A fifth of the businesses started by Britain’s growing army of sole traders close within a year, according to a study highlighting the precarious financial states of those who opt for self-employment.
A report by the Institute for Fiscal Studies found that less than half of companies set up by individuals have a long-term future, with 60% ceasing trading within five years.
The study found that between 2014 and 2015, the number of sole traders grew by almost 70,000, but this was largely the result of “churn”, with 650,000 businesses starting up and 580,000 closing.
Financed by the Office for National Statistics, the IFS report found that sole traders accounted for the biggest share of employment growth in the 15 years after the millennium, rising by 1.4m to 4.1m. Since 2007, a third of the growth has been from foreign-born sole traders.
Despite the rapid growth, however, investment and employment rates for sole traders were low, the IFS said. Most sole traders were not employing anyone else, and less than a quarter took advantage of tax breaks for capital spending.
The IFS said there were tax breaks for people opting for self-employment, but low and falling incomes among the self-employed and low levels of investment in small businesses raised questions as to why the government was providing incentives to quit employment and start their own business.
The financial crisis and deep recession of 2007-09 had a marked impact on the finances of sole traders. Median profits fell by 7% from pre-recession levels after accounting for inflation, and the drop was greater for higher earners. The IFS said that despite a 25% rise in the number of sole traders since 2007, aggregate turnover was lower than before the financial crisis.
Falls in average profits during and after the recession were driven by established businesses, not entrants, the thinktank said.
Jonathan Cribb, senior research economist at IFS and the report’s 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.”
