Xero research values overlooked small-business economy at £868bn

Research commissioned by Xero estimates that 3.3 million of Britain’s smallest businesses collectively generate £868bn in annual turnover, putting the economic contribution of often overlooked sectors into the spotlight as the government considers the costs of employing people and running commercial premises.

The analysis, undertaken by the Centre for Economics and Business Research (Cebr), focuses on businesses with fewer than ten employees across 20 sectors. It estimates £360bn in gross value added, £97bn in business taxes and 3.8 million direct jobs, described as nearly one in six private-sector positions. Turnover measures sales before costs, whereas gross value added is the contribution made to economic output; the two figures cannot be treated as interchangeable.

Rather than covering every microbusiness in Britain, Cebr selected the 20 sectors with the greatest turnover attributable to businesses employing fewer than ten people. It reviewed official economic data across 84 sectors and assessed employment, wages, output, taxation and how frequently individual industries appeared in five years of parliamentary debate recorded in Hansard.

Its findings range from building construction and engineering to wholesale trade, recruitment, professional services and vehicle repair. Many such businesses sit outside the most visible consumer brands, despite supporting the commercial activity on which larger employers and local economies depend.

To assess political visibility, researchers counted references to sectors in parliamentary proceedings. The average sector was mentioned 2,420 times over five years. Rental and leasing appeared 26 times, and wholesale trade 170 times, compared with 5,578 mentions for hospitality and catering. The disparity is striking, although a mention count cannot establish whether a sector receives adequate policy attention or whether a particular measure benefits its businesses.

Regional figures show how widely this activity is distributed. The study attributes £183bn of annual turnover and 747,000 jobs to the identified businesses in London. It estimates £35bn and 178,000 jobs in Greater Manchester, £22.7bn and 124,000 jobs in Birmingham, and £21.2bn and 99,000 jobs in Leeds. These are estimates for the selected sectors, not totals for every small enterprise in those areas.

Cebr also models the activity supported elsewhere in the economy. For every £1 generated directly by the selected businesses, it estimates a further 74p of output through wider economic effects, with total employment supported reaching 6.9 million. That broader employment measure includes indirect and associated jobs and must remain separate from the 3.8 million direct positions.

Xero is using the research to argue for changes to employment taxation and business rates. Its proposals include reducing employer National Insurance liabilities for the first nine employees, increasing the Employment Allowance and introducing a temporary hiring credit. It also advocates raising the threshold for Small Business Rate Relief from £12,000 to £25,000 and reforming the rates multiplier.

These are policy requests from the commissioning company, not recommendations independently demonstrated to be cost-effective by Cebr’s output estimates. Any reduction in employer contributions would affect Treasury receipts, while changes to business rates would create different benefits for premises-based companies and those operating remotely or with little property exposure.

Even within the group described as overlooked, operating models differ considerably. A small construction contractor may face vehicle, materials and insurance costs; a wholesaler is exposed to inventory financing and distribution; an accounting practice may have relatively modest physical assets but substantial labour and software costs. A common tax measure may therefore produce uneven outcomes.

Employer costs are especially relevant to companies considering their first additional recruit. A marginal increase in labour expenditure can carry greater weight where turnover is volatile and a small team must cover multiple functions. Yet lower hiring costs do not automatically produce new jobs: the decision also depends on demand, available skills and confidence that revenue can sustain the position.

For policymakers, the research provides a useful map of economic activity that is easily obscured when debate concentrates on major employers or high-profile consumer sectors. Its strongest contribution is the scale and distribution of the underlying businesses. The case for any particular relief must still be evaluated on its fiscal cost, targeting and likely effect on investment and employment.