Business owners have been the fastest-growing part of the UK labour force since at least 2000. This is an important labour market trend and is often hailed as a success because small businesses and start-ups are commonly viewed as the engines of growth. This is questionable in light of evidence that the UK has a long tail of low-productivity firms. However, understanding of business owners has been limited because they are not well captured in traditional survey data sources. We used administrative tax records to learn more about them.
It has become commonplace to state that the labour market is fundamentally changing. The perceived truism is that the workforce can no longer be characterised by employed individuals with single, full- or part-time, positions, and instead includes a significant number of independent workers with flexible, often intermittent, income streams. Yet, despite the growing body of anecdotes and examples – Uber being perhaps the best known – and the concerns about what this means for various individuals’ jobs and welfare, we know remarkably little about the changes taking place.
The data collection techniques that currently underpin the National Accounts, where measures of activity are largely based on surveys of businesses, were not designed to capture aspects of working patterns such as the volatility of self-employed incomes or moves between legal forms, both of which have become more important in the ‘gig economy’. We used administrative data from tax records to capture how economic activity is changing (whether people are employees, sole traders, partners or owner-managers), what compositional shifts in these workforces mean for income growth and how well such activity is captured in current surveys.
We used the universe of business owners’ administrative tax records provided by HM Revenue and Customs (HMRC) to learn more about business owners and their businesses than has previously been possible using survey data. Specifically, using these data, we documented the numbers, characteristics, incomes and business activities of business owners in the UK. We tracked the same business owners over time – something that has not been possible before – and used this to analyse patterns of business start-up and closure and to explain substantial falls in sole trader incomes since 2008. Our analysis relied on linking a number of administrative datasets.
Since the turn of the century, the business owner population has grown rapidly, and much faster than the number of employees. Owners now number over 6.5 million, up from 4.8 million in 2000/01. This growth has been incentivised by a tax system that taxes business owners less heavily than employees.
Business owners are a diverse group that cannot be accurately summarised by a ‘one size fits all’ description. They operate in all sectors of the economy; they include some ‘gig economy’ workers, but also, among others, partners in law firms, sole trader construction workers and company owner-manager IT consultants. They are overrepresented at both the top and the bottom of the income distribution. A minority of closely held businesses have substantial costs, make large capital investments and will be employing others, but the majority have low costs and do not invest or employ others. In many cases, profits will mainly reflect a return to the owner-manager’s labour.
It is common to describe those who are active in the labour market as either ‘business owners’ or ‘employees’. But a quarter of business owners earn some employment income while running their business. While the business owner population has grown especially quickly since 2007/08, this growth has been accompanied by a decline in reported capital investment. Sole traders, who account for 90% of the net growth in business owners since 2007/08, have seen large falls in income. These findings highlight that the ‘number of people running a business’ is a poor measure of the economic contribution of that sector.
Having a better understanding of the business owner population is important for public discourse and policymaking. A failure to appreciate the diversity of business owners may lead to poorly targeted policy. This project has shown the benefits of using administrative tax data to study the UK population of business owners. We can say much more than was previously possible about the legal forms people use, the activities they engage in and the ways in which they take their income. However, this does not provide answers to all questions. With more data, particularly linked data, researchers could make greater progress in understanding the dynamics of businesses and the labour market.