Groundbreaking report suggests small firms are vital for the UK’s jobs market

In the first report of its kind, the Federation of Small Businesses (FSB) underlines just how important small firms are to strengthening the economy, tackling unemployment, and taking on people who are shut out of the labour market.

Launched at the Liberal Democrat conference, the report: Back to work: the role of small businesses in employment and enterprise, shows that each year small and medium sized businesses take on around 1.3 million unemployed and disadvantaged people. In contrast, large firms with more than 250 employees hire less than 130,000 on average.

The report finds groups such as long term sick, disabled and students, among others, are more likely to be employed by a small business. In fact, 95 per cent of this group that find work in the private sector will work for or start up a small or medium sized business. Almost nine in 10 (88%) unemployed people that are actively looking for work will find a job in, or start up, a small business.

Despite these positive signs, the labour market remains fragile. Recently unemployment has fallen, however, confidence in the market remains low while company finances are squeezed with rising costs and falling demand.

This report shows that small firms and sole traders can create more jobs, but they need greater support from government policymakers. New rules on the way could act as a deterrent to taking on staff or starting up.

For instance, the FSB has raised concerns that Universal Credit could discourage self-employment through time-consuming reporting requirements and unrealistic assumptions on earnings. The organisation is also concerned that proposed changes to the tax system will create more red tape for small firms.

More than 50 per cent of FSB members have said that tax administration is one of the most complex areas for compliance. The FSB believes the introduction of Real-Time Information reporting, which will require a business to report information about employees and wages to HMRC 12 times a year, will be an administrative thorn in the side of small firms and goes against the Government rhetoric on tax simplification and cutting red tape.

In addition, small businesses must automatically provide a pension for their staff from 2015, which will be a time consuming and costly process for many. Given that, the FSB has called for the Government to take another look at the impact assessment to assess the true cost of the scheme for the smallest of businesses.

Small firms are the most important engine for job creation in the UK. In order to encourage small businesses to create more new jobs, the FSB urges the Government to look closely at extending the National Insurance Contributions holiday to all small firms across the UK.

John Walker, National Chairman, Federation of Small Businesses, said:

“Small firms play a unique role in providing the way to employment, especially for disadvantaged groups. They have a greater tendency to take on those that would struggle to find a job – those who have not worked for a long time, have little experience or have been sick. They have also shown resilience in the face of recession – still taking on some 1.3 million unemployed people per year. While not all of these will be new jobs, this is nevertheless evidence of the crucial role small firms are playing in our economic recovery.

“We know from our survey work that small firms want to do more to support jobs, but their employment intentions are currently on hold. Many businesses don’t have the confidence to create new jobs at the moment because cash-flow is tight and they need a helping hand. This is why we’re calling for the National Insurance Contributions holiday to be extended. There are also a lot of new regulatory changes in the pipeline. Our concern is that these changes will add to the already heavy administration burden for small firms meaning they choose not to grow or take on staff.”