The number of Sole traders, partnerships and private companies are all in decline, why is that and does it matter?

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Starting off

It is becoming less and less attractive to set out on your own path, to dip your toe in to see if it could work, and go into business following your dream.  Instead waves of people are choosing the mundane, the safe - employment.

Since 2019, Sole trader numbers are down 11% and Partnerships are down 18%.  These early stage entrepreneurs are usually the most inventive, fun and expressive businesses in the UK, so it is a real shame to see them dwindling. What’s behind it?

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‍COVID - the self employed got nowhere near the financial support employees did during the pandemic, this clearly drove many people into employment through necessity, most have never returned.

‍Improved flexibility as an employee - Working from home, working from abroad, 4 day weeks, flexible hours, uncapped holiday allowance are just some examples of initiatives being introduced across businesses in the UK, allowing individuals to tailor their working lives in ways that previously you could only do by working for yourself.

‍Increase in employment rights - The new government talk of employment rights being introduced on day one of your employment contract, this gives individuals huge confidence in their own position, meaning regular secure income.  Something which a self-employed business can’t always guarantee.

‍Cost of compliance - HMRC are making it harder for sole traders to comply with their requirements without engaging an accountant and/or accounting software.  Personal Tax Returns, MTD for VAT are just two examples.  Asking HMRC for advice is near impossible, due to their hold times and closing various services, so you are forced to engage a professional services company.

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The SME

Once your sole trader business, or partnership, has grown to a certain size, many people take the leap to incorporate either as a Limited Company or a Limited Liability Partnership, and enjoy their relevant protections and benefits.

The separation of the business and the individual, was there to give businesses the confidence to take risks, to try things and push the economy forwards.  However, this doesn't seem to be as attractive as it once was.

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2020 - Private businesses in the UK - 6 Million

2024 - Private businesses in the UK - 5.5 Million

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Now, what could be behind this? 

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COVID - Debt taken on from the pandemic is becoming a real burden for businesses as the interest rates over the last year or so have rocketed.  Banks, despite the government guarantees on the debt, are reluctant to assist with payment holidays.  One client told us that the bank had requested their team all take a 50% pay cut before the bank would consider a 6 month payment holiday - this is clearly completely unrealistic. This has forced many businesses to close their doors as they can’t afford to continue paying the debt down at the bank's rate.  Insolvency rates have never been higher

‍Consolidation - an aging Director population in the UK, means business owners have looked to sell their companies, usually to another business in their sector, to ensure that they recognise some value from their hard work over the years.  COVID was certainly a driver in this.

‍Banks - The banks appetite to help the SME market is now non-existent.  From speaking with clients, the days of the bank or bank manager (if you have a dedicated manager you are in the minority), being willing to help with cashflow difficulties or expansion plans are over.  Fees, rates and personal guarantees, all mean that the banks are no longer the partners they perhaps once were.

‍Tax/rates - Business rates and rent increases mean that a physical premises is as hard to maintain as it ever has been, many businesses rely on a physical premises, either as they sell directly to the public or that their team requires the engagement which comes with an office environment.

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For shareholders, Dividend rates have never been as high, and Corporation Tax is now at 25%.  So profits in your business have never been hit as hard.  It is yet to be confirmed, but it seems a certainty that in the Budget at the end of October, Capital Gains Tax will be increased.  It will likely fall inline in some way, with income tax.  The dream of a tax efficient lump sum on the sale of your business could be a thing of the past.

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Does it matter?

Of course it matters, innovation in SMEs is at the heart of a healthy economy. 

Tina McKenzie, policy chair at the Federation of Small Businesses said “There are now well over half a million missing small business owners. That’s half a million wealth creation units missing, which means local jobs and local enterprise are also missing,...The UK has a proud history of entrepreneurship, and we can’t afford to let that legacy slip away. There must be a pro-small business budget.” Yes, it does matter.

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What can be done?

A good and honest relationship with your professional advisers, to ensure that bills are forecast and changes in legislation and tax policy in the UK are communicated to you, so that you can plan for them.  Be this either by receiving regular management accounts, or a review of your company structure, we hope to provide this support to our client base at Folio Partners, give us a call!