Test-trading scheme, United Kingdom


United Kingdom
Public sector
Target Groups: 

The ‘test-trading scheme’ allows unemployed people to test a business idea for self-employment for a limited time period while continuing to receive their unemployment benefits. The principal objective of this scheme is to provide people who are registered as unemployed with a self-employment route out of unemployment. This measure targeted registered unemployed persons throughout the country.


One way of preventing unemployed people from engaging in undeclared work in the first place is to provide them with an opportunity to operate on a self-employed basis, while they are still registered as claiming unemployment benefits. This then enables them to make a smooth transition from unemployment to self-employment. Such initiatives are seen as both preventing people from participating in undeclared work in the first place, as well as helping those already engaged in undeclared work to formalise their enterprise. One scheme that provides such a bridge by which any registered unemployed person can move from unemployment into self-employment is the ‘test-trading scheme’. This scheme allows unemployed people to test a business idea for self-employment for a limited time period while continuing to receive their unemployment benefits.

This measure targeted registered unemployed persons throughout the country. The main actors involved in the initiative are civil servants from the Department for Work and Pensions (DWP) and the government agency Jobcentre Plus. The measure started in April 1998 and is still ongoing.


The principal objective of the test-trading scheme is to provide people who are registered as unemployed with a self-employment route out of unemployment.

Specific measures

For unemployed people who have been registered as unemployed and claiming benefits for 18 months or longer, Jobcentre Plus provides help for those seeking to start a business. This support scheme is divided into three distinct stages. Stage 1 is an awareness session, which is a one-day course with a business consultant to explore ideas for starting a business. Stage 2 involves business planning and is comprised of training one day a week for up to eight weeks. Over this period, the unemployed person gets advice, guidance and training in various aspects of self-employment. At the end of this stage, a business plan will have been produced.

Stage 3 then involves ‘test trading’ the business for up to a maximum of 26 weeks. During this test-trading period, the participants receive an allowance equivalent to their previous benefit entitlements, in addition to a grant of up to £400 (€538 as at 31 January 2008) paid in equal weekly or fortnightly instalments. The money that the business earns while in the test-trading period is either reinvested into the business or stored in a special bank account until the test-trading period has ended. A mentor is provided to support participants during the test-trading period and for up to two years afterwards. During this test-trading period, participants are also required to undertake training leading to formal qualifications.

Evaluation and outcome

Achievement of objectives

A recent evaluation of this scheme offering people the opportunity for a smooth transition from unemployment and related benefits to self-employment was carried out on behalf of DWP (Kellard et al, 2002). The findings reveal that take-up of the self-employment route is low, with just 1.6% of 18–24 year old unemployed people opting for this route, and 4.6% of long-term unemployed persons aged 25 years and over who fulfil the criteria of the government ‘New Deal 25 plus’ programme and 9.4% of unemployed people aged 50 years and over who can join the ‘New Deal 50 plus’ programme taking part in the initiative. Those most likely to opt for this route to self-employment were men rather than women, people living with a partner, people in older age groups, those with higher qualifications, those with fewer and shorter previous spells of unemployment, white people rather than people from minority ethnic groups, and those living in areas with lower levels of unemployment, especially rural areas. The evaluation report concludes that:

For many people, entry into (and success in) self-employment remains a difficult and at times a precarious activity and hence there are considerations about how far policies should encourage potentially vulnerable groups to choose such a difficult route. For some, the consequences of self-employment failure can have financial and personal implications, although for others the experience may enhance their future chances of making successful and sustained moves into the labour force.’ (Kellard et al, 2002, p. 7)

On the whole, however, no long-term evaluation has been conducted of those entering self-employment through the test-trading scheme, such as assessing their rates of business survival or whether they are more likely to both set up on a formal footing and trade on a declared basis.

The only evaluation of test trading was carried out in Northern Ireland by the Department of Employment and Learning in 2005. Based on a survey of 201 respondents who participated in the three stages of the scheme, the department finds that 87% of participants entered the test-trading scheme after completion of Stages 1 and 2 and a further 8.4% left the scheme after Stages 1 and 2 to start their own business. Almost three quarters of respondents were still self-employed after the end of the test-trading period, with 62.4% remaining in sustained self-employment 13 weeks after the end of test trading when evaluated.

Nevertheless, no evaluations have so far been conducted of whether this aid in helping registered self-employed people to start up a business on a formal footing has reduced the level of undeclared work; for instance, by helping unemployed people start up a business on a formal basis, enabling them to legitimise a previously cash-based business venture or decreasing the amount of undeclared work in which they engage while claiming benefits.

Obstacles and problems

Reflecting the lack of joined-up thought and action in UK central government bodies, Her Majesty’s Revenue and Customs (HMRC) did not recognise the concept of test trading and treated all participants on the scheme to be in remunerative work and subject to taxation. This required modifications to the scheme to ensure that the income received was held by the Jobcentre Plus manager until the 26-week test-trading period was completed.

Lessons learnt

According to Williams (2005), practitioners involved in this initiative conclude that for ‘test trading’ to become more effective, the following points need to be considered:

  • reducing the eligibility period which currently stands at six months or more of continuous unemployment benefit claims for people aged 18–24 years and which amounts to 18 months of continuous unemployment benefit claims for other unemployed people;
  • extending the current 26-week test-trading period to up to three years;
  • developing a gradual withdrawal of unemployment benefits, for example, 100% of benefits guaranteed in the first six months of the test-trading period, 70% the following 12 months and 40% the last 12 months; in parallel, a gradual release of the money earned by the business should be implemented, as it is currently stored in a special bank account until the test-trading period is over.

Impact indicators

Between April 1998 and September 2002, some 5,350 registered unemployed persons aged between 18 and 24 years started the test-trading period, and between April 2001 – when those aged 25 years and over were included in the scheme – and September 2002, a further 3,930 unemployed people aged 25 years and over test traded business ventures under this scheme (Hansard, 2003).

Although successful in moving some registered unemployed people into sustainable self-employment and providing a smooth route from unemployment benefits into self-employment, whether this scheme has had any impact on undeclared work has not yet been evaluated. As Williams (2005) reports, those involved with clients ‘on the ground’ – such as those working in Local Enterprise Agencies – widely assert that this scheme has helped stem participation in undeclared work among unemployed people. They also state that the scheme enabled registered self-employed people to start up as self-employed on a formal footing and facilitated the legitimisation of previously cash-based business ventures, but such evidence is currently anecdotal.


This initiative is potentially transferable to registered unemployed persons in other EU Member States as a way of facilitating a smooth transition from unemployment to self-employment. Nonetheless, the specific criteria of the scheme will have to be modified to suit national regulations regarding unemployment benefits.


Given that little evidence exists of unemployed people carrying out more than a small proportion of all undeclared work in the UK (Williams, 2004), such schemes – even if they are highly effective in stemming undeclared work among registered unemployed people – will have only a very minor impact on the overall level of undeclared work. For this reason, such schemes that allow for a smooth transition from unemployment benefits to self-employment should not be over-emphasised when putting together tool-kits for tackling undeclared work.


Main organisation responsible: Jobcentre Plus

Website: www.jobcentreplus.gov.uk/JCP/Customers/Self_Employment/Dev_011591.xml.html


Barbour, A., Government support programmes for the self-employed in the UK: analysis of existing provision, London, Community Links, 2003.

Department of Employment and Learning, Evaluation of new deal self-employment route, Belfast, Department of Employment and Learning, 2005, available online at: www.delni.gov.uk/final_ndse_evaluation_report.pdf.

Hansard, House of Commons written answers for 10 April 2003 (pt 18), London, House of Commons, 2003, available at: www.publications.parliament.uk/pa/cm200203/cmhansrd/vo030410/text/30410w18.htm.

Kellard, K., Legge, K. and Ashworth, K., Self-employment as a route off benefit, Research report No. 177, London, Department of Work and Pensions (DWP), 2002.

Prowess, ‘Double blow for unemployed women’, Profile, No. 6, Summer/Autumn 2006, available online at: http://www.prowess.org.uk/about/documents/Prowessprofile6.pdf.

Williams, C.C., Cash-in-hand work, Basingstoke, Palgrave-Macmillan, 2004.

Williams, C.C., Small business in the informal economy: making the transition to the formal economy – the evidence base, London, Small Business Service, 2005.

Colin C. Williams

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