What is really driving the growth in new UK companies?

Flag Of United KingdomWe recently blogged about the reports that appear on an almost weekly basis about the number of new companies being formed in the UK. Most of these reports use the same dodgy stats to announce that there are a record breaking number of new businesses starting in the UK. This is normally trumpeted as a celebration of a new entrepreneurial spirit sweeping the country.

Much has been made of the Conservative party’s support for startup businesses in the last few years. David Cameron regularly makes speeches about creating an “entrepreneurial, buccaneering spirit” and embracing “the spirit of ‘insurgent companies’ and their power to disrupt traditional ways of doing things”. Barely a week goes by without a conservative minister appearing at a pop-up shop or touring tech city.

However there is growing evidence that many of the new companies being formed are the result of a trend towards outsourcing jobs, not the result of an inspired business idea. When the City Link courier company collapsed last year more than 1,000 of their drivers and other employees received no redundancy pay and in many cases were left being owed thousands of pounds. This is because they weren’t classed as employees of City Link but were independent contractors, many operating through their own limited companies. Under this arrangement the contractors receive no regular hours, not holiday pay, no sick pay and no other employment rights. This model is common in the courier and haulage industries with thousands of drivers operating as self employed contractors.

As a company formation agent we deal with thousands of new limited companies every year. Among them we find hundreds of nurses, care workers, drivers and labourers. In most cases these people have been told by an employment agency that the only way they will get work is if they set up as a limited company on their own. This allows the agency who are employing them to bypass any employment regulations and makes the workers themselves responsible for their own tax, pensions and employment rights. This kind of arrangement has become very common in the NHS where the cost of employing agency workers rose from £1.8bn to £3.3bn over the past three years.


What are the numbers?

The most reliable statistics on UK businesses are the Business Population Estimates produced by the ONS. According to their figures in 2014 330,000 businesses new business were created in the UK. 197,000 (60%) of these businesses were owned and run by single person and did not employ anyone else. It is hard to say how many exactly of these new businesses were contractors but it is likely to be a significant proportion.


Why does this matter?

The rise in the number of contractors working through their own limited companies mean that tens of thousands of people are operating outside of the rules of normal employment. This change has passed largely unremarked by most commentators on the UK labour market but it is starting to be picked up. As Deputy Labour leader Tom Watson stated in a recent article for the New Statesman:

“I’m not sure we fully understood the change that has happened in the labour market since we came to office in the mid-nineties. Back then you might have been a warehouse manager – now you’re likely to be a self-employed courier. You may have been a cafe manager in a big company, now you’re an out-sourced catering company. “

As well as having an impact on individual workers lives the rise of the self employed contractor is distorting our picture of entrepreneurism in the UK. Virtually none of the reports trumpeting the latest rise in new businesses note the contribution that agency nurses, drivers and labourers make to those figures. Counting contractors in with the real new businesses with plans to grow, change the world (and employ people) is misleading and leads us to believe that we have a healthier business environment than we do. When these inflated and misleading figures are used to encourage people to quit their jobs and start their own businesses it becomes irresponsible.


How The Company Warehouse can help

We already work with lots of contractors, helping them to setup their companies and manage their finances so that they can run their own limited companies as cheaply as possible. In recognition of the new focus the labour party are putting onto contract workers we are also offering to provide 5000 free new company formation packages if Labour win the next election.

To find out more about our company formation services give us a call on 0800 0828 727. 

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