Thousands held back from their dream of self-employment. Thankfully!

A press release from Citizen’s Advice at the weekend said that 40 percent of the workforce would like to work for themselves but only 15 percent have managed to do so. It warns that red-tape and lack of support is “creating a barrier to people fulfilling their ambition of working for themselves” and “potentially viable businesses are failing unnecessarily for the want of guidance in the early stages”.

The report itself, Going Solo, strikes a slightly different tone. It is an in-depth study of why people go into self-employment and of the difficulties some of them face. The recommendations, more help with skills and support from Jobcentre Plus and, encouraging more peer group support among the self-employed are all good ideas.

I wonder, though, whether there comes a point when the aspiring self-employed have been given enough help and encouragement. Just because 40 percent of the workforce think it would be nice to run their own businesses it doesn’t mean they all should. Lots of people think it would be nice to live in the country too, without ever having thought through the practical implications.

There isn’t much the government could do to remove red-tape from startups because there is precious little of it as it is. It is mind-blowingly easy to start up a business in this country. It’s not even that difficult to start a limited company. A few minutes on the website, a £15 fee and away you go. You don’t even need more than one director now.

According to the OECD, the UK has one of the lowest levels of administrative burden for company startups. For businesses employing only the directors (which fall under the sole proprietor definition on this chart) it is one of the least regulated in the developed world.

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Anecdotally, I hear more complaints from small business owners about corporate red-tape. It’s not so much the government as utilities, banks and phone/broadband providers that mess small firms around. I reckon (again based on anecdotal data) that, over the last ten years,  it has become easier to set up a business but more difficult to get a bank account, as banks now take longer to check people out.

Even this isn’t that onerous though. As for handling tax and accounts, there are good, reasonably priced accountants and software packages that will calculate and submit your VAT returns for around £10 a month.

Business owners like to complain about regulation. There is something almost tribal about this. If you don’t have a moan about administrative aggro, you’re not really a proper business person. Yet it’s really not that much of a big deal, especially if you don’t employ people. Frankly, if people can’t cope with what little administrative burden there is, should they really be in business at all?

The Citizens’ Advice report also looks at finance, or the lack of it, among the self-employed. For the already low paid, which a significant proportion of the self-employed are, illness or just a period of lack of work can quickly become an emergency. As for getting a mortgage, unless you can show stable and regular earnings over a long period, forget it.

At one of the many round-table discussions I have contributed to on self-employment the question of mortgages came up. Should banks and building societies do more to accommodate those with fluctuating incomes? Someone from one of the mortgage providers remarked that it had taken them years to unwind the problems caused by mortgage self-certification and they would resist any pressure to start issuing them again. Who can blame them? With self-employment earnings low and falling the self-employed are a high risk. I keep hearing the ‘just because I’m self-employed they won’t give me a mortgage’ meme. Well, yes, that makes absolute sense. Statistically, self-employed equals low and precarious earnings.

Then, of course, there is the looming problem of Universal Credit and the self-employed. Unlike tax credits, Universal Credit will assume that all recipients earn the minimum wage. The trouble is, around 40 percent of the self-employed don’t. With the hike in the minimum wage over the next few years this could get even worse. It is unlikely that self-employed earnings will rise at the same rate as the minimum wage so more people will see their earnings fall below it. Their benefits will therefore reduce based on an assumed income are not earning.

Against this background, is it really fair to continue the policy of encouraging people to start up their own businesses and become self-employed? It may be the dream of 40 percent of the population but is it realistic? As well as selling the benefits, don’t the government, business organisations, think-tanks and charities have a responsibility to warn people of the pitfalls too? By all means go self-employed but you will probably earn less, you are stuffed if you are sick and you will find it almost impossible to get a mortgage. Over time, unless you set aside some money for training, your skills will gradually become obsolete Oh, and you have to go out and find your own work. Yes, that last one still catches people out.

There is still this widespread assumption that becoming self-employed is inherently a Good Thing, despite overwhelming evidence that the self-employed tend to be poor and countries with lots of self-employed people tend to be poor. If 40 percent of our workforce were self-employed it wouldn’t be much good for most of the people concerned or for the economy as a whole.

Over the past decade and a half we have seen a huge growth in the number of small low-turnover businesses but much less growth in these firms’ share of turnover. For the non-incorporated self-employed, total earnings have shrunk by £8 billion since the recession  despite there being 600,000 more of them. This suggests that a lot of these new businesses are marginal and not doing much more than taking business from other similarly precarious firms. David Storey reckons the government spends £8 billion a year supporting small businesses without any clear benefit. Most small firms simply play their part in the ongoing business churn.

Is it really such a bad thing that so few of the people who want to be self-employed actually end up doing it? The 40 percent who think they want to start their own businesses could do a lot worse than read the Citizens’ Advice report then see if they still fancy it afterwards.   For the truth is that many of them would not be very good at it and most would not make very much money. The barriers that are holding thousands of people back from self-employment are doing most of them a favour. Like the dream of moving to the country, they might get there and find they don’t really like it very much.



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12 Responses to Thousands held back from their dream of self-employment. Thankfully!

  1. P Hearn says:

    I had a conversation back in 2008 with an entrepreneur who’d just sold his business for £250m to venture capitalists. He was adamant that “anyone can do it”, but covered that statement with “but not everyone should!”.

    As a small employer, I think it would do everyone the world of good to be self-employed for a year. Having to take personal responsibility for your pension, sick days, attendance and output instead of expecting your employer to do so on your behalf, would be sobering for many.

    That entrepreneur’s business subsequently went bust under the new owners, (though it’s been re-stated since), so I rather think he was correct all along.

  2. David says:

    Couldn’t agree more PH , the reality check would embitter some and be the making of many but it would make all come face to face with their true (market) value whether they recognised as such or not .
    Many ‘commenters’ have frequently pointed out that the earnings reported are usually greatly understated so the data is at best frivolous . Obviously there are many who are completely unsuited to self employment and I would venture they are frequently unsuited for any kind of employment .

  3. Jason Kitcat says:

    It’s absolutely fair to say that there are significant risks ahead for going self-employed… as well as the potential rewards. And people need to go in open eyed.

    However I’m not sure the £8bn subsidy for small business figure is truthful or helpful in this debate. It’s based on 2001 figures and according to the appendix in David Storey’s chapter you reference, much of the calculation is obsolete. e.g. there is no longer a small business corporation tax rate, no Small Business Service, no Regional Development Agencies and so on. So let’s park that £8bn subsidy claim in the past.

    The fact is that with 5.2m UK micro-businesses employing 8.4m people we need to work out how to boost the productivity of this sector. Not everyone can nor wants to build their business into the next Google but they can be helped to be more productive.

    • Dave Timoney says:

      The productivity of micro-businesses is low because they lack economies of scale, capital intensity and workforce resilience (i.e. 1 person off ill can easily halve your turnover). This isn’t going to change for an individual business until it grows and stops being micro. Also, bear in mind that many micro-firms are essentially lifestyle businesses that have no interest in raising productivity (spending gross profit as a tax-deductible expense is common).

      The best way to improve the productivity of the sector as a whole is to increase the cost of doing business (i.e. more red tape and a higher minimum wage), as this will force the exit of lower productivity firms and encourage others to invest in more capital. In other words, our low level of productivity is partly due to the ease of starting a business. If you want to get the sector fit, it needs more stick and less carrot.

      • Jason Kitcat says:

        Lack of resilience is implicit for micro-businesses to some extent, but I still think there are ways 0-9 employee firms can be supported to be more productive such as with improved skills and better use of digital tools.

        I’d like to see some data on what proportion of micro-businesses are “lifestyle businesses”. I’ve no doubt some are, but I’m not convinced they are as commonplace as you suggest.

        If people want to try their hand at running a business I think that’s incredibly positive, making it harder to get started just to game the productivity figures doesn’t strike me as a worthwhile approach.

        • Dave Timoney says:

          I was making an ironic point. Economics is full of paradoxes, most of which are variations on a particular theme, namely that what makes sense at a micro level does not make sense at the macro level. The paradox of thrift is perhaps the most famous.

          For the economy as a whole, more micro-businesses (as a percentage of the total) are bad news because they lower aggregate productivity. This makes our exports uncompetitive, lowers average and median wages, and stifles innovation (see Rick’s later post). Between 2012 and 2015, the number of zero-employee businesses increased from 74% to 76% of the total (from 3,557k to 4,078k in absolute terms). That is not a good sign.

          You cannot increase the productivity of the micro-business sector sufficiently to offset this, regardless of clever use of IT or improved skills. It is worth remembering (pace Ronald Coase) that small businesses exist in part because larger businesses have decided to outsource certain functions, usually because those functions are inherently inefficient (e.g. they may only be needed sporadically). If a micro-business becomes particularly efficient, it is likely to grow (or be absorbed back) into a larger business. In other words, the relative lack of productivity of the sector is self-regulating.

          The term “lifestyle business” is obviously subjective (I suspect many would consider Sports Direct to be driven by Mike Ashley’s lifestyle demands), however we can make a resonable inference in the case of businesses with zero employees. Few of these will ever grow, and in most cases the founders will be perfectly happy with that. This would suggest that over half of all trading entities (sole traders, partnerships and firms) are essentially lifestyle businesses.

        • Dave Timoney says:

          I was making an ironic point. Economics has many paradoxes, a lot of which are variations on a single theme, namely that what makes sense at the micro level does not make sense at the macro.

          Increasing the number of micro-businesses may be good for some of the individuals involved, but at the aggregate level of the economy it is bad news. This is because it lowers average productivity, average and median wages, and impedes innovation (a point Rick makes in his more recent post).

          The term “lifestyle business” is subjective, but we can make a reasonable inference that most zero-employee businesses fit this description because we know that very few will actually grow. They will never advance beyond providing a lifestyle for the founder.

          According to BIS, the number of zero-employee businesses increased from 3,557,255 in 2012 to 4,077,590 in 2015. That might be half a million success stories, but it also meant that the zero-employee share of the business population rose from 74% to 76%, which is not good for the economy as a whole.

  4. roGER says:

    Well said, Rick.

    As a former member of the self employed “precariat” my experience is exactly as you described.

    To be precise, shit pay, long long hours, and a constant mantra of scrimp and save only there was nothing left over to save.

    Now I’m back in a full time job and earn nearly double for 35 to 45 hour weeks with 20 days paid holiday a year and full sickness pay if I need it. The pension fund is growing, as are the long term and medium term savings accounts.

    Frankly I dread having to return to self employment – I hope it never happens.

  5. David says:

    Then you either completely missed the point or didn’t have something worth selling . Nearly all start with the long hours for no rewards scenario . The idea is to grow that until you make yourself redundant in your own business so the situation is reversed , not remain stuck in the starting blocks .

  6. roGER says:

    David – if you’re message was directed at me, absolutely right, self employment didn’t suit me one bit.

    Which is exactly the point – we’ve got many many self employed people who would be far better off in paid employment as part of a company, rather self employed and barely surviving. Hence the title of the blog post “Thousands held back from their dream of self-employment. Thankfully!”

  7. Terry Hyman says:

    What a shame that nobody has addressed the issues of those thousands of self employed who do it because they don’t want the restrictions placed upon them by employment and also they are not necessarily in it to make a fortune. As an accountant for nearly 50 years (and largely self-employed during this time) I have dealt with thousands of self-employed nearly all of whom have moaned about the administrative burden. And now the government wants to make it worse by requiring 3- monthly returns and digitising their tax affairs. I am one of those good, reasonably priced accountants but even at my prices people will baulk at having to deal with me 4 times rather than once a year. Please don’t stigmatise the self-employed. They provide a great deal of employment to others (more bureaucracy), work like mad to provide for themselves and their families and then try to pay their taxes on time, if only their bigger customers would pay their invoices in a timely fashion. The self-employed need incentives to grow and wonder in utter disbelief that major global companies can get around their UK tax responsibilities by syphoning off profits to lower tax jurisdictions.

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