According to a report carried out by the Institute of Fiscal Studies, which analysed HMRC tax records, a fifth of businesses started by Britain’s sole traders don’t survive one year and the majority don’t survive five years. This research was funded by the Office for National Statistics through the Economic Statistics Centre of Excellence (ESCoE) and the Economic and Social Research Council.
Key findings from the report showed:
Between 2014 and 2015 the number of sole traders grew by almost 70,000, but this was the net effect of 650,000 sole traders starting up and 580,000 exiting;
This huge ‘churn’ in the self-employed population reflects that fact that most sole trader businesses close quickly: 20% within a year, and 60% by year five;
Between 2011 and 2015, 2.4 million people were operating as a sole trader each year, but 6 million people tried self-employed at some time over that period;
Combining business and employment activity is common but the share of the self-employed doing this (25%) has not changed over time.
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 a 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% 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 businesses more broadly should lead us to question why we are incentivising people to quit employment and start their own business.”
To read the executive summary and to read the full report click here: https://www.ifs.org.uk/publications/14241
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