How will Universal Credits affect your business?

By: Brian Palmer

Date: 21 February 2013

How will Universal Credits affect your business?/sterling money{{}}The newly proposed Universal Credit (UC) – a new single benefit payment for people who are looking for work or on a low income – is due to be introduced via a “Pathfinder” programme scheme in the North West this April.

Through the introduction of this initiative, administered by the Department for Work and Pensions (DWP), the Government hopes to simplify the benefits system and make it easier for individuals who are in and out of work to claim the benefit payment to which they are entitled. Although well intentioned, there will be implications for small and medium-sized businesses and particularly those looking to start a new business by becoming self-employed.

While some information has been made available about the new UC regime, SMEs are not yet aware of its implications and need to consider how the changes will affect them when it starts to be rolled out nationally from October this year. 

The question that would-be entrepreneurs will already be starting to ask is: “will it be more difficult to own and manage my own business?” The question that I would also pose is: “will the changes deter new start-ups altogether?”

What are the changes?

UC is designed to simplify our benefits system. It will replace and merge six benefits (income-based Jobseeker’s Allowance, income-related Employment and Support Allowance, Income Support, Child Tax Credits, Working Tax Credits, Housing Benefit and the disguised benefit named “tax credits”) into a single streamlined payment.

It will consist of a standard allowance that is paid monthly to people who are in low-paid jobs, as well as those who are out of work.

When will it come into effect?

With the exception of the Pathfinder programme, UC will be brought in from October 2013 on a phased approach, with the first stage targeted at the unemployed, those receiving existing benefit who experience a change in their circumstances and the newly self-employed.

For people in work, the changeover process will begin in April 2014.

Those currently self-employed are not going to be brought under the new regime until April 2014. However, those commencing to self-employment from October 2013 will be brought straight under the UC regime.

How will it affect you?

The new regime contains some obvious flaws that will primarily effect the self-employed.

1 Additional burden

The imposition of monthly reporting is going to be a major administrative burden at a time when the newly self-employed are focused on getting their business off the ground.

Monthly reporting of income to DWP is a major shift from the one-off annual reporting schemes that currently exist for HMRC. There will be consequences for those that report incorrect data so considerable effort will need to be made to implement the proper procedures.

These processes are naturally very timely and costly and it’s been reported that tax representative bodies are concerned about the new regulations, which could deter entrepreneurs from setting up a business.

2 Unconventional reporting processes

The regime as it stands has arbitrarily assigned dates for the monthly periods (ie not calendar months) and doesn’t follow conventional accounting principles. The regime ignores normal accounting rules – such as deferring income received in advance of work being undertaken and allowing for expenses incurred but not paid.

The self-employed are going to be expected to compile and file reports of their income and expenditure with seven days of their assigned month end, with an allowance of another seven days if late. If the second deadline is missed, the claimant will receive written notice of their removal from the UC system if they fail to file their late report within 30 days.

3 Losses

Losses arising in one month are not taken into account for offset against future income. For example, a seasonal trader could generate 90% of their income in December but have incurred all of their costs during the preceding 11 months. The effect of the current arrangements would be that the losses in the preceding months would be ignored in December, leaving a huge spike of income in that month. This means that the amount of tax credit claimed will not be a true reflection of overall income and may result in potential loss for the individual. 

4 Ignoring certain business expenses

Under the existing proposal, certain expenses that are currently (and legitimately) allowed as trading deductions, such as interest, are just ignored. This is just plain wrong; ignoring allowable business expenses will result in a claimant reporting a higher level of income to one government department than to another.

5 Minimum Income floor

A feature of UC that a self-employed claimant needs to be aware of is the Minimum Income Floor (MIF). This is a statutory presumption that will be introduced for a claimant after passing the first anniversary of their claim to incentivise them not to rely on UCs as their main source of income. 

The effect of the MIF is that, no matter how low a claimant’s income might be they are deemed to have earned the equivalent of a person employed for 35 hours per week on the national minimum wage for the calculation of UC payments.

6 Disproportionate effect

My concern and that of the wider taxation and accountancy profession is that the additional administration burden will fall disproportionately on those less able to cope or to understand (ie those at the lower end of the social economic spectrum).

For example, a subcontractor working in the building trade may struggle or fail to comply with the UK tax return filing regime. Taking this into account, someone in this position will never be able to comply with monthly report filing, as will be required under UC. The upshot will be that they will not actually claim the benefit to which they will be fully entitled.

Getting ready for Universal Credit

While the forthcoming changes under the UC regime will add yet another layer of bureaucratic complexity to those in businesses and how they are expected to report data to government departments, people should not be deterred from going self-employed altogether.

Appropriately, it is the role of the DWP to provide information, resources and advice so that the small players don’t get caught out. In the meantime, SMEs can take some simple steps to prepare for the changes including seeking advice from a professional accountant and reading the latest updates on the DWP website.

Brian Palmer is the Tax Policy Adviser at AAT (Association of Accounting Technicians).