Small businesses are frequently placed alongside medium companies in a so-called SME category. However, many of the smaller companies have little in common with the medium-sized companies. At the start of 2020, the government identified more than 6 million such companies, accounting for 99% of all businesses operating in the UK and accounting for 35% of the UK turnover, and 39% of employment, involving 13.8 million people.

Despite the considerable turmoil of 2020, business closures, which are dominated by small companies, have only increased by 7.4% in the first three quarters of the year. Government measures to protect employment and save companies have achieved much success given the severity of the 2020 downturn in the economy. An even lower impact has been recorded in company start-ups, which have fallen by just 4.6%. 2021 can be expected to be particularly challenging again for some industry sectors (notably hospitality and retail) with the further lockdown announced in January 2021 along with the new wave of COVID-19 cases.

Small businesses are active in virtually every sector of business and operate across all regions. London is home to the largest population of such businesses (with more than 1.1 million commanding a combined turnover of £515.8 billion). However, it is Northern Ireland that is most dependent on small businesses with 53% of the economy in their hands.

While the diversity of activities offers overall protection to the sector from normal economic vagaries, 2020 has created a particularly challenging environment for some (such as those in the hospitality sectors) while other sectors have been less impacted such as software development. New opportunities will arise in the recovery period, while some will be looking to market anomalies created by Brexit to develop activity, even though many market changes previously predicted have been minimised with the trade agreement negotiated in December 2020

• How has the industry structure been impacted by COVID-19?

• How are the different types of small businesses performing?

• How do small businesses perform in each of the industry sectors?

• What are the regional differences in the importance of small businesses?

• How will Brexit impact the sector?

The first COVID-19 cases were confirmed in the UK at the end of January, with a small number of cases in February. As the case level rose, the government ordered the closure of non-essential stores on 20 March. 

A wider lockdown requiring people to stay at home except for essential shopping, exercise and work ‘if absolutely necessary’ followed on 23 March. It was not until 15 June that non-essential stores were allowed to re-open, followed by pubs, restaurants, hotels and hairdressers on 4 July, and many beauty businesses on 13 July.

By September, it had become clear that the UK was at the start of a second wave, and social distancing measures were intensified. Continued increases in infection numbers led to Wales implementing a two-week national lockdown from 19 October, England announcing a full month-long lockdown from 5 November, and Scotland introducing a new five-level system of coronavirus restrictions. 

Despite these restrictions, however case numbers continued to increase, and after a brief relaxation for Christmas Day, a full national lockdown was announced on the evening of 4 January. There is no defined end date for the lockdown: the legislation presented to Parliament extends to 31 March, but Boris Johnson has said he hopes that schools will be able to re-open after February half term.

The UK’s vaccination programme started on 8 December, and with both the Pfizer-BioNTech and the Oxford-AstraZenica vaccines licensed for use in the UK, the government aims to offer a vaccine to 15 million people by mid-February.

Much of this Report was prepared in December 2020, before the announcement of the January lockdown, and when the extent of the vaccine rollout was less clear.

However, the content was reassessed and, where necessary, adjusted on 8 January, in order to ensure that our analysis and our forecast expectations still hold true.

Our core assumptions on the path of the pandemic had always included an expectation of severe disruption to markets and consumers’ lifestyles well into 2021, with a strong likelihood that the virus would still be with us even into 2022.

Similarly, MBD had factored in the likelihood that an effective vaccine would be available from early to-mid 2021. The licensing of the Pfizer-BioNTech and Oxford-Astra Zeneca vaccines puts us slightly ahead of that assumption, but the challenge associated with rolling out a new vaccination programme to millions of people means that our previous assumptions are still broadly consistent with the new reality.

MBD’s economic assumptions are based on the Office for Budget Responsibility’s central scenario included in its November 2020 Fiscal Sustainability Report. The scenario suggests that UK GDP will have fallen by 11.3% in 2020, recovering by 5.5% in 2021, and 6.6% in 2022. GDP is not expected to return to pre-COVID levels until the fourth quarter of 2022. The central scenario has unemployment peaking at 7.5% in Q2 2021.

The current uncertainty means that there is wide variation on the range of forecasts, however, and this is reflected in the OBR’s own scenarios. In its upside scenario, economic activity returns to pre-COVID-19 levels by Q4 2021. Its more negative scenario, by contrast, would mean that GDP does not recover until Q3 2024.

The second wave of infections and subsequent lockdown means that the short-term prospects for the country are consistent with the OBR’s negative scenario, but this needs to be balanced against the fact that the vaccine rollout is ahead of even the OBR’s central scenario. Medium- to long-term, then, we are still basing out forecasts and market analysis on the OBR’s central economic scenario.

Small and medium-sized enterprises represent 99% of all businesses in the EU. The definition of an SME is important for accessing finance and EU support programmes targeted specifically at these enterprises, and so the EU has defined specific criteria for the sector. In the UK, small businesses alone account for 35% of corporate turnover.

The main factors determining whether an enterprise is an SME are:

• staff headcount

• either turnover or balance sheet total

These ceilings apply to figures for individual firms only. A firm that is part of a larger group may need to include staff headcount/turnover/balance sheet data from that group too.

In addition to these categories, MBD has included sole trader status, representing businesses with zero or one employee, comprising sole proprietorships and partnerships with only the self-employed owner-manager(s) with no or one employee, and companies comprising an employee director with no or one further employee.

Companies defined as larger than the SMEs are referred to in this Report as large companies, but are often called enterprises.

Turnover figures exclude financial and insurance activities, where turnover is not available on a comparable level.

All values quoted in this Report are at current prices unless otherwise specified.

Some numbers in tables do not add exactly due to rounding.

The term 1 billion refers to one thousand million.