Universal Credit

Baroness Donaghy Excerpts

Wednesday 21st December 2016 Lords Chamber

[Baroness Donaghy (Lab)]

I thank the noble Lord, Lord Farmer, and the Government for enabling this end-of-term Christmas show to pay tribute to a man who looks as amiable as Bob Cratchit—and whom I sincerely hope history will not judge as Scrooge. A Minister who actually understands his brief is regarded as a clear and present danger to his own side. The Opposition know that he has the confidence to make changes where they make sense and do not harm the overall project. His is one of the most complex and heavy areas of work, and he steered it through for six whole years on the Front Bench. In prison terms, that must make the noble Lord a long-termer.

During the debate on the then Welfare Reform Bill, I tabled an amendment about exempting industrial injuries benefit from the benefit cap. The noble Lord said in reply:

“My Lords, I will not make any promises on this but I will have another look at it. That is the weakest of possible promises. In fact, I am trying to say that it is not a promise at all”.—[Official Report, 23/11/11; col. GC 428.]

However, he delivered on this, and I was eternally grateful.

Others will be able to speak much more coherently on the other aspects of universal credit. I still think that including housing benefit was a huge mistake, and administering universal credit is extraordinarily complex, but it is not my intention to rain on today’s parade.

The noble Lord will probably know that my ignorance of welfare matters was total. When asked to participate in the debate, I explained to the noble Baroness, Lady Hollis of Heigham, that I had worked for 40 years and my expertise was in the world of employment. She immediately replied, “That’s excellent—you can deal with the self-employed”. I buried myself in this world and must have bored the Minister rigid with my analyses. I like to think that if the Treasury had allowed him, he would have been more flexible with the problems of the low-paid self-employed. I promise him that I will continue to pursue this.

Finally, I have to say something about the Mesothelioma Act 2014, which would not have existed without the noble Lord, Lord Freud. I took part in the debate as a tribute to the trade union movement, which campaigned to get mesothelioma recognised as an identifiable disease. Arising from the Act, an oversight committee was set up and I was invited to chair it. We oversaw the paying of £26 million last year, and the noble Lord should be extremely proud that claimants and their families will at least have some anxieties removed as a direct result of his actions.

I hope the noble Lord does not object if I conclude with a limerick. For the benefit of Hansard, the second line is “cold-water warrior”—I would not like it to be set down as “Cold-War warrior”:

“There was a long-termer named Freud,

A cold-water warrior who toyed

With a system that groaned

And a Chancellor who moaned,

And to his universal credit, he deployed—partially”.

God bless us, every one.

Welfare Reform and Work Bill

Baroness Donaghy Excerpts

Monday 14th December 2015 Lords Chamber

Moved by

[Baroness Donaghy]

61: After Clause 15, insert the following new Clause—
“Self-employment and minimum income floor
In Schedule 1 to the Welfare Reform Act 2012 (universal credit: supplementary regulation-making powers), in paragraph 4, at end of sub-paragraph (4) insert “, and may prescribe modifications of such provisions in respect of particular persons or classes of persons”.”

[Baroness Donaghy (Lab)]

In moving Amendment 61, I shall speak also to Amendment 66 in my name. The detailed amendment comes before the general one, but it is about the self-employed—and the Minister will not be surprised by that because I raised this in the Welfare Reform Bill discussions. I am coming back to haunt him.

With approximately 4.8 million self-employed people, this is an important area for growth in our economy, which makes it even more surprising that this Bill makes no reference to the particular and varied needs of the self-employed at such time that they might need some support from the social security system. I am grateful to the Low Incomes Tax Reform Group for its briefing.

Amendment 66 would add a new reporting obligation on the Government about self-employment and the impact of the minimum income floor in particular. The self-employed are a very diverse group which includes freelancers, farmers, seasonal traders and workers in construction and IT. Their needs will be different if their businesses are start-ups or are ongoing business. We need an annual government assessment. Some will take up to five years before their business is viable, and some will experience extremes of volatility in their income depending on their profession. We do not know enough about how this diversity fits into the social security system. The self-employed might be flexible, but their experience of the system is anything but.

I am arguing for a different system for the self-employed and for groups within the self-employed, particularly bearing in mind the Chancellor’s announcement that the minimum income floor will be the equivalent of the national living wage from next April, when it was originally the statutory national minimum wage. That is comparatively good news for the employed, but is bad news for the self-employed. To require the self-employed claimant to achieve an earnings pattern similar to that of the employed claimant is fundamentally to misunderstand the nature of profit and to ignore the fact that a business has to meet its costs and expenses before it can declare a profit. They include rent, heating, lighting, office equipment, vans, tools et cetera.

Reporting to Parliament would help to reveal what work is organised and regular under the new, much more stringent test to qualify for working tax credit. It would help to reveal how monthly reporting to DWP for universal credit purposes adds to the difficulty in the lives of the self-employed. This also has to be seen in the context of the Chancellor’s recent announcement that small businesses will have to report quarterly from 2020 instead of annually, just as our largest companies are dropping quarterly reports to their shareholders. Apparently, it is going to be made easy because the Government are,

“going to build one of the most digitally advanced tax administrations in the world”.—[Official Report, Commons, 25/11/15; col. 1361.]

Does that statement not fill you with terror?

The assumption is that more frequent reporting will improve accuracy, but that is far from the case. It does not take account of annual reconciliation, disputes about holidays or sickness, seasonal working or long periods of not working for freelancers, particularly writers and actors. We have the best actors in the world, but it is important that they do not all come from Eton. Equity recently conducted a survey of its members and found that 20% had claimed some form of benefit in the previous 12 months and more than half of them had claimed tax credits. When asked about their earnings, 25% of Equity members said that they earned between £5,000 and £10,000 from their self-employed work in the previous 12 months, and just over 23% earned between £10,000 and £20,000. Equity has said that when you factor in net profit figures, it is clear that many will hit the problem of the minimum income floor. I hope I will be forgiven for repeating what I said at Second Reading, which is that is that a minimum income floor is set for the self-employed who are deemed to be earning the national minimum wage—recently changed to the national living wage—whether or not they earn it.

You could argue that at least this is equal misery for all under the new system, but it is worse for those self-employed people with fluctuating earnings. If earnings in any month from April 2016 onwards are high enough to disentitle the claimant from universal credit, the surplus earnings regulations will apply to bring the surplus earnings in that month into account as earnings for universal credit purposes in each of the next five months. To summarise, actors will be worse off because of the application of the minimum income floor. That is why I ask in Amendment 61 for more flexibility to be applied to certain work groups because of their fluctuating earnings. It may seem an obscure amendment because it refers to the Welfare Reform Act 2012. However, the purpose is the same as it was when we discussed the self-employed during the debates on that Act. There is no evidence that a flexible approach has been adopted since the Act, and I do not believe it is impossible to prescribe the modifications that I have asked for.

To be self-employed, activity needs to be undertaken on a commercial basis, with a view to making a profit, and, as I said earlier, it must be organised and regular. With effect from April 2016, a self-employed claimant must register as self-employed with HMRC for self-assessment and provide their unique taxpayer reference with their working tax credit claim. It remains uncertain how HMRC will determine whether an activity is undertaken on a commercial basis; whether there will be different interpretations of whether someone is employed or self-employed for tax and tax credit purposes; and how claimants and prospective claimants will be helped to ensure that they claim on the correct basis to avoid unwittingly incurring an overpayment. HMRC is still developing its guidance, apparently.

The Minister’s letter to Peers of 25 November 2015 says that the same tests for determining the commerciality of a trade will be applied to tax credits as to income tax. However, the Minister goes on to say that if HMRC decides that the test is not met for tax credit purposes, the income from the activity will still be subject to income tax. It would be interesting to know on what basis that income would be taxed; if it were taxed as profits of a trade, it would be an indication that the tests of commerciality are not the same.

The minimum income floor will be particularly problematic—a word that I cannot say—for seasonal trades and trades that take more than 12 months to move into profit; newly established businesses taking on their first employee; businesses experiencing a downturn, a bad debt or the bankruptcy of a key customer; businesses depending on the weather; and businesses that incur large expenses in certain months. I have already mentioned entertainers and those in other unpredictable trades, but there are also bed and breakfast owners in the winter season; arable farmers who earn all their profit at or around harvest time; and livestock farmers, who face the cost of rearing and getting their livestock to market.

The fundamental objection to the monthly minimum income floor is that it opens up a gap in the treatment of employed as opposed to self-employed claimants. For example, a livestock farmer who has had his universal credit restricted by the minimum income floor in the seven months of the year when he makes little or no profit, and who receives no universal credit at all in the five months in which his business becomes profitable, will be entitled to considerably less universal credit over the course of the year than an employed claimant who may earn the same over the whole year but whose earnings are spread evenly over 12 months. It is wholly wrong that the amount of welfare support that a worker receives should depend so much on cash flow rather than earnings. The position is made worse by carrying forward surplus income and expenditure with a view to total annual profits being assessed over the course of the year, as the minimum income floor will continue to be applied on a monthly basis.

Many self-employed claimants will be disadvantaged by the minimum income floor even when their annual profits exceed it. Given that the intention of universal credit is to assist claimants at the point when they most need help, it seems perverse to restrict entitlement when cash flow is at its lowest and to exclude from entitlement when profit from that expenditure is finally received.

For claimants whose income and expenditure arise unevenly, would the Minister consider accepting Amendment 61 so that they may opt for appropriate and tailored conditionality instead of the minimum income floor? This would limit the risk to the DWP while addressing an otherwise unfair anomaly. Assuming that a statistical framework is already in place for self-employed and the minimum income floor, why should it not be made publicly available and sector-specific so that we can see who is most disadvantaged?

--- Later in debate ---

[Baroness Donaghy]

I thank the Minister for his response, which I will read carefully in Hansard. I thank noble Lords who have taken part in the debate. In view of the time, I shall be brief. The point of this group of amendments to this important part of the Bill was to indicate that some of us do not think there is sufficient focus on these areas when the issue of social security comes into consideration. These are not add-ons. Like the Minister, we sometimes think we live in a parallel universe. It is not a question of propping up failing businesses; it is a question of some seasonal and fluctuating businesses wanting their annual income to be taken into consideration, so there is some fairness when they claim for social security. The Minister says that there is some flexibility already and the powers already exist, but I have to say there is very little evidence for that, apart from the grand announcement that those in the first year of business will be exempt.

Yes, the number of self-employed on universal credit is low, but if you see an articulated lorry thundering down the middle of the road towards you, you probably have an idea that you might get run over if you stay in the same place. All I am trying to say is that the establishment of a minimum income floor will cause trouble with universal credit in future—and it would be well to heed that warning. In view of the time, though, I beg leave to withdraw my amendment.

Amendment 61 withdrawn.

Welfare Reform and Work Bill

Baroness Donaghy Excerpts

Tuesday 17th November 2015 Lords Chamber

[Baroness Donaghy (Lab)]

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 6 April this year, creates a slightly different rule whereby a claimant must meet the condition of being either employed or self-employed, as defined. For them to be self-employed, their activity needs to be undertaken on a commercial basis with a view to making a profit and it must be “organised and regular”. What is interesting is that the additional conditions laid down in the Autumn Statement—namely, that a client must register as self-employed with HMRC for self-assessment and provide their unique tax reference number with their working tax credit claim—have been postponed for introduction next year. Reading between the lines, I wonder whether this was a minor victory for the DWP and the Minister.

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 Bill, 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.

Health and Safety at Work etc. Act 1974 (General Duties of Self-Employed Persons) (Prescribed Undertakings) Regulations 2015

Baroness Donaghy Excerpts

Wednesday 22nd July 2015 Lords Chamber

[Baroness Donaghy (Lab)]

My Lords, I regret that these regulations are before the House. As they are here, I think they are the least worst option. I see from the impact assessment that a “probabilistic” approach was taken to these regulations. It is not a word I have ever heard of. I hope they veer towards the probable rather than towards the ballistic in their outcome.

As the Minister has said, the catch-all provision to ensure that those self-employed persons who may pose a risk to others are not exempt from Health and Safety law is at least an improvement on the original intention. The word “may”, however, leaves an awful lot to be desired. This all arose, of course, from an explicit assurance by the noble Lord, Lord Wallace of Saltaire, to my noble friend Lord McKenzie of Luton, who was seeking inclusion of this provision in the Bill.

I still believe that the phrase,

“may pose a risk to others”,

will cause confusion. Professor Löfstedt actually recommended exemption from Health and Safety law for,

“those self-employed people whose work activities pose no potential risk of harm to others”,

which is what the noble Baroness herself just quoted. There was no “may” about it.

It may be that the impact will be minimal because, even under current legislation, there is evidence that a significant number of self-employed people do not think the Health and Safety at Work etc. Act applies to them. In one piece of qualitative research, only five out of 60 people interviewed thought that they had any health and safety obligations. Not a single one of them responded to say that this change would make a difference to their working practices.

The regulations may be more about perception than a real change, as stated by Professor Löfstedt. In one sense, I hope that is correct, and that health and safety at work will not diminish. However, perceptions are extremely important, and these regulations may encourage the perception that not only is health and safety a burden but that it is respectable to avoid obligation. There is still potential for self-employed people to assess incorrectly whether the exemption applies to them. The Health and Safety Executive guidelines—to which, again, the Minister referred—are still in preparation, so we do not know what impact or coverage they will have.

With approximately 266,000 new businesses being established each year, we do not know what impact these regulations will have on them. As the impact assessment points out:

“The newly self-employed will still need to spend some time determining whether they are exempt under the proposals”.

I hope it will be made clear, in communicating information about these regulations, that there are still more than 40 sets of regulations that apply to the self-employed, either explicitly or in more general regulations. For example, the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations, known as RIDDOR, will still apply. When I was preparing my report on fatalities in the construction industry, I was concerned about the low level of reporting of accidents and injuries under RIDDOR. It was quite clear that hospitals were more likely to know the extent of occurrences under RIDDOR than the reporting mechanism itself. It was also clear that there was a pattern that low levels of reporting on minor injuries also saw a higher proportion of serious injuries and fatalities. I realise that these comments apply to construction, which is not an exempt industry under these proposals, but I am making the point that, if anything, there is a problem of underreporting, which can lead to more accidents. It is in the interests of government and the taxpayer, as well as the self-employed person, to be conscious of the costs to the health service and the DWP of any increase in accidents at work. This is why I remain concerned about the policy of exempting people from an Act that has served and is serving this nation well.

[Lord Cormack (Con)]

My Lords, it is very clear from what the noble Baroness has said that the health and safety of the English language are at risk. I should like an assurance from my noble friend that the word “probabilistic” will never appear again in any document or on the Floor of this House. I should like an assurance that she will take some time during the Recess to distribute to everyone within her department a copy of Sir Ernest Gowers’ Plain Words. May we also have a resolution that, when we come back in the autumn, acronyms will be banned?