The Entrepreneurial Audit Entrepreneurial The The Entrepreneurial Audit Twenty policy ideas to strengthen self- employment and micro businesses in the UK by Benedict Dellot February 2017 and Fabian Wallace- Stephens February 2017 Contents Introduction 4 Recommendations 11 Tax and National Insurance 15 Welfare and pensions 24 Business support and employment services 33 Regulation and late payments 41 Conclusion 47 Appendix 48 Traditional laissez-faire approaches to enterprise support – epitomised by corporation tax cuts and deregulation drives – have reached the limit of their effectiveness. If the government is serious about improving the pro- ductivity, resilience and long-term financial success of the self-employed, then it must be more willing to intervene to set problems right – and to do so with a package of reforms stretching from taxation to welfare, through to pensions and late payments. In this report, we put forward 20 ideas for how the self-employed could be better supported, such as by reforming National Insurance contributions, ironing out the problems of Universal Credit, overhauling business rates, and creating new rights for home-based workers. In doing so we have sought to be pragmatic and realistic, conscious that we live in straitened times and aware that every extra expense must be budgeted for. The package of measures we present may not be easy wins, nor are they likely to enjoy universal support. But each proposal is presented with the long-term interests of the self-employed in mind, not least those who live in more precarious circumstances. Our fundamental goal – as ever – is to ensure that more people, regardless of their background, have the opportunity to enjoy the benefits of meaningful self-employment, which at its best can offer economic security married with flexibility and a deep sense of purpose. The RSA in partnership with About the RSA The RSA (Royal Society for the encouragement of Arts, Manufactures and Commerce) believes that everyone should have the freedom and power to turn their ideas into reality – we call this the Power to Create. Through our ideas, research and 28,000-strong Fellowship, we seek to realise a society where creative power is distributed, where concentrations of power are confronted, and where creative values are nurtured. The RSA Action and Research Centre combines practical experimentation with rigorous research to achieve these goals. About Crunch Crunch is the UK’s first and fastest-growing online accountant, combining a team of expert in-house accountants available on-demand with simple online accounting software. It is designed specifically for freelancers, con- tractors, sole traders and small businesses. Crunch serves its almost 10,000 clients with accounting, insurance, mortgages and financial services. With its wider community of 24,000 firms Crunch works to support the UK’s entrepreneurial sector through education, research and campaigning. Acknowledgements The authors are grateful to Crunch for their generous support, and in particular to Jason Kitcat for his advice and expertise. Thanks must also go to RSA colleagues for their feedback, including Tony Greenham, Anthony Painter, Matthew Taylor, Janet Hawken, Paul Duffy and Kenny McCarthy. Many external stakeholders have fed into the report, and we are especially grateful to the business support representatives who attended our project roundtable in November 2016, as well as to Alice Johnson and Vicki Hughes at Fugu. The Entrepreneurial Audit 3 Introduction A labour market in flux Self-employment is once again in the media spotlight – and for good reason. The number of people who work for themselves has grown by 46 percent since the turn of the century and today stands at 4.8 million, or 1 in 7 of the workforce (see Figure 1).1 This compares with just a 12 percent growth in the number of employees over the same period. Since 2008, self-employment has been responsible for nearly half (44 percent) of all jobs growth in the UK. Equally impressive has been the growth in the number of micro busi- nesses, defined as firms with zero to nine employees. In 2000 there were 3.5m micro businesses in the UK. Today there are closer to 5.2m.2 While much of the expansion has been driven by one-person firms, the number of micro businesses with employees has also increased. 8.5 million people in the UK now own or are employed in a micro business. But are these welcome developments? Recent media coverage depicts the self-employed as one more legion in a growing army of precariat workers. Bleak headlines such as ‘80% of self-employed people in Britain live in poverty’, and ‘Self-employment used to be the dream. Now it’s a nightmare’ are increasingly common.3 The overall picture is one of a reluctant band of unhappy workers that would rather be in steady em- ployment. Micro businesses, meanwhile, are painted as lightweight and an overall drain on our economy.4 While there is a degree of truth to these claims, many appear to be overstated. For example, the assertion that most of the self-employed have little option but to work for themselves does not bear out in govern- ment data or independent surveys. Previous polling by the RSA found that just 19 percent of the self-employed started up in business to escape unemployment – a finding that is repeated across multiple studies.5 This is reinforced by the Bank of England’s analysis, which revealed that few of the newly self-employed (those who started up after 2008) are in search of other work.6 1. RSA analysis of UK Labour Force Survey 2000-2016 (with 2016 being an average of January to September). 2. RSA analysis of Business Population Estimates (2010-2015) and BEIS SME Statistics (2000-2009). 3. Fleming, P. (2016) Self-employment used to be the dream. Now it’s a nightmare [article]. The Guardian, 19 October. 4. See for example: Nightingale, P. and Coad, A. (2014) ‘Muppets and Gazelles: political and methodological biases in entrepreneurship research’ in Industrial and Corporate Change. Vol 23 (1). 5. See Dellot, B. (2014) Salvation in a Start up? The origins and nature of the self- employment boom. London: RSA. 6. Tatomir, S. (2015) Self-employment: what can we learn from recent developments? Quarterly bulletin, Q1 Bank of England. 4 The Entrepreneurial Audit Figure 1 - Change in the number of employees and self-employed workers since Q1 2008 Source: RSA analysis of Labour Force Survey Another claim is that a large proportion of the self-employed are in dire financial straits. A recent study by the Resolution Foundation found that the average pay packet of the self-employed has barely moved in 20 years, while research by the Social Market Foundation shows that half the self-employed now earn below the National Living Wage.7 The Family Resources Survey appears to corroborate these findings, showing that the median full-time self-employed worker earns a third less than the typical employee, and that this gap has widened (albeit marginally) over the last decade.8 As before, however, these findings should be treated with a note of cau- tion. According to the Understanding Society Survey, the self-employed are nearly just as likely as employees to say they are satisfied with their income (see Figure 2). This may be explained by them having a greater reliance on wealth over earned income. Over a third of households with only self-employed workers own their homes outright, meaning they have no outgoings in the form of a mortgage.9 A related point is that a greater proportion of the self-employed are retired, and many of these will have made a conscious decision to trade in a higher wage for more flexibility.10 7. Resolution Foundation (2016) Typical earnings of the self-employed lower than 20 years ago [Press notice] RF; and Broughton, N. and Richards, B. (2016) Tough Gig: Tackling low paid self-employment and the UK. Social Market Foundation. 8. Median weekly gross earnings among the full-time self-employed were £310 in 2014/15, versus £467 among employees. 9. Dellot, B and Reed, H. (2015) Boosting the Living Standards of the Self-employed. London: RSA. 10. Labour Force Survey data (2015) shows that over 2,006,000 people aged over 50 are self- employed. The Entrepreneurial Audit 5 Figure 2 - Satisfaction with life and aspects of work by employment status Source: RSA Analysis of Understanding Society Survey (Wave 5) Precarious if not precariats Misperceptions about the self-employed arise in part because they are often treated as one homogenous group. The typology below, drawn from earlier RSA research on self-employment, denotes six ‘tribes’ of self-employed worker, each varying in their ambition, intensity and style (see Figure 3).11 While some groups are keen to expand their business, take on employees and bring transformative products to market, others treat their venture more as a part-time hobby – one that bides their time during old age. It is unwise to measure each tribe against the same yardstick of success, or to always cry foul when they have different experiences to conventional employees. In the same vein, we should be wary of conflating workers that use on-demand ‘gig’ platforms with the self-employed community as a whole. The stratospheric rise of Uber and Deliveroo is as unsettling as it is im- pressive, and unions are correct to question whether workers using these platforms have been denied rights by being misclassified as self-employed. However, their experience speaks to only one part of a 4.8 million strong self-employed workforce. The RSA will shortly publish a report on the experience of workers in the on-demand economy, part of which will delve into definitional dilemmas.