Report finds 68% of UK jobs created by high-growth small firms

Fast growing smaller companies make up just 1% of all UK businesses

Fast-growing small firms created 68% of all new jobs in the UK between 2012 and 2013, despite making up just 1% of the total business population, according to a new study.

Research commissioned by tech-focused venture capital firm Octopus Investments and published by the Centre for Economics and Business Research (Cebr) found that ‘High Growth Small Businesses’ (HGSBs) – defined as having an annual turnover of between £1-20m and over 20% average yearly growth over three years – also generated 36% of UK economic growth, despite representing just 3.4% of the total UK economy.

There are currently 30,000 HGSBs in the UK, following an 18% rise in such businesses between 2011 and 2013. One-third of HGSBs are located in London and the South East, with around one in 25 workers in the capital working for one.

The High Growth Small Business Report 2014’s findings have been met with surprise by experts, as it is the first time the full extent of these companies’ contribution to the UK economic recovery has been quantified.

It means HGSBs were responsible for more than 250,000 jobs over the period, lending credence to the view that such firms are even more vital to the UK’s nascent economic recovery than previously assumed.

However, the report’s authors said disproportionate concentration of HGSBs in the London region highlighted the correlation between underperforming regional economies elsewhere and an absence of HGSBs.

Octopus’ report urged the government to do more to encourage HGSBs’ continued growth through a series of policy recommendations drawn from its survey of 400 such companies.

One such recommendation was a temporary deferral of corporation tax, allowing firms to hold on to short-term capital to enable faster growth and encourage external investment in the medium term.

Another suggestion was allowing private company shares to be held in tax-advantageous Individual Saving Account (ISA) portfolios, which would achieve parity with publicly-listed companies and open up smaller private firms to the growing ISA investment market.

HGSBs surveyed said the greatest challenge to continued growth was a shortage of employees with the skills needed to grow their business, and the report urged the government to revisit its policies on apprenticeships and create more retraining opportunities.

The report was welcomed by both main political parties at a launch event last week, with speeches from Labour’s chair of the Business, Innovation and Skills select committee Adrian Bailey MP and Conservative committee member Nadim Zahawi MP both stressing the need for future governments to support these businesses.

Vince Cable, secretary of state for Business, Innovation and Skills, also welcomed the report, and said: “Government recognises that a small percentage of firms generate a disproportionate amount of innovation and employment growth.

“Understanding the behaviour of firms, in such a highly skewed environment, represents significant statistical challenges. That is why I welcome reports such as Octopus High Growth Small Business Report 2014, which add further insight into the successes of these companies.”

John Allan, national chairman of the Federation of Small Businesses (FSB) said: “These findings underline the critical role small businesses play in the UK economy. The report shows that some small firms play a disproportionately large role in creating growth, innovation and new jobs.

“It highlights how important it is for policy makers to give their backing to small businesses and endeavour to create a business support environment that allows these businesses to grow and prosper. A key element to this will be making sure businesses, wherever they are located, have access to a range of finance options to support their ambitions to grow.”

Simon Rogerson of Octopus Investments said: “At Octopus we work with high growth small businesses day in day out. We know how tough it can be for them but we also see first-hand the value that they can deliver not only to our investors but to the broader UK economy.

“We need to ensure that the UK continues to create the best environment to support them. A series of governments have done a great job in achieving this but the report makes a strong case for doing more – particularly in encouraging the birth and development of more HGSBs outside of London and the South East.”

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