The Minister will remember that I raised a number of issues in the debate on 17 January concerning the self-employed and the quasi self-employed. These were mainly around the requirement for monthly reporting, the burden of different systems being applied for tax and benefit purposes, and the need to recognise that not all self-employed people were in a position to choose their employment status. If I had had time, I also would have raised the problems caused by the different criteria used by HMRC and the DWP for claiming reasonable expenses, as well as the need to recognise seasonal variations for those working in agriculture and preparation periods for freelance writers.
I made the point that under generally accepted accounting principles, a true and fair statement of how a business is doing involves accounting for business receipts and expenditure over a period to which they relate. The huge advantage of working tax credits was that this principle was also adopted, enabling claimants to draw up one set of accounts that keeps administration costs down and matches the support given by the benefits system to the actual state of the business. The universal credit regulations have departed completely from these generally accepted principles by requiring a month by month reporting system and not allowing any carryover of a previous month’s loss. This artificially short period does not present a true and fair picture and does not allow for events beyond the claimant’s control.
No provisions have been made in the regulations for seasonal gains and losses or periods of economic difficulty, and there is no recognition that a business may experience low or no profits. Added to this, there is no facility for carrying forward a loss made in one month to subsequent months. This is a fundamental flaw in the design of the regulations for the self-employed. The Government see the need for this facility, but have not made any changes, because the IT system has not been designed to allow carry-forward. In reply to the point about carryover in January, the noble Lord, Lord Freud, assured the House that,
“I am aiming to introduce something for that to work efficiently; that will be in time for when the people who need it will be using it”.—[Official Report, 17/01/13; col. 832.]
The noble Lord made a similar remark earlier this evening. I believe that the Minister is looking for a solution, but it is not yet there and I have a number of real concerns.
My first concern is the Minister’s statement that, “It will be in time for when the people who need it will be using it”. I am not so sure that the Government have the luxury of the six months’ grace or the year’s lag. What happens if the wife or husband of the self-employed person puts in a claim for universal credit first? Surely the information on the self-employed person’s earnings will be required straight away. Secondly, the regulations could have a damaging impact on particular industries. I use the example of farmers and the farm industry, although other examples could be writers and actors. A farm could have a negative cash flow for eight or nine months a year, as cited in the Social Security Advisory Committee’s recent report, and its entire income could be concentrated in a three or four-month period when the farm’s produce is sold. Even a quarterly reconciliation would not work in these cases, let alone monthly assessment.
There are also a range of factors beyond the farmer’s control, such as the weather and inability to move stock, which would affect the profitability of a farm. In answer to a Parliamentary Question on 28 February last year, we find that in excess of 90% farmers in England and Wales are self-employed; and between 31% and 43% of all farmers earned less than the national minimum wage over the past five years. Imagine the scene at the assessment interview, where there is a framed motto on the wall which reads:
“Universal Credit should support people to be self-employed but only insofar as self-employment is the best route for them to become financially self-sufficient”.
This is a point that the Minister has already raised. I realise that it is a long motto to have on the wall, but it is important to quote the Government’s response to the Social Security Advisory Committee in full.
So the farm worker, possibly self-employed or technically self-employed, is sitting there and told by the assessor that his way of life is not “the best route for them to become self-sufficient” and that he should go back and look for work. Remember that 60% of farmers’ income already comes from taxpayer subsidies. That is the self-employed in the farming industry down the pan for starters. Obviously we should not accept that a third of all farmers should seek alternative work without considering a number of factors, many of which I have mentioned. How qualified will the assessors be in making these judgments, and how detailed will the guidelines need to be to ensure consistent standards of application? The Government have apparently turned their back on a pilot scheme, which is regrettable.
A third concern is the construction industry, where bogus or quasi self-employment is anything from 40% to 90%. It suits the contractor because it gives flexibility to hire and fire and it sometimes suits the individual for tax reasons. Other workers accept self-employed status as the only way to get a job. Contractors must submit monthly returns detailing all their subcontractors’ pay during the tax month and certifying that none of them is an employee. The view of the Business, Innovation and Skills Committee in 2008 was that,
“the questions asked of a contractor to establish whether any of their sub-contractors are self-employed, are remarkably similar to the criteria used for identifying direct employment”.
As I said in my report on the underlying causes of fatal accidents in construction, the current system,
“relies too much on HMRC monitoring and enforcement resources which are likely to come under pressure in any economic down-turn”.
6.45 pm
The Government have accepted the recommendation by the Social Security Advisory Committee about the importance of correctly identifying those who are technically self-employed and would be more appropriately treated as an individual seeking employed work, and those who are self-employed and developing their business. The initial gateway interview will determine this. Referring back to the BIS committee definition of self-employment, how will this work for construction workers? The gateway interview will decide that they are not in gainful employment and send them off to seek work. They will turn up at the building site and if they get a job they will be regarded as self-employed—with or without their knowledge. As the Low Incomes Tax Reform Group said,
“employers treat them as self-employed, even though the relationship between the worker and the engager is in reality, strictly and probably legally, one of employment. The workers have no real choice in the matter—either they work for that employer on those terms, or they look elsewhere for work and face whatever sanctions are imposed for failure to take up the work that is offered”.
I am seriously concerned that many workers—particularly building workers—will find themselves in a no man’s land where these regulations are concerned. The uncertainty of their employment status is endemic in the construction industry and it has been tolerated
by successive Governments. As the Social Security Advisory Committee saw for itself when it visited a jobcentre, the practice,
“of ‘jobs’ being advertised on ‘self employed’ terms … appears to be most common in casual or temporary employment and often involves the more vulnerable and lower paid”.
The committee recommended that,
“the Government should provide further clarity on the responsibilities of the Government, employers and their intermediaries, and individual jobseekers in determining the employment status of posts, in particular for the purpose of reporting income”.
This is an important recommendation, because it recognises that potential claimants should not be expected to take on the whole burden of the idiosyncrasies of their industry. For over four decades, successive Governments have failed to tackle the wild west employment world in the construction industry. Not only does it have an impact on claimants, it also means that we have lost billions in tax revenue over the years. It could all end up with an out-of-work construction worker sitting in an office with an assessor, possibly a very junior grade civil servant, being cross-examined about whether he is,
“in a situation of seeking work rather than developing a business”.
I am not saying that an attempt should not be made to distinguish between the two. In fact, I am pleased that more attention is being given to the subject of the self-employed and more information is now being sought. However, if successive Governments could not disentangle the real employment status of workers in the construction industry, how will jobcentre staff achieve it and who will be the potential losers? The self-employed and those who are employees, but designated self-employed because of the nature of their industries or their lack of bargaining power, deserve answers and practical solutions when they get into difficulties.
Finally, the Prince’s Trust survey of its successful businesses cited two entrepreneurs who said that working tax credit, which is going to be replaced by the UC rate, has been a life saver and was “a real lifeline”. I hope that the eventual verdict on these regulations by the self-employed will not be that they were left to sink or swim.