Many self-employed U.K. taxpayers dealing with the economic impact of the COVID-19 crisis face significant clawbacks of income support payments because of complex universal credit rules, a welfare benefits expert warned.
The surplus earnings rule for universal credit presents a “real and urgent problem for a rapidly increasing number of people,” according to Gareth Morgan, director of Cardiff-based Ferret Information Systems.
HM Revenue & Customs announced on May 27 that 2.3 million claims with a total value of £6.8 billion have been made under the self-employment income support scheme (SEISS). The grants are taxable and will be treated as earnings for the purpose of universal credit, a means-tested benefit.
The combination of the tax liability, reductions in universal credit by reference to both actual and deemed income, and “double counting” in the surplus earnings rule can produce a “marginal deduction rate” in excess of 100 percent in some circumstances, Morgan told Tax Notes.
The Department for Work and Pensions has recorded 2.6 million claims for universal credit in eight weeks, the Resolution Foundation noted in a May 27 release. “Despite this surge its systems are generally performing well. Over 90 percent of payments due were paid in full and on time, and the vast majority of advance payments are paid within 72 hours,” it said as it published a report on the welfare system and its effect on living standards during the coronavirus pandemic.
Twenty-seven percent of new universal credit claimants surveyed were self-employed before the crisis began, the Resolution Foundation said, noting that this was “consistent with other work that suggests that there is relatively high take-up of [universal credit] among this group.”
Universal credit claimants are required to report payments and receipts to the Department for Work and Pensions. Income received during an assessment period is used to calculate the following month’s benefit, Morgan explained in a blog post on May 24.
The fact that earnings in each assessment period may be different “can lead to months when higher earnings taken into account lead to lower or no universal credit, or low earnings taken into account lead to a higher award,” Morgan wrote. The surplus earnings rule was introduced because the Department for Work and Pensions was concerned that some people “might take advantage” by concentrating income in one month in order to get more universal credit in later months, he said.
The surplus earnings rule provides that “where somebody loses entitlement to universal credit because their earnings are too high in one month, some of the extra [earnings] can be taken into account if universal credit is reclaimed during the following six months,” Morgan said, adding that SEISS claimants are treated as reclaiming.
A buffer, or de minimis level, is intended to prevent the rule applying when, for example, a relatively low-paid person has five paydays rather than four in an assessment period. The de minimis level was held at £2,500 a month in April “in order to safeguard the efficient administration of universal credit by not reducing the de minimis to £300 as provided by the Universal Credit Regulations 2013,” Welfare Minister Will Quince announced in March.
“This measure will cost £70 million in 2020-2021 and will mean around 500,000 fewer people will see their universal credit award reduced by surplus earnings,” Quince said.
Morgan noted that while the surplus earnings rule has had little impact so far because of the buffer, the SEISS grant of up to £7,500 is likely to trigger the rule, creating “hardship and penalties among a group of people who cannot be expected to understand its justification or application.” He suggested that any decision to reduce the de minimis level to £300 could lead to “administrative, financial, and social chaos.”
“The COVID-19 pandemic has resulted in an unprecedented number of claims for [universal credit] in a short period of time. Many of these claimants are likely to be new to the benefits system. Many will be self-employed,” the Social Security Advisory Committee, an independent statutory body advising on social security, noted in a May 18 letter to Neil Couling, director general of the Change Group at the Department for Work and Pensions.
The surplus earnings rule is likely to be triggered by “a far larger number of claimants than originally envisaged,” said Victoria Todd, chair of the committee’s universal credit subgroup.
The committee paid tribute to “everyone who has been working tirelessly to ensure [universal credit] continues to provide essential financial support to those who need it,” Todd wrote. But she asked Couling to set out how the department plans to deal with the surplus earnings policy on “a potentially much larger scale” than hitherto.
It is important that the surplus earnings rule does not “inadvertently undo the positive policy measures” introduced recently, Todd said.
The Universal Credit (Coronavirus) (Self-employed Claimants and Reclaims) (Amendment) Regulations 2020, made on May 19, confirm that the SEISS grant is to be treated as income, for universal credit purposes, in the assessment period in which it is received.
The Department for Work and Pensions has not yet responded to the committee’s letter, but a spokesman noted that the regulations will enable universal credit to be reinstated without the need for the claimant to make a new claim. The regulations will apply to “a small number claims where earnings exceed entitlement and the surplus earnings rules apply,” he told Tax Notes, adding that “where appropriate, surplus earnings will impact for up to five subsequent assessment periods as usual.”
The government “will look at” whether income received by company directors in the form of dividends from owner-managed companies could be made eligible for grants under the coronavirus job retention scheme, Prime Minister Boris Johnson told the House of Commons Liaison Committee later on May 27. Johnson would have to discuss that question with Chancellor of the Exchequer Rishi Sunak, he told Mel Stride, chair of the Treasury Committee.
“Business owners who have contributed for years through corporation and dividend tax are now suffering purely because of the way they pay themselves,” Federation of Small Businesses Chair Mike Cherry said in a May 27 statement.