These views were set out in a letter to the Welfare Reform Minister, Lord Freud, from the Low Incomes Tax Reform Group (LITRG), supported by a number of tax, business and accountancy bodies and welfare rights organisations.
LITRG’s chairman, Anthony Thomas, commented that:
'The Government say that universal credit will ensure that work always pays. That will not be the case for many self-employed. There will be disincentives to taking up self-employed work, leaving some people unnecessarily trapped on welfare. There will also be a significant increase in bureaucracy for small business. Both of these are the opposite of what the Government want.'
The mechanics of working tax credit have so far worked well for small businesses in that they recognise the same profits and losses as for tax purposes. This means that where the tax system supports the self-employed through start-up or loss-making periods, or times when they are investing heavily to grow their business, tax credits do likewise.
Under the universal credit rules as currently proposed those advantages will be lost. Businesses will have to draw up two sets of accounts – one for HMRC, the other for DWP – and the latter will have to be done monthly, thereby massively increasing bureaucratic burdens. The basis of accounting favoured by DWP will not give full recognition to large items of expenditure in any one month, potentially heavily distorting the economic reality of how a business is doing.
Anthony Thomas also observed that:
'In many cases the income of self-employed earners will fall sharply making it, in some cases, uneconomic for them to continue to work. The proposed minimum income floor will further distort the picture and will mean that the self-employed will receive less benefit than employed claimants even though their income may be the same. Surely this cannot be right nor fair.'
Further comments were made by John Walker - Chairman of the the Federation of Small Businesses (FSB):
'The reason why the recession hasn’t proved as devastating on employment as first feared is because huge numbers of people laid off from their regular jobs have turned to self-employment.
However, the government needs to be clear these proposed changes to Universal Credit could reverse this trend and remove a valuable route back into the labour market through self-employment. Entrepreneurs and small firms already find tax complicated to deal with and these proposed changes are completely at odds with Ministers’ wishes to simplify the tax system.
Furthermore, both HMRC and DWP are placing too much faith on the ability for small firms to deal with their tax affairs online. It betrays a lack of understanding about the way small businesses operates. Moreover, the UK’s digital infrastructure simply isn’t able to cope.'
To view the letter to Lord Freud please use the link.
Contact: Robin Williamson (please use form at http://www.litrg.org.uk/ContactUs)