Universal credit reforms risk 'crushing' hopes of self-employed people, warn MPs

Some 5m people are now self-employed, accounting for 15 per cent of the British workforce

Frank Field, Labour chairman of the Work and Pensions Committee (Justin Sutcliffe)

Theresa May’s flagship welfare policy risks “crushing” the prospects of millions of self-employed workers, an influential committee of MPs has said.

A new report by the Work and Pensions Committee said universal credit was “designed with little regard for the reality of self-employed work” and poses a “very real risk” to entrepreneurship and the wider economy.

New rules mean business owners must show they are earning a minimum amount after a year to qualify for universal credit - so the state is not subsidising unprofitable firms - but MPs have warned it was too short for startups to get off the ground.

There are around 5m self-employed people in Britain, accounting for 15 per cent of the total workforce.

The concerns are latest in a long-running row over the overhaul of the benefits system, which merges six existing benefits into one single monthly payment.

Frank Field, Labour committee chairman, urged ministers to extend the cut-off period to three years or risk forcing potentially viable start-ups to close.

“Universal credit was not designed with self-employment in mind and it shows,” he said.

“Its current set-up for people starting and running their own business risks crushing potentially viable, productive enterprises. At the same time, it risks throwing away the significant investment of taxpayers’ money in them to that point.

“The DWP should give people longer to get going, and not punish them for the income volatility that is in the nature of self-employment.

“This would give a boost to the entrepreneurship that is so vital in a dynamic economy. It would also offer good value for taxpayers and a fillip to the department’s beleaguered flagship policy.”

MPs said there was no evidence to back up the suitability of a one-year period and the Department for Work and Pensions (DWP) will not publish any significant analysis of the controversial benefit's effect on self-employment until 2019 - four years after the full service roll-out began.

People with seasonal incomes such as farmers or traders working on a job-by-job basis would also struggle with monthly reporting requirements, as their earnings can fluctuate, the report found.

The committee urged minister to ditch its "unyielding commitment" to monthly reporting and give workers more flexibility, with advice from work coaches.

Luke Johnstone, founder of smoothie company Pack’d, told the committee it had taken two years of working tax credits to get to the point he was running a successful company.

Luke Johnstone, Founder & Managing Director of PACK'D (PACK'D) (PACK'D)

He got into personal debt when starting the business and it took two and a half years before he began to earn the minimum wage.

Responding to the report, Mr Johnstone added: “The current design of universal credit is a false economy that compromises long term benefits for short-term savings and discourages social mobility.

"A one year deadline does not reflect the many nights it takes to become an overnight success and the odds in business remain firmly stacked against those that cannot afford to start."

A spokesperson for the Department of Work and Pensions said: “Entrepreneurs make a vital contribution to local communities, and that is why Universal Credit tailors the support available to self-employed people to ensure they have the right conditions to thrive. Through Universal Credit people can receive support from dedicated work coaches as well as access to business mentoring support from the New Enterprise Allowance.

“We recognise the important role of entrepreneurs in boosting the economy, however it’s unsustainable for Universal Credit to prop up unviable businesses that may not be working. Universal Credit strikes the right balance between helping new businesses and being fair to the taxpayer by supporting self-employed people during the first year while they establish their business.

"After the initial year, gainfully self-employed people are treated as if they are earning the minimum wage. If they are not and they want to maintain the same level of income, they will be expected to increase their earnings rather than relying on their UC payment.”