Supporting people to legitimise their informal businesses

Aaron Barbour and Marlen Llanes

This research studied ten UK organisations that were supporting small businesses to formalise and become legitimate.

How can people be helped to legitimise their informal businesses?

An innovative model for formalisation could be adopted and replicated effectively across the UK.

This research studied ten UK organisations that were supporting small businesses to formalise and become legitimate. The analysis was used to develop a model of a formalisation service to help practitioners and policy-makers.

  • The study found noticeable increases in the numbers of newly registered businesses in areas where formalisation services were operating.
  • To succeed, formalisation services depended on: the quality of the relationship between the informal entrepreneur and their personal adviser, and the specific tasks and activities involved in the formalisation process.
  • Employment support services need the flexibility to provide innovative services for formalisation support without having to disclose informal business activity.
Summary

Key points

  • Formalisation of business enterprises did not just occur naturally; it required specific, tailored support services. 
  • To succeed, formalisation services depended on two key aspects: the quality of the relationship between the informal entrepreneur and their personal adviser, and the specific tasks and activities involved in the formalisation process.  
  • It could take anywhere between three months and three years to support the formalisation of a business, depending on the skills, experience and resources available.  
  • Although the majority of support for formalisation was a by-product of existing provision for business support, specific formalisation support could cost on average £2,500 per client.  
  • Evaluation data on formalisation services in the UK is lacking. However, the research found noticeable increases in the numbers of newly registered businesses in areas where formalisation services were operating.  
  • Employment support services need the flexibility to provide innovative services for formalisation support without being bound by the obligation to disclose informal business activity.

Background

The UK's 'informal economy' represents about 12.3 per cent (£270bn) of annual gross domestic product, with around 2m 'moonlighters' and 'ghost' workers; 20 per cent of people have traded informally at least once when starting a business. In the short term, informal work helps people deal with poverty triggered by illness or job loss. In the medium term, however, informal work can leave people outside the formal labour market, unable to access rights such as the minimum wage and sick pay, and kept in poverty. For some, informal work has a more positive longer term role, developing confidence and skills, and building social capital.

What is formalisation?

Formalisation is how informal paid work becomes compliant with employment, tax and benefit laws. The research found noticeable increases in newly registered businesses where formalisation services were operating, with smaller support organisations registering on average 80 new businesses a year. However, the UK’s current approach to tackling the informal economy is based on deterrence rather than support.

Existing support for formalisation is not enough. Advisers and organisations argued strongly that formalisation was a specialist, personalised process, requiring extensive knowledge of the local area, local market and government systems. This was the only viable way to formalise businesses, but such support was precisely what mainstream institutions like Jobcentre Plus or Business Link were not offering.

However, a number of UK organisations offering business support, information, advice and guidance and micro-finance services were already quietly providing formalisation support. This might cost £2,500 per client on average. Key to enabling a business to formalise was the quality of the relationship between the informal entrepreneur, the supporting organisation and its advisers. Additionally, specific activities were needed, including outreach, referral, early advice, financial, personal and business support, and exit support.

How a formalisation relationship succeeds

Trust

Trust was crucial. Informal workers were wary, as they were scared of being reported to the authorities. Advisers had to overcome clients’ expectations based on previous bad experiences. Clients particularly mistrusted statutory services, because of these agencies’ strong messages concerning fraud.

Trust developed when people felt at ease and could form a good rapport with their adviser, as the starting point of a productive relationship. Trust had to be maintained and used as a mechanism to keep clients engaged, so they could relax and disclose confidential information like their business needs or barriers experienced. This was necessary for formalisation to occur. The best approach to building trust was to adopt an informal manner, avoiding formal business language or meetings in offices, so that people trading informally could let their guard down.

If the adviser's support organisation had a longstanding positive reputation, and was rooted within the local community, informal businesses were more convinced of the adviser’s trustworthiness and were more willing to engage quickly.

Empathy and non-judgement

Empathy and non-judgement were the attributes most needed to make formalisation happen. Empathy arose from advisers recognising that informal work was often unplanned and usually a response to the threat of poverty. If advisers showed empathy, they could start to challenge clients constructively, identify ways to improve their business and act as critical friends.

Understanding

Understanding encompassed similarity of experience, background or learning between adviser and client. This deepened the connection and strengthened the bond of trust. Having an adviser with a similar cultural or linguistic background to the client was advantageous to understanding where they were coming from and specific barriers they faced.

Collaboration

The relationship's success depended on the adviser’s skills, the client's willingness and active collaboration. This was achieved when both parties worked together towards the best outcomes for everyone. If the client felt in control, they were better equipped to make informed decisions.

Positivity

A forward-looking, positive attitude was integral to formalisation. The adviser had to build and maintain the client's confidence, while being realistic about the difficulties of running their own business. The adviser also needed to offer continual encouragement, while steering, nudging and advising the client in the right direction.

Experience

Advisers in formalisation support had on average ten years' experience, particularly in business support roles. They needed to understand the innovation and risk critical to a successful business mindset.

The formalisation process

Outreach and referrals

More than half the organisations interviewed used outreach to engage with informal workers locally. This informal cultivation of relationships was comprised of advisers engaging people face to face through chatting, or more formally through workshops or drop-in sessions in community settings such as places of worship and cafes. It was common practice not to mention the informal economy, but rather to talk about business start-up. It was also beneficial if outreach workers came from the local community, as it was easier to connect with people and for the community to trust them. If organisations were well established in the community, local people often self-referred.

Demonstrate distance from statutory agencies

Advisers had to make it absolutely clear that they did not work for the local authority or any other government agency, as people did not want to get caught. Suspicion was a great risk to formalisation.

Early advice

The initial meeting not only built trust, it also enabled the adviser to identify the needs of the informal business, such as establishing how developed it was. Appropriate support could thus be identified and alternative routes to formalisation recommended. During the early advice stage, where personalised action plans were developed and the benefits of formalisation identified, the entrepreneur would switch from seeing their activity as an income generator to regarding it as a successful business.

However, even after early advice was given, some people still decided that formalisation was not for them. For a few, their business was a hobby. Others did not formalise because they wanted to retain their benefits, or simply did not have the skills and vision to run a formal business.

Personal and financial support

It was imperative for advisers to understand and address people's wider support needs. Advisers had to be capable and flexible to act as a one-stop shop for advocacy, counselling and referrals, supporting people in a range of skills and offering 'better off calculations.

Business formalisation and development support

At this stage of the process the requirements of formalisation were established in full detail, including legalities, health and safety, financial implications, sales and marketing, registration and insurance. A mutual decision was made to formalise the business or to accept that it would not be profitable enough and to seek formal employment or training elsewhere. For those who wished to progress, test trading was tried for three to six months.

Exit support

Exit support varied from weekly to quarterly contact, depending on the needs of the business and the ability of the support organisation. Exit support was of vital importance, as self-employment could be extremely isolating, so some continuing support could build confidence and resolution to succeed.

Formalisation model

From these research findings, a best practice model of formalisation was developed. It could take anywhere between three months and three years to support the formalisation of a business, depending on the skills, experience and resources available. The three technical phases are: developing relationships; providing business support; enabling stability and growth.

Conclusion

The lack of substantial monitoring or evaluation of existing initiatives to tackle the informal economy contributes to why government has been unable to design appropriate, cohesive policy measures. Best practice models are absent. This research suggests an alternative, innovative model for formalisation that could be adopted and replicated effectively across the UK.

Policy recommendations

  • The Government needs to conduct further economic analysis to determine a fuller picture of the costs of formalisation services and the financial returns from formalised businesses.
  • A cross-departmental working group is needed to develop a clear, consistent strategy of agreed policies for deterrence and compliance.
  • As the key to successful formalisation is building trusting relationships between advisers and informal businesses, these support services should be granted flexibility over their duty to disclose informal business activity.
  • Government needs to design and implement sophisticated monitoring and evaluation of formalisation services, to develop best practice.
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