How UK firms got
bigger and smaller
The changing shape of the corporate sector
before and after the recession
January 2015
Table of Contents
Introduction ............................................................................................................. 3
Summary ................................................................................................................ 4
Approach ................................................................................................................ 5
Numbers of firms .................................................................................................... 6
Employment ............................................................................................................ 7
Turnover ................................................................................................................. 9
Turnover-employment ratio ................................................................................... 10
Note on methodology............................................................................................ 12
2
Introduction
Recent years have seen important changes in the UK labour market. Among the
most significant of these has been the surge in the number of self-employed people.
This has led to an important focus on structural factors such as (poor) growth, job
(in)security, low pay and unemployment.
Less attention has been given to changes in the shape of the private sector itself.
The substantial growth in the number of self-employed people has significant
implications for how we understand recent growth in the number of businesses in the
UK and how we interpret data on UK businesses. Indeed, understanding more about
the structure of the private sector can complement analyses of the labour market.
Clearly it is important to ask questions such as:

Which sectors and industries are creating jobs? Do these industries require
mainly high or low skilled workers, or a mix?

Where are businesses growing and providing new jobs?

What size are the businesses that are providing jobs, in terms of both the
number of people they employ and their turnover?
The last of these questions is the focus of this report. We look at how the private
sector is changing in terms of the size of the businesses that make it up. The
following analysis looks at business counts, employment and turnover by business
size since the turn of the century, and focuses on changes that have happened
during the current government.
3
Summary
Since 2000, the number of firms with no employees has grown hugely but
turnover among these firms has grown more modestly, meaning a lower
turnover per firm now than in the 2000s. The number of very large firms has
grown only slowly. But as a share of employment, they remain the biggest
part of the UK economy. As a share of turnover, they are an even bigger part
than a decade ago.
Since 2000, there has been huge growth in the number of businesses with zero
employees, more or less consistently over the past decade and a half – this growth
precedes the recession but has continued since it started. Firms with no employees
now make up 76% of all firms.
Despite their description, there is a lot of employment in firms with no employees, for
instance directors and working proprietors. Total employment in these firms has
grown at roughly the same pace as the number of firms and is now 60% higher than
in 2000. But while turnover has grown since 2000, the pace has been much slower,
including real terms falls in some years. The result is that the ratio of turnover to
employment has fallen dramatically from £70,000 to £53,000 per person employed in
just five years.
Both small firms (1-49 employees) and medium-sized firms (50-249), have seen
some growth in numbers and employment over this period, but while their share of
total private sector employment has only slightly fallen from 44% to 43% since 2000,
their share of private sector turnover has fallen from 46% to 40% in the same period.
Very large firms, those with 500 or more employees, have seen their overall
numbers grow 9% since 2010 following 5% growth between 2000 and 2008 and a
slowdown during the recession. Turnover has grown even more quickly, meaning
that these very large firms are the only one to see turnover per person employed
grow in the last few years. What this means is that by 2014 the 3,300 largest firms
(those with 500 or more employees) contributed 8.9 million jobs to the economy (a
35% share of private sector employment) and turnover of £1.6 trillion (47% of total
private sector turnover).
4
Approach
This research uses data from Department of Business, Innovation and Skills: Small
and Medium-sized Enterprise (SME) statistics from 2000 to 2009 and Business
Population Estimates (BPE) from 2010 to 2014. BPE replaced SME statistics due to
methodological changes. These databases give estimates for the number of
businesses in the UK economy at the beginning of each calendar year.
NPI acknowledges that certain methodological changes over the years can lead to
problems in terms of the comparability of certain estimates. Despite these caveats,
we consider our research findings to be robust.
We have used the size-band data, combining sized bands as follows:

Zero employees (both registered and unregistered businesses)

Small – between 1 and 49 employee(s)

Medium –between 50 and 249 employees

Large – between 250 and 499 employees

Very large – 500 or more employees
In the case of turnover and the ratio of turnover to employment, we combine large
and very large, in which case we are looking at all firms with 250 or more employees.
The analysis is, on the whole, quite straightforward .We look at numbers of firms,
numbers of people working in those firms and the total turnover, all broken down by
size. Doing this we can say how the numbers of, for instance, firms with over 250
employees have grown. What we cannot say is whether these are brand new firms,
or smaller firms which grew over time. It, would, though, be fair to assume the latter.
5
Numbers of firms
The first graph above shows the change in the number of businesses in the UK
between 2000 and 2014. Figures above 100 in the graph indicate rising numbers of
firms, while figures below 100 indicate a fall.
Change in the number of firms and share of private sector by firm size
180
100%
90%
80%
160
150
140
130
120
110
Share of private sector
Index of number of firms, 2000 = 100
170
70%
60%
50%
40%
30%
20%
100
10%
90
0%
2000 2010 2014
Source: Business Population Estimates 2014, Department of Business, Innovation and Skills (BIS).
This graph captures the fairly consistent increase in the number of firms with no
employees, an increase of more than two-thirds. By 2014, there were 4 million such
firms. In 2014, as the second graph shows they made up 76% of all firms, up from
74% in 2010 and 68% in 2000.
Within this group there is a great deal of variation. BPE captures parts of this
variation: 990,000 businesses with no employees operate above the £79,000
threshold required in 2013/14 to pay VAT, compared to almost 3 million that don’t.
This serves as an illustration for how small some of the businesses are.
It is also worth noting that these firms do not only comprise self-employment. There
are 650,000 companies with an employee-director and no further employees, while
the rest are sole proprietorships and partnerships, with one self-employed or two or
more self-employed working proprietors respectively. So, despite the description,
zero employee firms do have people working for them. Although some sole
proprietorships and partnerships are employers, the majority of these are also in the
‘no employees’ category.
6
There was some growth in the number of both small and medium sized firms in the
years up to the recession, of around 10%. Unsurprisingly, there was little growth for
the next few years – the number of small businesses fell – but some signs of an
increase since 2013.
Among large and very large businesses, there was a fall at the beginning of the
2000s and little growth until the end of the decade. However, we are seeing a
marked increase over the past two years with consecutive annual increases for the
first time since 2000. In the case of large businesses the upturn has lasted three
years. The combined increase in the number of large and very large businesses is
about 8% since 2011.
Employment
Change in employment and share of private sector employment by firm size
100%
Index of employment, 2000 = 100
160
150
140
130
120
110
100
90
Share of private sector employment
170
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000 2010 2014
Source: Small and Medium-sized Enterprises statistics, 2000-09; Business Population Estimates,
2010-14. Department of Business, Innovation and Skills (BIS).
These graphs show total employment, not just total employees. A firm can have zero
employees but the owners or directors would still count towards the total in
employment. Likewise, people could work part time for two different companies, and
so turn up in the graphs above twice.
For the most part, the time-series index on aggregate employment by firm size
shows the same patterns as the time-series on the number of businesses (see
above). The number of people employed by large and very large businesses has
7
increased since 2010. Discounting the ONS 2003 reclassification as the graph above
does, employment in very large firms has grown slightly in most years up to 2008,
fell during the recession, and then started growing again from 2010 onwards.
The 35% share for very large firms, those with 500 employees or more, remains the
largest of any categories, despite falling from 37% in 2000. Employment in this group
rose from 7.8 million to 8.3 million between 2000 and 2008 and then fell to 8.1 million
in 2009, during the height of the recession. It has since grown to 8.9 million in 2014.
The story is slightly different for large firms, which experienced an 8% fall in
employment between 2001 and 2007, but have seen employment grown by 15%
since 2009 to around 1.2 million in 2014. Employment in in SMEs grew in the early
2000s, fell slightly and then grew steadily until 2008. Medium-sized firm employment
grew significantly between 2009 and 2011, while employment in small firms has also
grown particularly since 2011.
Despite falling between 2000 and 2001, employment in firms with no employees
grew rapidly between 2001 and 2014 from 2.6 million to 4.4 million, only failing to
grow between 2004 and 2005 in that period. Many commentators have noted the
rise of self-employment, most of which fits into the ‘no employees’ category, as a
significant factor explaining falling levels of unemployment since the recession. As
shown by the second graph, the ‘no employees’ share of total private sector
employment has increased slightly since the recession, from 16%in 2010 to 17% in
2014. But in truth this trend predates the recession, with the share at 13% in 2000.
8
Turnover
Due to statistical anomalies in the turnover data for firms in the 250-499 size band,
we have combined the turnover data for large and very large companies for the
following time series and when calculating the turnover employment ratio,
Change in turnover and share of private sector turnover by firm size
150
100%
Share of private sector turnover
90%
140
130
120
110
80%
70%
60%
50%
40%
30%
20%
100
10%
90
0%
2002 2010 2014
No employees
Small
Medium
Large and very large
Very large
Large
Medium
Small
No employees
Source: HMRC Notice 700/1 and 700/11 Supplement, March 2014; ONS CPI reference tables,
December 2014; Small and Medium-sized Enterprises statistics, 2002-09; Business Population
Estimates, 2010-14. Department of Business, Innovation and Skills (BIS).
The turnover of businesses with 250 or more employees has increased by 38% in
real terms since 2002, from around £1.4 trillion in 2002 to over £1.9 trillion in 2014.
Following the recession, real turnover among these firms dipped until 2012, after
which it increased by 12% over two years. While these firms always had the largest
proportion of private sector turnover, this has increased from 47% in 2002 to 53% in
2014.
SMEs and firms with no employees in general saw growth in their real turnover up to
2009, then a sharp fall following the onset of recession, though not as sharp as that
of large firms. Real turnover only began going up again for small firms and firms with
9
no employees from 2013 into 2014. While it increased for medium firms between
2011 and 2013, it fell in the last year of data. Firms with no employees have a 7%
share of private sector turnover, while the share of SMEs has fallen from 46% to
40%.
Turnover-employment ratio
Turnover per worker in 2014 prices, £000s
Turnover per worker, adjusted for CPI (£1,000s)
250
200
150
100
50
0
2002
2003
2004
No employees
2005
2006
Small
2007
2008
2009
Medium
2010
2011
2012
2013
2014
Large and very large
Source: Small and Medium-sized Enterprises statistics, 2000-09; Business Population Estimates,
2010-14. Department of Business, Innovation and Skills (BIS).
The final graph shows how the ratio of turnover to employment has changed over
time by firm size. Obviously, a large firm can be expected to have a larger turnover
than a small firm, both in absolute terms and relative to its size. Larger firms often
have greater capital in the form of machinery allowing greater output and hence
turnover per person. So it is no surprise that the graph roughly shows that larger
firms have larger turnover per worker. What is more interesting are the changes.
The ratio for businesses with no employees, having remained relatively flat prerecession, from a peak of £76,000 per worker in 2003 adjusted for CPI to £70,000
per worker in 2009, has since fallen by 24% to £53,000 per worker in 2014. The
ratios of SMEs increased quite gradually before the recession, but have since 2009
fallen away to return fairly close to pre-recession levels.
10
Large and very large firms saw an increase to £208,000 per worker in 2009 from
£150,000 per worker in 2002. This fell to £171,000 per worker in 2012 but has since
increased by 9% in the last two years to £186,000 per worker. The longer term trend,
then, seems to be of increasing turnover in large and very large firms, at best no
change in SMEs, and falling turnover in firms with zero employees.
11
Note on methodology
As we set out above, this paper draws on published ONS statistics. In addition, we
have made certain adjustments to the original data from SME and BPE. These are
as follows:
(1) BPE 2014 which uses a consistent methodology to estimate the number of
firms in each size band. The most significant difference in these estimates
from the original SME statistics publications was in the case of unregistered
firms. We have used a simple methodology to adjust our time series of
employment and turnover, using an estimate of average employment in small,
unregistered firms (1.1 per firm) and using the VAT threshold for each year to
estimate the maximum size of those firms.
(2) In 2003 the ONS reclassified 275 Primary Care Trusts and NHS Trusts,
comprising 990,000 in employment and £41 billion turnover, from public
corporations/nationalised bodies, which meant they showed up in private
sector statistics, to central government. We have removed this amount from
the pre-2003 data in the case of businesses with more than 500 employees.
(3) We have used CPI to adjust the turnover figures. Numbers given in this report
are in 2014 prices.
12