with contacts/agent, researching, etc.). She has worked this year and has some work booked at the end of the year so far. Last year she earned around £30,000.00 profit, this year however she is set to earn £8,000.00 profit based on current estimates.
Example one: ‘Legacy benefits’
Jenny’s Working Tax Credit and Housing Benefit entitlement are as follows:
WTC award £21.05 per week/£91.00 per month
Housing benefit £109.60 per week/£474.00 per month
TOTAL £565.00 per month
Example two: Universal Credit - gainfully self-employed
In this example, Jenny claims Universal Credit. The DWP deem that she is ‘gainfully self-employed’ and the MIF is applied:
Standard Allowance (single claimant aged 25 or over) £317.82
Housing Costs element £600.00
Maximum UC award £917.82
Actual earnings £0.00
MIF applied £1047.50
63% of earnings £659.82
UC award £257.90 per month
Example three: Universal Credit - employee
In contrast to the above, if Jenny were an unemployed employee, her maximum award would be £659.92 more per month, as follows:
Standard Allowance (single claimant aged 25 or over) £317.82
Housing Costs element £600.00
Maximum UC award £917.82
UC less 63% of earnings N/A
UC award £917.82 per month
From the examples, it is clear that the self-employed UC claimant is far worse off on UC than they were on legacy benefits, and even more so in comparison to the employed UC claimant. As UC payments include housing costs, claimants will be unable to pay their rent as a result of the measure, creating a real risk of homelessness.
An analysis of the legislation for means tested legacy benefits ensures that self-employed income is assessed fairly and accurately, and this has been upheld by the courts. For example, the regulations for the Calculation of Earnings of Self-Employed Earners for Income Support, Job Seekers Allowance and Employment and Support Allowance[10] all read as follows:-
‘… where a claimant’s income consists of earnings from employment as a self-employed earner the weekly amount of their earnings is to be determined by reference to their average weekly earnings from that employment—
(a) over a period of one year; or
(b) where the claimant has recently become engaged in that employment or there has been a change which is likely to affect the normal pattern of business, over such other period as may, in any particular case, enable the weekly amount of their earnings to be determined more accurately.’
The regulation provides for various methods of assessment depending on the facts of the case, with a safeguard for hardship, and requirement for determining earnings accurately. Alongside this, there is a specific provision to allow the decision maker to depart from the regulation if necessary for the sake of accuracy:
‘Notwithstanding [the above regulation] the Secretary of State may assess any item of a claimant’s income or expenditure over a period other than that determined under [the above regulation] provided that the other period may, in the particular case, enable the weekly amount of that item of income or expenditure to be determined more accurately.’
Similarly, self-employment income assessments for Housing Benefit require that the period over which net profit is assessed must be ‘appropriate’ in order that ‘average weekly earnings may be estimated accurately’[11] and that this assessment should not, ‘in any case exceed a year.’ This approach recognises the need for accuracy and flexibility with the length of the assessment period, thereby reflecting the reality of the self-employment. In turn, case law shows that an appreciation for the realities of the claimant’s self-employment and understanding of the character of the work are guiding principles[12] for the judiciary when assessing self-employment.
HB/CTB guidance to decision makers makes clear that ‘fluctuations in business activity’[13] are to be expected and taken into account when deciding on appropriate assessment periods. It makes clear that claimant hardship is to be prioritized over uncertainty when assessing the average weekly profit:-
‘There may be some cases …when it may be more appropriate to make an assumption in the short term as to the likely future level of earnings. This avoids causing hardship to the claimant by denying benefit solely on the grounds of uncertainty.’[14]
Therefore legacy benefit law shows that fairness, accuracy and flexibility are incorporated into the rules for self-employed earnings assessments. UC regulations depart completely from this longstanding and judicially endorsed approach. It is unclear from where this mandate specifically for the unfair treatment of the self-employed has been provided for or what the evidence base was.
The treatment of the self-employed under UC has been criticised by leading experts since its inception. For example, in 2012 the Low Income Tax Reform Group (LITRG) advised the government on its UC draft regulations:
‘We are strongly of the view that if implemented as they stand, they will do severe and lasting damage to the small business sector in the UK. It will render the Government’s hope that universal credit will always make work pay merely aspirational for the self-employed – if a person faces disincentives on this scale to taking up self-employed work, but cannot find traditional employment, they will have no option but to remain trapped on welfare. That is clearly contrary to Government policy.’[15]
Regarding the disparity between the employed and self-employed in Universal Credit at Work and Pensions Committee hearing in September 2012, David Freud stated:
‘We are going to make sure that there is parity between the self-employed and employed’ and that ‘to the extent that there is not, we will sort that out.’[16]
It is disappointing to find that there has been no apparent change to UC legislation to ensure that this promise was adhered to.
Unlike other most other UC claimants, entertainers do not have a choice as to whether they pursue self-employment. They must be registered for self-employment order to work professionally. If the entertainer claims Universal Credit and is deemed gainfully self-employed then they are financially penalised by the MIF. If they are not deemed to be gainfully self-employed, then they are mandated to look for any work, primarily employment (PAYE) work which is not generally offered in performance work. This gives entertainers no choice but to depart from work that they are professionally trained to do, and may have an impact on the industry, especially in terms of enabling those from poorer backgrounds to enter it. Ironically, the standard rates for work the industry are set above the national minimum wage average, unlike the work on offer through the job centre with UC.
It is extremely disappointing that the UC system was designed with no provision for self-employed professionals like entertainers. DWP have failed to make any changes despite extensive representations from Equity. In March 2017, the Work and Pensions Committee criticised DWP for having ‘its head in the sand’ over UC and the growing body of evidence about the very real hardship that it is causing.[17] In July 2017, Citizens Advice has called on the government to pause the roll out of UC, drawing from extensive front line evidence to show how there are significant problems within system that are leaving people destitute.[18]
In April 2017, The Work and Pensions Committee called for solving problems in the practical operation of universal credit to become an 'urgent priority' in the new Parliament.[19] It later released an evidence based - ‘Self-employment and the Gig Economy’ - making numerous recommendations for change to UC, including a specific recommendation that the MIF is suspended while an independent review is carried out on UC and the treatment of self-employment:
The Department is seeking to support entrepreneurship without subsidising unprofitable self-employment. The existing Minimum Income Floor in UC does not get this balance right and risks stifling viable new businesses. The incoming government should commission an independent review of the MIF with a view to improving its sensitivity to the realities of self-employment. Until this is complete, the MIF should not apply to self-employed UC claimants.[20]
DWP argue that UC is designed to push people to increase their earnings and move off benefit, however this approach fails to appreciate that UC replaces the safety net, which the majority of society who do not have substantial wealth, may need draw upon, as unpredictable nature of life dictates; unemployment, ill health, disability and so forth. If it is made too difficult to make and/or sustain a claim, it will end up pushing more and more people into debt and hardship, and in turn creating more costs to the state - for example, with homelessness and healthcare provision. With reputable organisations and government committees lobbying for the suspension UC until it is reviewed and improved, it hard to see how the DWP can continue to ignore reality and fail to take any action.
For more information, please contact Emma Cotton (Tax and Welfare Rights Organiser) on 0207 670 0257 ecotton@equity.org.uk or Alan Lean (Tax and Welfare Officer) on 0207 670 0251 alean@equity.org.uk.
Tax and Welfare
July 2017
Appendix 2
Impact of the MIF: real life case studies
Case study one
C is a 33 years old single mother.
She is a professional theatre practitioner. Her work consists of creating and/or directing theatre, as well as acting and teaching, etc, however it should be noted that as a creative professional, she turns her hand to many different types of performance/theatrical work in the industry. She runs a theatre production company and a few after school drama clubs. She undertakes acting work in all types of media, voice over and role play.
She moved to Brighton in August 2016 from Bournemouth in order to be near the children’s father from whom she is separated, in order for them to share child care and keep the children together.
She mostly works in and around her local area and south west England in order to facilitate her work alongside childcare. She is self-employed by profession (tax law has established that entertainers like herself are usually best classed as freelance). The flexibility of her self-employment helps fit her work around her childcare responsibilities.
C has an acting and contemporary theatre degree and Equity membership. She has been actively trading as a full time entertainment worker since 2005, apart from some time out taken to have her children.
C has been found to be gainfully self-employed under Universal Credit. Her self-employment is considered to be her main profession that the earnings received from that profession are self-employed earnings and that her profession is organised, developed, and regular and carried on in expectation of profit (regulation 64, UC Regs 2013).
The minimum income floor is applied to C’s UC claim because of this. It is set at 25 x national minimum wage per month = £788.26 applied per month regardless of earnings actually received. In Charmaine’s profession, work is undertaken on a short term basis and dates for payment fluctuate. For example, in November 2017 she earned just £96.00 net profit (£141.80 gross) from self-employment, whereas in other months she may earn much more, as a monthly breakdown of her earnings for tax years 2016/17 and 2017/18 (so far) demonstrate:
C’s current UC award including the MIF leaves her unable to cover unable to cover her essential costs, as follows:
UC award
Standard amount adult: £317.82
Child: £277.08 (partner receives amount for other child)
Housing £834.05
TOTAL = £1428.95
This is reduced to only £926.18 per month taking into account the MIF and amounts taken off for advance payments and housing benefit arrears caused by UC first payment.
Essential outgoings
- Rent: £1095 per month for a 2 bed flat. (Average rent for area. Shortfall of around £260 pm)
- Council Tax: £82.81per month
- Utilities (gas, electric, water): £80-100
- Household (food, clothing, toiletries): £180-200
- Internet/phone: £20-30
- Travel: £60-80
- TOTAL = £1517.81-£1587.81
Taking into account C earnings in November, she is unable to cover her essential costs by £565.81. She has been turned down for Discretionary Housing Payment for her rent shortfall. She receives no help towards her council tax via council tax support as her local authority also applies the MIF to her award.
The DWP have advised Charmaine that in order for the MIF to not be applied, she will need to stop pursuing her professional self-employment work on a full time basis and find at least part time employment work. It is not generally possible to find PAYE work in the entertainment industry.
When C was on Tax Credits and housing benefit she was much better off as both benefits were assessed on an average of her actual earnings and allowed for fluctuations to be taken into account.
For example, based on the above, in 2016/17 she would have been entitled to £123.69 per week tax credits and £116.24 per week. She would have received this support consistently - e.g. month by month - which would help with monthly fluctuation. Her payments would increase when she reported the 2017/18 income drop. When her earnings dropped to £1829.08 in 2017/18, she would receive £145.04 in tax credit and £102.36 in housing benefit (roughly £8 per week more support).
Case study two
D is a professional actor in his early 50s who has worked his entire life as an actor. Had previous tax year income (2015/16) of around £20k. Single. Rent of £609 per month.
In the period leading up to his UC claim he had had little work, as is the nature of the profession with fluctuations in income, and periods of no paid work although he is constantly working - practising, rehearsing, looking for work, networking, research, auditions, etc. D has only ever claimed social security a few times in the past for short periods, however at that point regulations were in place that allowed him to make national insurance based job seekers allowance claims as a self-employed actor.
In 2017/18 D made a UC claim. It was initially assessed on his actual income and included housing costs. The total award was £926 including housing costs. However the UC self-employment assessment was then completed and he was judged to be GSE. The MIF was applied (set then at £1006.97). As a result his award fell to £272 per month; a drop of over £650 per month. As a result he was unable to cover his basic living expenditure, bills and rent. The day to day financial difficulties that were caused by the shortfall prevented D from being able to get on and work and he fell into considerable debt and rent arrears over the course of several months. Fortunately, he then managed to get contract work abroad and estimates that his 2017/18 tax return will report around a £20k net profit on which income tax, class 4 NIC and class 2 NIC will be charged. D believes that his profit for 2017/18 would have been higher had he not had to endure the stress caused by claiming UC and receiving inadequate support.