July 9, 2019
One-fifth of sole traders in self-employment don’t survive one year, and the majority don’t survive five, according to a new study from the Institute for Fiscal Studies (IFS). The analysis of HMRC tax records by researchers at the IFS was funded by the Office for National Statistics through the Economic Statistics Centre of Excellence (ESCoE) and the Economic and Social Research Council.
According to the report, there are three ways of working for your own business – by being a self-employed sole trader, a self-employed partner, or a company owner-manager. The analysis distinguishes between these forms of work, which are different in important ways. All types of business are found in all sectors of the economy, although sole traders are disproportionately based in construction, partnerships are disproportionately in agriculture while owner-managers are disproportionately working in business services.
Other key facts about business owners that we now know as a result of analysing tax records include:
Between 2000 and 2015 the number of self-employed sole traders grew by 1.4 million
1) Business owners have long been the fastest growing part of the UK workforce. Between 2000 and 2015 the number of sole traders in self-employment grew by 1.4 million (around 50 percent) to reach 4.1 million. Since 2007, a third of the growth has come from foreign-born sole traders. Since 2000, the number of company owner managers more than doubled to 1.8 million. In contrast the number of employees (by far the most common form of paid work) rose by 10 percent.
2) Employment and investment among sole traders is low. 70 percent have total business costs of less than £10,000. Most sole traders are not employing anyone else and less than a quarter make any use of deductions for capital investment.
3) Median (middle) sole trader profits are 7 percent below pre-recession levels after adjusting for household inflation. The falls are larger for higher-earners: mean profits fell by 21 percent between 2007 and 2015, and the fraction of sole traders with profits above £40,000 halved. Median earnings of employees fell by a similar amount to sole traders over the same period (6 percent), while mean employee earnings fell by 8 percent – substantially less than for sole traders. Sole traders’ real mean incomes have fallen by so much that, despite there being 25 percent more sole traders since 2007, aggregate turnover for the group as a whole is lower than before the recession.
4) Falls in average profits during and after the recession were driven by established businesses, not entrants. Newly formed businesses always have lower profits on average than established ones, but this was true before, during, and after the recession. The dramatic difference in the period between 2007 and 2011 was that the average annual profits for those firms who stayed in business fell by 16 percent or £2,500.
5) Inequality in taxable incomes is significantly higher in self-employment than for employees. In the most recent data, 36 percent of sole traders had less than £10,000 in total taxable income, compared to only 15 percent of employees. 60 percent of sole traders had less than £10,000 in profit from their business alone (i.e. excluding employment income earned elsewhere). In stark contrast, 7 percent of partners are in the top 1 percent of income taxpayers; this rises to 37 percent of partners in financial services, where mean income across all partners is £308,000.
Happy but precarious
Simon McVicker, Director of Policy at IPSE commented: “Not only are sole traders and the self-employed among the UK’s most economically productive and dynamic groups; they are also happier with their way of working. Our research shows that 94 per cent of the self-employed have been in business more than a year and over three quarters are happy with their way of working.
“A recent study by the Centre for Research on Self-Employment (CRSE) showed that the self-employed drive innovation, giving businesses across the UK the flexible skills to grow and also navigate peaks and troughs in demand. Sole traders are no different from small businesses across the UK, far too few of which survive the first year. This reflects the shamefully limited support from government for these vital groups.
“Far from discouraging them, for the sake of productivity, British business and the wellbeing of the workforce, we as a country should give more support to the self-employed. Government must simplify the self-employed tax system, give freelancers the infrastructure they need and clamp down on the blight of late payment.”
Policy discussions often overlook the huge diversity of activities and incomes of the self-employed
Jonathan Cribb, Senior Research Economist at IFS, and report author said, “The growth in self-employment is an important and substantial change in the labour market. We show for the first time how misleading it is to discuss the self-employed as a fixed group – there is huge churn in the self-employed population with hundreds of thousands of people trying a business venture and failing quickly each year. Despite the huge number of people starting and closing their businesses, it was actually those sole traders that remained in business during the recessions that drove the large fall in profits seen in that period.”
Helen Miller, Deputy Director of the IFS, and report author said, “Policy discussions often overlook the huge diversity of activities and incomes of the self-employed. Our findings demonstrate that the self-employed span all sectors of the economy and while many have low and failing incomes, some are dramatically overrepresented in the top 1 percent of income taxpayers.
“Behind the staggering growth in business ownership – which is higher than in any other OECD country and is often hailed as a success – lies a hefty tax penalty on employment relative to self employment. Preferential tax rates for business owners is a ‘one size fits all’ approach that fails to provide the support that some need while giving unjustifiable tax breaks and incentives to others. Low and falling incomes among the self-employed and low levels of investment among small business more broadly should lead us to question why we are incentivising people to quit employment and start their own business.”