Wednesday, November 17, 2010

Will benefits reform help entreprenuers and remove 'onerous regulations and taxes'?

Tangental to news stories about tax are those about reforming the benefits system (after all, tax credits are simply 'benefits' in disguise).

I already had a concern about Ian Duncan Smith's long awaited proposals to reform the benefits system. I'm a supporter in principle but wonder if it will address a much overlooked but important issue. The benefits system at present discriminates against honest entrepreneurs.

I was reminded of this when I heard that the PM has urged:
"more people to make a job rather than take a job."

And that Vince Cable has backed the PM's call during Global Entrepreneurship Week UK, pledging to tackle:

"onerous regulations and taxes"

Vince then made the all too common assumption that all entrepreneurs start new companies when they start new businesses. In fact this is rarely a good move from a tax planning perspective unless the entrepreneur is confident they will make substantial profits from the outset.

The point being that many people who start a businesss, whether they are contractors, service providers or web based, will do so as self employed people. They may or may not have entrepreneurial ambitions.

There are few 'onerous regulations or taxes' that can act as a disincentive here. But the benefits system can do so.

When someone goes to register for, what is currently called, job seekers' allowance they are asked how many hours a week they are available for work. That's not unreasonable as the benefit is evidently for 'job seekers'. By definition therefore it is not available to anyone who takes the opportunity to start a business. In most cases they will do so, at least initially, as a sole trader or in partnership with someone else. This means they're not available for a job so are denied the 'benefit'. Or they could lie and not tell the benefits agency that they are looking for business as a sole trader. The system should not incentivise lying.

I imagine this is all quite common and that the job seekers' allowance is paid to people who do some causal work and those who promote their services as a contractor, service provider or whatever. The problem is though that they are then disincentivised from declaring this income. To do so would deny them future benefits - although self employed/causal income is hardly comparable with employed earnings. Much the same is true for tax credits although at least there the system doesn't discriminate against those who start new businesses of their own.

I suggest that the new universal credit needs to recognise that not all unemployed people will be looking for a job. If the Government is serious about encouraging "more people to make a job rather than take a job" the benefits system must support this aim.



  1. Hi Mark,

    I couldn't agree more. The benefits system at present is self-contradictory. They have posters up all round the Jobcentre encouraging people to become self-employed, but then they make it almost impossible to actually be self-employed unless you come off benefits.

    If you do continue to claim Jobseekers Allowance, then as you say, you're not supposed to work more than 16 hours per week which isn't enough to gain any traction.

    New Deal is even worse. You're supposed to go on a work placement 3 days a week - but not in your own business!

    So, how is the country to create all these new jobs, when the benefits system actively discriminates against anyone trying to create their own job or be entrepreneurial.

  2. In the early 1980s there was a benefit called 'enterprise allowance' or something like that. It was £40 per week, paid to those who could show they were starting their own business. Many successful writers and comedians started out on this allowance. I think it was paid for a maximum of six months.
    However, isn't Duncan Smith thinking of reintroducing it? See:

  3. Becky you were talking about some Enterprise Allowance in the early 1980s and you said it just continued for only 6 months. Can you justify that what was the reason that later this Allowance was stopped?

  4. Once you have been registered as unemployed for thirteen weeks you become eligible for the self-employed credit.

    This means that if you sign off to start your own business you are entitled to received £50 per week for sixteen weeks. This is tax free.

    All you need is to show that you have an active business bank account during this period.

    It's not much, but it's all there is at present to help new businesses.

  5. Thanks guys for the comments and clarification. I vaguely remember the enterprise allowance. I haven't heard of the 'self-employed credit' and suspect it's not always mentioned to the unemployed.

    Struggled to find out much about it online but did "track this down eventually:

    Self-employment credit
    If you have been unemployed and getting Jobseeker's Allowance for 13 weeks or more, and you set up as self-employed working at least 16 hours a week, you may be able to get a self-employment credit worth £50 a week. You can only get it if you stop claiming Jobseeker's Allowance and expect your work to last at least 5 weeks. Ask at your local Jobcentre Plus office for more details."

    Many thanks for letting me know about it James.