Freelancers and Self Employed Driving Growth in New Businesses

The Business Population Estimates for 2014 have just been released by the Department for Business Innovation and Skills (BIS) and the Office for National Statistics (ONS). As there is no central register for businesses in the UK they put together a report every year to try and estimate how many businesses there are in the UK and whether the figure is going up or down. There methodology for doing this is somewhat convoluted as you can see from the flowchart below:

Business Population Stats Methodology

Despite the methodology the Business Population Estimates are generally seen as one of the more reliable ways to estimate the number of UK businesses.

Record Number of New Businesses

The headline stat from this year’s Business Population Estimates is the same as last year’s. That we have a record number of businesses in the UK with 330,000 new businesses started in 2014 bringing the total up to 5.2 million. Of these 29% are limited companies, 62% are sole trader and the remaining 9% are self employed partnerships.

BIS and the ONS have identified the key driver for the increased number of new businesses as being the increasing number of people becoming self-employed or working as freelancers. Of the 330,000 new businesses created last year 263,000 (79.7%) did not employ anyone other than the founder, indicating that they are being run by the self-employed or by freelancers. This continues a trend from the last decade with 91% of businesses created since the year 2000 being started by self-employed people.

“True” Self-Employed Activity

One of the biggest challenges for the ONS in creating the Business Population Estimates is working out how many of the people who are self-employed are running a stand-alone business and how many are working as contractors for a single employer. They say that:

many “no employee” businesses are labour-only sub-contractors; that is, self-employed people trading in their own skills or professional knowledge. They might work for just one customer. Many are genuine entrepreneurs or at least think of themselves as separate from the organisation to which they sell their skills. The improved BPE methodology used since the 2010 edition makes use of additional questions on the ONS Labour Force Survey around who pays the salary or wage of the self-employed and whether they pay their own National Insurance and Income Tax to better identify “true” self-employed activity

These observations by BIS and the ONS reflect changes that we have seen as company formation agents. It is becoming increasingly common for people in industries such as IT, medicine and transport to gain work through an employment agency and then invoice the agency, or the end company they are working for through a limited company of which they are the sole employee.  If they are working for, and invoicing, lots of different companies then they can be seen as ‘truly’ self-employed. However, there are many cases where people work for a single employer on a full time basis but get paid via an invoice rather than PAYE in order to lower the tax bill for themselves and for the company they are working for (this also allows the employer to opt out of many responsibilities such as paying sick or maternity pay, making National Insurance contributions or having to offer any form of job security). It is this second group of people that BIS and the ONS are trying to filter out as not being ‘true’ self-employed.

Part-Time Businesses Count Too

Sometimes referred to as ‘hidden entrepreneurs’ the Business Population Estimates shows that 0.4 million people in the UK have a second income through some form of self-employment. In many cases these are people who do a bit of freelancing on the side while holding down a full-time job, or who have a small craft or food business that they run in their spare time. This is a popular way to test out business ideas and to build an initial client base so that entrepreneurs can be confident of having a sustainable business model when they leave their full-time job. With 400,000 people currently having a second income of this type they make a significant contribution to the UK Business Population.

If you are thinking of starting your own business, or becoming self employed, we can help you to get your business properly registered and legally compliant. You can contact us or give us a call on 01245 492777 or 0800 0828 727.

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