It’s the biggest overhaul and shake-up to the benefit system with the introduction of Universal Credits (UC) and it will affect many individuals and businesses when the rollout begins nationally this October.Â Universal Credits is set to replace six existing benefits (Jobseeker’s Allowance, Employment and Support Allowance, Income Support, Child Tax Credits, Working Tax Credits, Housing Benefit and Tax Credits) and is a new single monthly benefit payment.
The success of the UC rollout is predicated on businesses submitting accurate payroll information to HMRC through the new Real Time Information (RTI). This in turn is passed to DWP for them to process and calculate UC claimants’ entitlement in real-time.
While the long-term benefits are clear and seem obvious enough, in the short-term small businesses already struggling with the complexities of the tax system are struggling even more with the additional administrative burden imposed by RTI.
As always seems to be the case, the burden falls disproportionately on the SME community purely because they lack the resources and expertise to cope with the imposed changes.
The first big worry is the massive administrative burden this places. Monthly reporting of employment income to DWP (via HMRC) is a major shift from the one-off annual reporting schemes of the past. After a year’s grace an onerous penalty regime will be introduced for those who fail to comply.
AAT and other tax representative bodies are concerned that the new RTI regulations and accompanying penalty driven compliance regime could deter would-be entrepreneurs.
Then there is the issue of unconventional reporting processes. The UC regime is not self-employed friendly. It does not assign dates for monthly income periods linked to calendar months.Â Furthermore, in calculating the self-employed claimant’s income DWP ignores normal accounting conventions such as discounting income received in advance of work being undertaken and the provision for expenses incurred but not paid.
The self-employed will have to compile details of their income and expenditure within seven days of their assigned month end, with an allowance of another seven days if late, and lodge this information online. This will be an onerous process and of course there will be consequences for those that struggle to comply.
A further flaw in the UC regime for the self-employed, is that losses arising in one month are not carried forward 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. UC arrangements mean that losses that accrued in the preceding months will be ignored in December, leaving a huge spike of income in that month.
And finally teething troubles are continually being highlighted. With the national rollout of UC due in October, Labour has claimed that work on the UC system is suffering huge IT problems with a number of suppliers and key figures stepping down. There is a real fear that while most agree that the benefit system did need to be revised and the UC system offers a solution, many are worried about exclusion and delivery and for a large majority of small businesses there is a lot of uncertainty and confusion. The best advice I can give to any business owner is to seek advice from a professional accountant and don’t bury your head in the sand, keep informed on the DWP website.
Brian Palmer is the Tax Policy Adviser at AAT (Association of Accounting Technicians).