The Entrepreneurial Audit
20 policy ideas to strengthen self-employment and micro businesses in the UK
By Benedict Dellot and Fabian Wallace-Stephens
Follow Benedict and Fabian on Twitter @BenedictDel @fabian_ws
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 productivity, 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 twenty 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.
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 below). 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 businesses, 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. 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. The overall picture is one of a reluctant band of unhappy workers that would rather be in steady employment. Micro businesses, meanwhile, are painted as lightweight and an overall drain on our economy.
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 government 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.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.
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. 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.
As before, however, these findings should be treated with a note of caution. 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. 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.
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). 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 impressive, 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.
Nevertheless, we should not be blind to the real insecurities that face people who work alone. Not every self-employed person is a ‘precariat’ — in the sense of being unhappy and forced into a situation not of their choosing — but most do operate precariously. Life in self-employment is characterised by peaks and troughs, with business that ebbs and flows in line with the markets people operate in. According to polling by Bright Blue, 55 percent of the self-employed on a low income said that income volatility is one of the biggest challenges they face.
People who strike out alone also forgo protections they may have taken for granted as an employee. There is no access to Statutory Maternity Pay should they become pregnant, nor is there recourse to Statutory Sick Pay should they fall ill at work. Recent government moves to establish a National Living Wage and to auto-enrol workers onto a private pension scheme have passed them by. Insecurity is inherent across all the above tribes and is as much a problem for the high-skilled as it is for the low-skilled.
Left unchecked, the risk is that such precariousness will lock out the least affluent from secure self-employment. It is already the case that people with wealth to their name, assets to fall back on and valuable connections to tap are most likely to thrive in business. Previous RSA analysis shows that people who have received an endowment of £10,000 or more are twice as likely to move into self-employment as those who have received no inheritance. Entrepreneurship is treated as one of the most meritocratic arenas, but the data tells a different story.
Our belief is that self-employment, at its best, can be the route to a better life — one that allows people to make their mark on the world and find a better work-life balance. We also know that it can be financially viable in time, and that people who move into self-employment are far from destined to be destitute. New insights are emerging that show self-employed earnings can grow significantly in the right conditions. Our analysis of longitudinal survey data reveals that people who have been self-employed for 3+ years earn twice as much on average as those who have worked for themselves for less than a year (see Figure 4).
The question as we see it is therefore not: “How do we save people from self-employment?” But rather: “How do we enable more people to take part in meaningful self-employment?” That is, the kind that can offer economic security married with flexibility and a deep sense of purpose. The prize is not just a workforce that is healthier and happier, but also a nation that is more prosperous and diverse. Although the narrative of the heroic entrepreneur may be misplaced and oversold, a society that is more entrepreneurial in the round is something we should inherently value.
Moving the dial on self-employment policy
How, then, should policymakers respond?
The growth of self-employment has not been lost on the new government, nor on its predecessors. Both Cameron and Osborne were vocal champions of entrepreneurship and enacted various initiatives in the name of supporting the self-employed. Under their tenure, the higher rate of Corporation Tax was reduced from 28 to 20 percent, regulation was culled through programmes like the Red Tape Challenge, and access to finance was expanded through schemes such as Start Up Loans (SUL). The last government also launched two specific inquiries into self-employment: the Deane and Mone Reviews.
Yet while some of these moves have been welcome, others are hard to justify. The cut in Corporation Tax, for example, mainly benefited larger corporations and does little for start-ups that are usually loss-making in the first few years. The ‘one-in, two-out’ rule on red tape, meanwhile, seemed more of a ploy to grab the headlines than an attempt to resolve a real barrier facing the average business owner. It is also clear that in some cases, business initiatives have been chronically underfunded. The Local Enterprise Partnerships were stymied from the outset due to a lack of resources.
While these issues are a reflection of shallow policymaking, equally concerning has been the narrowness of government agendas. Seldom have policymakers strayed from the traditional policy levers of regulation, tax and finance to look at the personal issues facing the self-employed, for example their access to pensions or mortgages. The Julie Deane Review, which had a remit to look at these topics, was a step in the right direction, but its final policy recommendations were disappointingly timid. Policymakers have been particularly reticent to look at welfare coverage, possibly seeing it as anathema to an entrepreneurial society.
It is against this backdrop that the RSA and Crunch have chosen to explore and critique recent policy affecting the self-employed. With a change of government and May’s succession to the office of prime minister, we have a window of opportunity to look afresh at how the self-employed are treated. The rest of this paper details the findings from our research and lays out a number of recommendations across four policy domains: taxation; welfare and pensions; business support and employment services; and regulation and late payments. We will return to other issues such as enterprise education and procurement in future work.
Underpinning each of our proposals is a broader call for policymakers to be more interventionist. Past governments have sought to do right by the self-employed by leaving them to their own devices. But this laissez-faire approach — epitomised by ill-targeted tax cuts and broad brush deregulation drives — has reached the limit of its effectiveness. The time is ripe for the government to move from a low-road to a high-road policy approach in its treatment of the self-employed, and show a greater willingness to invest in business support, strengthen welfare coverage, and boost productivity and earnings potential of small businesses. The launch of the Taylor Review into Modern Employment Practices and the creation of a new Industrial Strategy indicate that the incoming government may be more open to such a hands-on approach.
In crafting our policy ideas, we have sought to follow six core principles, and would urge policymakers to do likewise as they seek to support the self-employed in future:
1. Seek equality of rights and responsibilities — Wherever possible, the self-employed should receive the same rights and protections as employees, however this comes with added responsibilities and may require the levelling of taxation. A broader shift towards neutral treatment is desirable.
2. Recognise the diversity in 4.8 million individuals — Policy must be built on a recognition that not all the self-employed share the same experiences or have the same needs. Few live up to the stereotype of the all-or-nothing, heroic entrepreneur.
3. Consider the individual, not just the business — Policy must not only strive to make businesses profitable. It must also help to make self-employed lives more liveable, for example by opening up access to pensions, insurance and mortgages.
4. Avoid self-employment for self-employment’s sake — Too often we champion any rise in self-employment, regardless of the underlying drivers. Policy must not be driven by numbers but by the quality of people’s experiences in self-employment.
5. Be guided by evidence, not what appears common sense — Too many initiatives are based on guess work and underpinned by outdated business stereotypes. Policymakers should dedicate resources to gathering and evaluating evidence, including direct consultation with the self-employed.
6. Aim for continuity and avoid reinventing the wheel — Notwithstanding the ideas put forward in this report, the government should aim for policy continuity. Unnecessary change can create confusion and disruption.
Recommendations
Recommendation #1 — Equalise the treatment of employees and the self-employed for National Insurance contributions
The government should seek to close the gap in National Insurance contributions (NICs) paid by employees and the self-employed, noting that this is a driver of bogus self-employment and delays progress in extending more rights to business owners.
Recommendation #2 — Undertake more regular property revaluations to ensure the business rates system is fit for purpose
The government should commit to undertaking regular revaluations of properties, which would make levies more accurate, reduce the number of appeals and allow businesses to absorb smaller tax hikes over time.
Recommendation #3 — Explore the scope for transitioning from a business rates to a revenue rates system
The government and the Office of Tax Simplification should consider whether business rates could be replaced with a levy based on firm turnover, or looking to the future, a levy based on the value of land (a Land Value Tax).
Recommendation #4 — Consider extending the use of cash accounting to the smallest of companies
HMRC and the Treasury should reflect on the findings of the Office of Tax Simplification’s small business tax review, and in particular consider whether there is a strong case for allowing the smallest companies to use cash accounting methods.
Recommendation #5 — Lessen the fixation on Corporation Tax and concentrate future efforts on more burdensome levies
The new government should reconsider its commitment to reducing Corporation Tax to a new low of 17 percent, and instead aim cuts at more burdensome taxes such as business rates and VAT.
Recommendation #6 — Establish a Paternity Allowance and an Adoption Allowance for self-employed parents
The government should use proceeds from an increase in Class 4 NICs to create a Paternity Allowance for self-employed fathers and an Adoption Allowance for the self-employed who adopt children.
Recommendation #7 — Reform Universal Credit to ensure it responds to the realities of starting and growing a business
The Department for Work and Pensions (DWP) should iron out the flaws in Universal Credit (UC) to ensure it is fair in its treatment of the self-employed and employees, and that it does not hinder potentially viable businesses:
- Extend the ‘start up period’ from 12 to 24 months
- Move from monthly to annual or quarterly reporting
- Give New Enterprise Allowance (NEA) advisers responsibility for undertaking the Gateway Interview
- Align information and accounting requirements for the tax and UC systems
Recommendation #8 — Protect the self-employed against dips in income caused by illness and injury
In the absence of Statutory Sick Pay, the government should explore alternative ways of protecting the incomes of the self-employed at times of ill health. More specifically:
- Consider the scope for a collective income protection insurance scheme, in the same mould as Nest
- Open up all elements of the new Fit for Work service to the self-employed
Recommendation #9 — Boost pension enrolment among the self-employed through an opt-in / opt-out question
The government should present the self-employed with a ‘forced choice’ question asking whether they would like to opt in or out of a private pension scheme. This could be presented when the self-employed complete their tax self-assessment.
Recommendation #10 — Transform the Lifetime ISA (LISA) into a suitable savings gateway for the self-employed
The government should make adjustments to the Lifetime ISA to ensure it runs with the grain of self-employed lifestyles. More specifically:
- Raise the age limit for opening an account from 40 to 50
- Scrap the 5 percent penalty for early withdrawals
- Allow account holders to freely draw down on their savings on the condition they promptly repay the funds
Recommendation #11 — Establish a What Works Hub for Business Support Evaluation
The government should fund the creation of a permanent evaluation centre to monitor, coordinate and disseminate the results of evaluations of business support schemes. In addition, the government should commit to underpinning all new major business support schemes with a randomised control trial.
Recommendation #12 — Expand and raise awareness of the business coaching role of accountants
The Institute of Chartered Accountants in England and Wales (ICAEW), the Association of Chartered Certified Accountants (ACCA) and other accountancy trade bodies should look at how accountants might deepen their business advice and mentoring role, while ensuring that more of the self-employed are aware of these opportunities.
Recommendation #13 — Consult businesses on the creation of a UK equivalent to the Small Business Administration in the US
The government should open a public consultation on the merits of creating a UK Small Business Administration that would co-ordinate state-led business support and provide a forum for shared learning across the public, private and third sectors.
Recommendation #14 — Promote co-operatives as a form of mutual assistance for the self-employed
The government, Co-operatives UK and trade associations should work together to champion co-operatives among the self-employed, and consider whether there need to be legislative changes to remove barriers in their way.
Recommendation #15 — Ensure the Jobcentre Plus is match fit to support the self-employed post Work Programme, with a specialist in every branch
In preparation for the end of the Work Programme, the DWP should undertake an audit of staff skills in the Jobcentre Plus network, and ensure there is at least one work coach in every branch that can be a named self-employment specialist.
Recommendation #16 — Reform the payment structure of the New Enterprise Allowance to avoid unnecessary drop outs
The government should adjust the NEA payment structure to ensure it is both fair and practical. More specifically:
- Raise the NEA payment to the level of the Jobseeker’s Allowance (JSA)
- Taper away the payment after three months rather than halve it abruptly
Recommendation #17 — Remove the ‘one in, two out’ rule for regulation and shift the emphasis to quality over volume
The government should drop its commitment to the ‘one in, two out’ rule on regulation, acknowledging that quality is more important than volume. It should also preserve the ‘green tape’ that allows small businesses to attract talent, engage with customers and be protected from unscrupulous competitors.
Recommendation #18 — Clarify how the self-employed are treated under the Health and Safety at Work Act
The government should reverse its confusing amendments to the Health and Safety at Work Act, which could lead many of the self-employed to falsely believe they are exempt from a general duty to protect themselves and others from the risk of harm.
Recommendation #19 — Ease rules and harmonise taxes that constrain home-based businesses
The government should work with local authorities and landlords to remove unnecessary obstacles that prevent the self-employed operating from home. More specifically:
- Consider the merits of a Right to Home Working, whereby the self-employed would not need permission to operate from home so long as they abide by existing nuisance and disturbance clauses in their contracts
- Take steps to harmonise council tax and business rates to ensure home-based business owners are never double taxed
Recommendation #20 — Strengthen protection against late payments, including through a Right to a Written Contract
The government should beef up regulation against late payments by focusing on deterrence, disclosure and prevention. More specifically:
- Increase the interest rate that can be charged on late payments
- Extend the new ‘duty to disclose’ payment terms and procedures to medium-sized companies
- Create a Right to a Written Contract for any supplier engaging in a transaction above a given size
The overarching message of this report is that self-employment is here to stay, and that this requires a more serious response from policymakers.
While we applaud the efforts of past and present governments to make the UK a better place to start and grow a business, policies have been lacking in imagination and are too often grounded in outdated business stereotypes. Broad brush deregulation, ill-targeted tax cuts and a general laissez-faire attitude have been the order of the day. Seldom have policymakers given the same degree of attention to matters of welfare, pensions, insurance and business support.
Our central call is for the government to take a more hands-on approach to supporting the self-employed, enabling them to upskill, improve their earnings potential and become net contributors to the UK economy. This is not about issuing special favours. Indeed, one of our core principles is a ‘rights and responsibilities’ approach, which would see some of the self-employed pay greater National Insurance contributions in return for greater protections. Nor is it a demand for expensive, blockbuster initiatives — a call that would fall on deaf ears in straitened times.
Rather, it is a request for more subtle interventions that are grounded in evidence rather than ideology, and which respond to the changing realities of a modern economy. From reconfiguring business rates and reviewing late payments legislation, through to repairing Universal Credit and deploying nudging techniques to boost pension enrolment, each of the recommendations laid out in this report are intended to improve the lives of the self-employed in a way that is economically feasible and politically palatable.
As we continue to develop our proposals over the coming months, we would be grateful for feedback and ideas for further avenues of exploration.
If you would like to find out more, please email Benedict Dellot at benedict.dellot@rsa.org.uk
