IFS - One-fifth of self-employed sole traders don’t survive one year, and the majority don’t survive five

9 Jul 2019 09:58 AM

One-fifth of self-employed sole traders don’t survive one year, and the majority don’t survive five.

Many more people try self-employment than the aggregate numbers suggest, but most fail quickly and very few ever go on to make significant investments or employ others.

• 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 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.

These are some of the key findings from new analysis of HMRC tax records by researchers at the Institute for Fiscal Studies, funded by the Office for National Statistics through the Economic Statistics Centre of Excellence (ESCoE) and the Economic and Social Research Council.

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. Our 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:

1) Business owners have long been the fastest growing part of the UK workforce. Between 2000 and 2015 the number of self-employed sole traders grew by 1.4 million (around 50%) 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%.

2) Employment and investment among sole traders is low. 70% 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% below pre-recession levels after adjusting for household inflation. The falls are larger for higher-earners: mean profits fell by 21% 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%), while mean employee earnings fell by 8% – substantially less than for sole traders. Sole traders’ real mean incomes have fallen by so much that, despite there being 25% 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% or £2,500.

5) Inequality in taxable incomes is significantly higher for the self employed than for employees. In the most recent data, 36% of sole traders had less than £10,000 in total taxable income, compared to only 15% of employees. 60% 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% of partners are in the top 1% of income taxpayers; this rises to 37% of partners in financial services, where mean income across all partners is £308,000.

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% 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.”

Report

Who are business owners and what are they doing?