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A fifth of sole traders don’t survive a year, says report.
One-fifth of self-employed sole traders don’t survive one year, and the majority don’t survive five, according to a report from the Institute of Fiscal Studies.
Many more people try self-employment than the aggregate numbers suggest, says the IFS, but most fail quickly and very few ever go on to make significant investments or employ others.
Its figures are based on an analysis of HMRC tax records. It says that 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. The IFS says this huge ‘churn’ in the self-employed population reflects the fact that most sole trader businesses close quickly: 20% within a year, and 60% by year five.
Its figures show that 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.
It also says that many combine self employed work on the side of employed work, but the share of self employed people doing this has not changed over time.
The IFS differentiates between different types of self employed people, including sole traders and company owner managers. It says that 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%.
The IFS also says that most sole traders do not employ anyone else and that their average incomes have fallen by far more than employed people’s incomes between 2007 and 2015. The report also points out the difference in income and tax payments between different kinds of self employed people, depending on whether they are sole traders or partners and depending on which sector they are in.
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.”
IPSE, the organisation for self employed people, said the report showed a need for more support for sole traders in particular. Simon McVicker, IPSE’s Director of Policy, said: “Government must simplify the self-employed tax system, give freelancers the infrastructure they need and clamp down on the blight of late payment.”