Business formations fall after tax clampdown

Tax clampdown on public sector contractors behind drop in business formations in 2017.

The latest Companies House data, as analysed by the Centre for Entrepreneurs (CFE), shows that 589,008 new businesses launched in 2017 – a drop from 657,790 in 2016. The Centre’s analysis suggests this is mostly a result of the government’s clampdown on “disguised employment” among public sector workers.

The clearest impact of the government’s clampdown, which came into effect in April 2017, is found in Wiltshire. 2016 saw 10,164 new businesses registered in the county, with 7,475 (73%) registered to an accounting firm that provides payroll solutions to contractors. In 2017, only 3,409 businesses were registered in Wiltshire, 458 of which were registered to this address.

Similar drops, in some cases over 70%, can be found in Wellingborough, Lichfield, East Hertfordshire, Bolsover and Central Bedfordshire – all areas where contractor accounting firms have significantly outnumbered genuine entrepreneurial business formations in recent years. The Centre found 30,000 fewer companies registered by known contractor accounting providers in 2017 compared to 2016.

“This is a welcome re-adjustment to business formation figures, which have become increasingly distorted over the past few years by the rise in contractor accounting firms. The company formation statistics now give far more accurate insight into the state of entrepreneurship nationwide”, said Matt Smith, director of the Centre for Entrepreneurs.

This is the Centre’s fourth annual analysis of company formation figures. The detailed insight is possible as a result of the Centre’s novel analysis of high-density postcodes – addresses that had hundreds if not thousands of new business registrations in 2017. The Centre has identified the likely source behind the 200 most-used postcodes, in which over 101,000 new businesses were registered last year.

While businesses registered in homes, offices and local accountancy firms across the UK constitute the vast majority of the total (an estimated 515,000), the Centre’s analysis shows that 60,000 founders have made use of company formation agents, business centres or virtual offices – a 20% increase from 2016.

Away from areas highly impacted by the clampdown, local authorities across Britain saw a slight fall in business formations last year. The Centre suggests two reasons for this.

Firstly, the clampdown is likely to have affected contractor accounting firms registered to homes and offices nationwide, not just the hubs highlighted above.
Secondly, the cumulative effect of business rate rises and other regulatory burdens, combined with muted encouragement for entrepreneurs from the current government, could be discouraging individuals from turning their business ideas into action.
Brexit is not deemed to have had an impact; there was no slow-down observed in the final six months of 2016, so it is unlikely to have directly impacted on formations in 2017. This is supported by the FSB’s Q4 2017 Small Business Index, which suggested that “surging operating costs, weak domestic growth and flagging consumer demand were at the top of business owners’ concerns”, ahead of Brexit.
“With business registrations increasing for nearly a decade it is not surprising to see the record streak come to an end” said Smith. “While the tax clampdown is responsible for most of the drop, there is evidence that formations have fallen more than expected. To boost startup figures, the government must return to championing entrepreneurship and supporting entrepreneurs, as it did so well under David Cameron”.

Stay informed

  • This field is for validation purposes and should be left unchanged.