By Marcus Leach
The number of new companies being set up is on the rise for a second consecutive year, up by 9.4% to 396,000 over the year to March 2011.
According to Wilkins Kennedy, the number of new companies setting up each year is now at its highest since before the credit crunch.
The research by the accountancy firm shows that there were record falls in the number of incorporations during the recession, with the number of new companies established per year falling by 17% from 450,000 in 2006/07 to 372,000 in 2007/8, followed by a drop of 11% to 330,000 in 2008/9.
Wilkins Kennedy says that the continued improvement in business creation is partly a sign that entrepreneurs are willing to take the plunge, defying fears of a double-dip recession - although a considerable number of new companies could have been set up to achieve better tax efficiency for the business owners.
“There are early encouraging signs for the UK economy, which are in line with the cautious, but more optimistic mood that we’re seeing in the business community," Kevin Walmsley, Partner at Wilkins Kennedy, said.
“Despite continued economic uncertainty, there seems to be a consensus now in the UK that it is time to get on with business and bring new commercial ideas to life. Every recession also presents its own opportunities.”
“Starting a new business is hugely challenging given how difficult it still is to obtain funding. The fact that there are small and medium sized businesses being established indicates that there are still entrepreneurs out there who are confident enough in their business model to launch their own company.”
“That kind of determination is impressive, and it shows that entrepreneurial spirit in the UK is alive and well. Imagine how many more start-ups the UK could have if entrepreneurs weren’t held back by the continuing lack of lending and red tape.”
The rise in the number of new companies could partly be a reflection of the fact that limited companies are increasingly being used by business owners as a shelter for higher rates of personal tax.
“People have become much more proactive with tax planning since the introduction of the 50% headline tax rate last year. Replacing structures such as partnerships and sole trader by a limited company can be much more tax efficient. By leaving the profits in the company and paying themselves a “lower” salary, business owners can avoid paying the top rate of income tax,” Walmsley continued.
Wilkins Kennedy welcomed the Chancellor’s decision to consider the tax revenue implications of the 50% tax rate, cautioning that the Coalition Government’s decision to affirm the top income tax rate of 50% legislated by the last Government for those earning over £150,000 from April 2010 is likely to act as a drag on new business generation.
“The coalition wants to reduce the budget deficit, but they need to be careful that the top rate tax bracket does not discourage people from setting up businesses in the UK and actually hitting tax revenues,” Walmsley concluded.
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