Self-employment and entrepreneurship: lessons from tax records and challenges for policy

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1 Self-employment and entrepreneurship: lessons from tax records and challenges for policy Institute for Fiscal Studies 4 June 2018

2 A picture of business owners in administrative data Thomas Pope

3 Share of workforce Business owners make up a greater share of the workforce than before the financial crisis 16% 14% 12% 10% 8% 6% Business owners 4% Share self-employed 2% Share owner-manager 0% Source: Authors calculations using Labour Force Survey

4 Today Use administrative data to shed more light on these populations Focus on businesses with one owner and one manager Self-employed: sole traders Excludes partners Owner-managers: 1 director 1 shareholder companies Excludes multiple-director companies Answer: How many are there? Who are they? What are they doing?

5 How many are there?

6 Size of population (thousands) How many people operate in these legal forms? ~4 million sole traders ~300,000 sole owner-managed companies

7 Size of population (millions) How many people operate in these legal forms? Self-employed Owner-managers ~4 million sole traders ~300,000 sole owner-managed companies

8 Population ( =100) Both populations are growing quickly Self-employed Owner-managers % increase in self-employed since % increase in owner-managers since

9 Who are they?

10 Both groups are male dominated 100% 80% Female 60% 67% 75% 40% 20% Male 0% Self-employed Owner-managers Owner-manager statistics based on a data match between personal and corporate tax data in Sole traders statistics based on

11 Both groups older than employees on average 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 74% Over 35 84% 62% Under 35 Self-employed Owner-manager Employees Owner-manager statistics based on a data match between personal and corporate tax data in Sole traders statistics based on Employee ages based on the Labour Force Survey

12 Owner-managers based in business services, self-employed in construction 0% 5% 10% 15% 20% 25% 30% 35% Business Services Construction Domestic services Hairdressing Owner-manager Self-employed Taxis Wholesale & Retail Owner-manager statistics based on a data match between personal and corporate tax data in Sole traders statistics based on

13 What are they doing?

14 Aggregate turnover ( billion, prices) Self-employed aggregate turnover higher than owner-managers Self-employed turnover less than 3x higher than owner-manager turnover Population more than 10x larger Self-employed Owner-manager

15 Mean turnover (, prices) On average owner-managers have much higher turnover Average ownermanager turnover is 4.5x larger Self-employed Owner-manager

16 Mean profit (, prices) Owner-managers have higher profits Self-employed Owner-manager Owner-manager statistics based on a data match between personal and corporate tax data in Sole traders statistics based on

17 Mean profits (, prices) Average business profits are lower than before the crisis Self-employed Owner-manager Note that business profits understates the income from owner-managed companies as directors also pay themselves a wage.

18 Mean profits (, prices) Average business profits are lower than before the crisis Self-employed Owner-manager -18% since -21% since Note that business profits understates the income from owner-managed companies as directors also pay themselves a wage.

19 Share using capital allowances Less than half of business owners invest 80% 70% 60% 50% 40% 30% 20% 10% 0% Self-employed Owner-manager 45% 25%

20 Share using capital allowances The share investing in capital in both populations is falling sharply 80% 70% 60% 70% Self-employed Owner-manager 50% 40% 60% 45% 30% 20% 25% 10% 0%

21 Share employing others An even more dramatic fall in the share of self-employed employing others 20% 15% 10% 17% 7% 5% 0% A sole-trader is registered as employing others if wage or salary costs are greater than zero

22 Share of self-employed population A large share of the self-employed have some employment activity 30% 25% 20% 15% 25% 18% 10% 5% 0% Some employment income More employment than self-employment income Note: Based on HMRC administrative data sources. Includes sole traders

23 Share of self-employed population But these trends are not explained by more double-jobbers 30% 25% 20% 15% 10% 5% 0% Some employment income More employment than self-employment income Note: Based on HMRC administrative data sources. Includes sole traders

24 Aggregate turnover ( bn, prices) Aggregate self-employed turnover is declining Self-employed Owner-manager

25 Summary 4 million sole traders and 300,000 single director and shareholder companies in administrative data Despite growing by 25%, the self-employed population accounts for less turnover now than in Share of self-employed with some employment income almost 25% has been stable over the last decade The share investing or employing others has fallen dramatically Average profits have also fallen substantially since the crisis