Company formation statistics, obtained from Companies House provide an interesting sideshow on what’s currently happening in the British economy.
Surprisingly, company formations in the UK actually increased in 2009 compared with 2008 by 7.4%. Whilst 2008 was down on 2007 by 26%, this was largely due to a change in legislation in 2007 that led to a flurry of formations before the 2008 budget.
Looking at the last 3 months of 2007, 2008 and 2009, the figures show a promising trend so that the period from October to December inclusive for 2009 was over 10% up in the equivalent period for 2008 and even 2% up on the figures for 2007.
This positive trend has continued in 2010 with the first 10 weeks of the New Year showing figures up 25% on the equivalent period in 2009 and 12.4% over those for 2008.
So, what conclusions can we draw from this?
A simplistic view might be that these numbers indicate UK Inc coming out of recession. The problem is, companies are formed for so many different reasons that it is very difficult to get underneath the headline statistics and really know the reasons why so many companies are currently being formed. Whilst it is possible that a gradual increase in confidence and optimism around the country may have led to an increase in the numbers, it is hard to argue that this in itself is any indication of sustained recovery.
Another argument might be that this is further indication of more and more people being made redundant and deciding, in the midst of a bleak employment market, to “start up on their own”.
Another explanation might be provided by fiscal issues. The increase in tax rates due to come into force from 6 April 2010 makes the operation of a limited company even more compelling as a way of sheltering profits. This would definitely affect many who had operated previously through unincorporated entities. With the tax year almost over as this post is written, it will only be after 5 April that we can see whether there is any substance to this argument. However, this on its own wouldn’t really explain the increase in figures overall in 2009, and particularly the last quarter.
The likelihood is that the increase in company formations statistics is probably down to a combination of the above factors – and perhaps some others. Whether or not we are seeing a genuine restructuring of the business landscape of the UK is hard to fathom, but I for one will be watching the company formation numbers with interest.