One-fifth of self-employed sole traders don’t survive one year, and the majority don’t survive five, according to analysis of HMRC tax records.
Between 2014 and 2015 the number of sole traders grew by 70,000, it was found in a study undertaken by the Institute for Fiscal Studies (IFS) and funded by the Office for National Statistics.
However, this was the net effect of 650,000 sole trader businesses starting up and 580,000 closing during that time period.
Jonathan Cribb, senior research economist at IFS, and one of the report’s authors, 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.”
This ‘churn’ is demonstrated by the fact that most sole trader businesses close quickly, with 20% closing within a year and 60% closing within five years.
This is also reflected in the turnover of people operating as sole-traders between 2011 to 2015.
During this time, 2.4 million people were operating as sole traders each year, but 6 million total people tried self-employment during this time, showing that while the number of sole traders at any given time fairly remained constant, this group of people changed each year.
Despite the risks, business owners have long been the fastest growing section of the UK workforce, with the number of self-employed sole traders growing by 1.4 million (a 50% increase to 4.1 million) between 2000 and 2015. A third of this growth has come from foreign-born sole traders since 2007.
Helen Miller, deputy director of the IFS, and the second author of the report, said that sole-trader business owners are at a disadvantage when it comes to business tax, saying: : “Behind the staggering growth in business ownership – which is higher than in any other OECD country (Organisation for Economic Co-operation and Development) 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.
“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.”
Falling salaries and other facts
In addition to looking at the survival rate of sole trader businesses, the tax record analysis also found several other facts about sole trader business owners.
- Both employment and investment among sole traders is low, with 70% of sole traders having business costs of less than £10,000, while most do not employ anyone else. Fewer than 25% make use of deductions for capital investments.
- Median sole trader profits are 7% below pre-recession levels after adjusting for house hold inflation, with the falls being larger for higher earners. Between 2007 and 2015, profits fell by 21% while 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 is lower than before the recession.
- 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 fall by 16% or £2,500.
- 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.
- The records indicate what the key drivers for business closure are. Younger and older business owners are more likely to close their business than those closer to middle age. Being in business for many years substantially reduces the probability of business closure, while very low turnover – unsurprisingly – substantially increases the probability.