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Incorporations drive peak in business numbers

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23rd Oct 2012
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Despite the fluctuating economy, there are now a record number of businesses trading in the private sector in the UK. 

According to official figures, the number of private sector businesses increased to 4.8m at the start of 2012, a jump of 253,000 on the previous year.

The figures also show that small and medium sized businesses account for 60% of private sector employment and 49% of private sector turnover. 

As reported on our sister site BusinessZone.co.uk, 3.6m UK companies have no employees and more than a million firms employ fewer than 10 employees.

Other findings from the Department for Business, Innovation and Skills report include: 

  • 99.9% of the 4.8m private sector businesses were small and medium sized businesses
  • Estimated number of private sector businesses have increased every year for the last 12 years
  • The private sector businesses employed an estimated 23.9m people and had an estimated turnover of £3,100bn.

Business minister Michael Fallon said the statistics were an "encouraging sign" of the government's efforts to rebalance the economy in favour of the private sector through its efforts to reform employment law, reduce red tape and boosting business mentoring.

A year ago, however, AccountingWEB members were comparing notes on the surge in numbers of limited company contractor clients. More recently tax consultant Nichola Ross Martin drew the minister's attention to the tax advantages of incorporation as an explanation for this growth.

"Factors which may have increased the numbers recently include the change in the law when ESC C16 enacted in March 2012. This meant a lot of companies were struck off ahead of the change in order to take advantage of ESC C16 and extract their distributable reserves as capital. I would estimate that most of those business owners probably have started up with new companies in 2012," she said. 

According to Ross Martin, the key factors driving incorporations include the advantage of limited liabiity and the convenience of being able to incorporate (and as necessary strike off) a company in a matter of minutes. An owner manager can save NICs by paying dividends, and double up the tax savings by bringing their spouse in as a shareholder. Many people who are made redundant from larger companies set up on their own while they are looking for long term employment.

Employers - including many public sector bodies that use a lot of temporary staff and agency staff - often stipulate that all new workers trade via personal service companies to avoid PAYE and NICs.

In addtion to the continuing boom in incorporation, she added, "I think that we will be seeing a record number of LLPs incorporating too in coming years when people realise they won’t bite, are easy to run and have at a lot of tax advantages too."

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