Has Government misled over record business startup claims?

The Forum of Private Business (FPB) is responding to Competitiveness Minister Stephen Timms’ assertion that there are now a record number of small businesses in the UK by pointing to new research suggesting they are struggling to grow under Gordon Brown’s leadership.

Mr Timms was questioned by the Conservative Party’s Shadow Minister for Business, Enterprise and Regulatory Reform, Mark Prisk, who asked him how small firms could remain competitive while being ‘taxed to death’.

The Competitiveness Minister, who also praised the Chancellor of the Exchequer, Alistair Darling for his decision to remove Capital Gains Tax taper relief, stated that there were now more small businesses in the UK than ever before. He said that 180,000 had been created each year since 1997.

However, the FPB’s National Chairman, Len Collinson, pointed out that the move to encourage existing small firms and one-man bands to officially register as businesses was the major reason for the increase, rather than a surge in new start-ups.

"The fact of the matter is that there are no more employers than there were in 1997," said Mr Collinson. "This increase in the number of small firms is all about more companies without employees."

A study carried out by the European School of Management (ESM), commissioned by Shadow Chancellor, Tatton MP George Osborne, has claimed that small business growth is in decline. In its interim report, the ESM said that the proportion of businesses achieving an annual turnover in excess of £1 million in their first five years fell dramatically from 29% in 1998 to 16% in 2006.

Only 6.8% achieved a turnover of more than £7 million in their first five years, a far lower rate than the 16.3% elsewhere in Europe. Since 2002, this figure has continually fallen in the UK, while rising across Europe.

The report said that, while there were more than 4.4 million small businesses registered in 2006, compared to 3.8 million in 2001, the cost of complying with employment red tape increases the bigger a business becomes, causing many firms to struggle.

"I would be interested to know how many of those ‘new’ firms are micro businesses and one man bands that have now officially registered," said Tracy Hoather, of courier firm Sameday Plc in Knutsford, Cheshire. "Beyond former employees now employing themselves, how many actual jobs have these businesses created?"

In its report, the ESM argued that analysing growth, not counting the total number of firms, is the best way to judge the strength of small businesses in the UK. It said that a skills shortage and rising taxation also acted as significant barriers to growth.