New Universal Credit regulations could hamper self-employed

The self-employed could face difficulties accessing state benefits from next year if draft regulations regarding the new Universal Credit system go ahead, tax advisers have warned.

The draft regulation sets out different rules for the self-employed on how they report their income to HMRC. Unlike employees or small businesses, self-employed persons will be required to submit an additional online report in order to calculate their entitlement to Universal Credit.

Paula Tallon, a member of the SME tax committee for The Institute of Chartered Accountants in England and Wales (ICAEW), claims the process could 'severely' hit the self-employed.

The proposed Universal Credit - due to be rolled out from October 2013 - is being designed to provide a streamlined single payment of benefits for the employed and unemployed, incorporating payments such as income support, child tax credits and housing benefits.

The amount of benefits an employed individual is entitled to will be earnings related and calculated via HMRC's new real time information (RTI) system. However, those who earn an income outside of the PAYE system, such as the self-employed, will have to declare their earnings via a separate reporting procedure.

Under the proposed procedure, self-employed earnings will be reported on a monthly basis. Failure to make a claim within seven days of this period will result in payment being suspended - a timescale described as too restrictive.

In addition, benefits will be withdrawn if the claimant fails to make an income report within four weeks.

"The new UC regulations will actively discourage self-employment and undermine the policies of reducing administrative burdens on small businesses. For low earners this is no incentive to start a new business," Paula Tallon said.

Other flaws in the procedure were also highlighted by the ICAEW SME committee members, including potential discrimination against businesses with no internet access, and uncertainty for workers on whether employers are reporting their earnings to HMRC.

The Department for Work and Pensions (DWP) said that Universal Credit was being implemented to simplify the benefits system and cut back on fraud and error.

A consultation into the measures is open until the 27 July 2012.