Universal credit rules hit self-employed

Draft regulations setting out conditions and procedures for claimants of the proposed Universal Credit (UC) will impose new reporting requirements that put the self-employed at a disadvantage, tax advisers are warning.

Gabelle’s Paula Tallon, a member of the ICAEW’s SME tax committee sounded the alarm this week after reviewing the draft regulations and 59 pages of accompanying notes.

“The purpose of the universal credit is to simplify the benefits system, but what is causing concern is how self-employed individuals are required to report their income. The reporting requirements are different to those currently being consulted on for small businesses. It makes no sense to introduce another system. These proposals are unworkable and will hit the self-employed severely,” Tallon told AccountingWEB.

“The new UC regulations will actively discourage self-employment and undermine the policies of reducing administrative burdens on small businesses. For low earners this is no incentive to start a new business.”

The Welfare Reform Act 2012, passed in March, paved the way for reforms to the benefits and tax credits system by combining benefits for the employed and unemployed into a single system.

Those eligible for UC who are in employment will receive monthly benefit payments based on their earnings in the previous assessment period, calculated from figures supplied via HMRC’s real time information (RTI) system. Anyone earning income outside of PAYE will have to declare those earnings separately.

There will be a minimum income floor to limit the amount of UC a self-employed person can claim. This threshold is intended to prevent UC from subsidising non-viable or low-paying businesses. Those launching new businesses will be entitled to a once-only start-up period where they will be excused the DWP’s usual work search/availability criteria.

Under the proposed procedures, earnings from self-employment will be reported montly to the DWP on a simplified cash income basis, via an online tool that will ask them for their total business income and details of outgoing payments under seven defined expense categories.

If a claimant does not report his/her income within seven days of the period end, their payment will be suspended. UC benefits will be withdrawn if the claimant fails to make an income report within four weeks.

“The seven-day deadline is really tight, and the way information is required is different to the existing GAAP rules and those being proposed under the new cash accounting approach. Businesses already provide information to HMRC, and now they’re getting a completely different system recording something else. Why have a parallel system? There’s no consistency,” Tallon said.

“There are a lot of other flaws,” she added, highlighting points that were raised by other ICAEW SME committee members:

  • Potential discrimination against businesses with no internet access, including security concerns for those who may have to use public computers to submit their monthly income reports
  • No formal document exists to provide the required “proof of tax registration with HMRC”
  • Ongoing uncertainty for workers about whether their employer is treating them as self-employed; they may not be aware whether or not their earnings are reported via RTI, leading to potential loss of benefits
  • Ambiguity over the definition of people who are “in a position analogous to that of a sole owner or partner in the business”.

The draft Universal Credit Regulations 2012 published on 15 June were drafted under the powers of the act are likely to come into effect by August, but given the scope of the changes, the Social Security Advisory Committee (SSAC) headed by former HMRC chair Paul Gray has been asked to seek evidence on the measures before implementation. The deadline for responding is 27 July and Tallon is keen for the profession to express its misgivings about the UC regulations to the DWP.

“Accountants outraged at the proposals should feed their comments to their professional bodies so representations can be made,” Tallon said.

This article first appeared on AccountingWEB on 27/06/2012.