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My Lords, I shall concentrate on an area in which the Government take some pride: the self-employed. The Bill will make the lives of the low-earning self-employed more difficult. The chasm between the Treasury and the DWP is more apparent in this area than in any other. There has been a huge growth in the number of self-employed since 2008 and the Government have favoured it as a viable route off welfare and into work, which is good, provided that it is not forced and that it is genuine self-employment.
Benefit claimants starting their own business are encouraged by the Government with a grant or loan under the new enterprise allowance, together with support from a business mentor. Perhaps the Minister could tell the House, if not today then in a letter that could be placed in the Library, how many loans or grants have been awarded in such circumstances together with their value, and how many business mentors have been involved. You never know, that may present a rosy picture, but things become a lot bleaker for the self-employed when one contemplates the effect of the tax credit and universal credit cuts without the counterweight of the new national living wage premium—which employees, but not the self-employed, will receive. It has also become tougher for the self-employed to secure working tax credits since April this year.
I am grateful to the Low Incomes Tax Reform Group, and to Robin Williamson and his colleagues, for the briefing that they have provided. As I said, HMRC has tightened up the rules for the self-employed claiming working tax credits. The decision was first announced in the Chancellor’s Autumn Statement in December 2014 that self-employed claimants whose earnings were below 24 hours a week multiplied by the national minimum wage would be asked to show that their self-employment was genuine and effective. At the time of the Autumn Statement, the Low Incomes Tax Reform Group said that the proposed test was likely to discriminate unlawfully against disabled self-employed people who might not be able to work 24 hours a week for health reasons but who qualified under existing legislation on the basis of a 16-hour week.
The actual legislation, SI 2015/605, effective from
In a briefing published in April 2015, HMRC offered some information about how the new condition will be applied. It refers to selecting cases on the basis of a minimum-earnings threshold equivalent to qualifying working hours multiplied by the national minimum wage. It appears from its guidance that it is using the declared hours of the claimant rather than the hours needed to qualify for working tax credit to select claimants, and that leaves many uncertainties. How will HMRC determine whether an activity is undertaken on a commercial basis? Will there be practical implications for the difference in tax and tax credit interpretation of status, whether employed or self-employed? How will claimants and prospective claimants be helped to ensure that they claim on a correct basis to avoid incurring an overpayment by mistake? Apparently, HMRC is still developing its guidance on this. No wonder the Bow Group has said that self-employed people may be pushed on to unemployment benefits as a result.
I turn to the minimum income floor and universal credit. I raised this during the debates on the Welfare Reform Act, and nothing has changed. The Government make the incorrect assumption that a self-employed person is running a viable business if they are making a clear profit equal to at least the national minimum wage. This ignores the fact that a business has to meet its own costs and expenses before it can declare a profit, and for an employee the salary that he or she is paid is clear of all those costs and expenses. The self-employed worker, though, has to pay for rent, heating, lighting, office equipment, a van, tools and so on, and can take home only what is left over. The two situations are not comparable. However, the DWP, in administering universal credit, deems that a claimant who is gainfully self-employed should be earning a clear profit equal in most cases to the national minimum wage for a 35-hour week, known as the minimum income floor. If they are not, their welfare payments will be restricted as though they were.
The exception is the start-up period during the first 12 months of a new business. This policy is unrealistic and impractical because very few self-employed people are able to make much, if any, profit in the early years of a new business, let alone the first 12 months. Many make a loss as a result of new premises, low receipts, bad debts, seasonal factors or taking on their first employees. This particularly affects the farming and hospitality industries. From April 2016, claimants will be allowed a limited carry-forward of cash trading losses made in any month, but this will not help to cushion the impact of the minimum income floor. Another rule will provide that if the claimant’s earnings in a month are high enough to no longer entitle them to universal credit, any surplus is to be treated as earnings in any of the next six months in which the claimant again claims universal credit. This rule is likely to bear more harshly on the self-employed claimant, again because of the impact of the minimum income floor.
Do the Government intend to align the minimum income floor with the national minimum wage, or the national living wage for the over-25s? This would raise the level of profit that they assumed a self-employed universal credit claimant was earning if their actual earnings in the month were less than that amount. With the cuts in tax credit levels and an increase in deemed income for universal credit purposes without any increase in actual income, this would be a double whammy for the low-earning self-employed worker and Britain’s pay rise would become another cut in welfare for the low-income self-employed worker.
Lastly, I want to raise the issue of the support for mortgage interest. According to the impact assessment, 170,000 households receive support for mortgage interest or SMI, 55% of claimants are of working age, and single females comprise almost half the case load. However, it is difficult for me to say how many self-employed would be affected because there is no reference whatever to the self-employed in any of the impact assessments.
Whether or not the proposal is justified, it will make life more difficult for the self-employed on low earnings. The SMI payments will be changed from a benefit to an interest-bearing loan, secured against the mortgaged property, from April 2018. Would the Minister consider a two-year grace period before SMI payments become loans secured on the property? This change, which would reflect an option previously given by the DWP during consultation, would ensure that SMI continued to act as a straightforward short-term safety net for homeowners in financial difficulty. I strongly believe that interest should not be charged on SMI loans, and that administrative costs should not be secured on property. I look forward to the Committee stage of the Bill.