The ROT tax deduction – a description of the firms development between 2010 and 2015
This study is a descriptive analysis of what is known as the ROT tax deduction for services within repair, rebuilding and extensions. Our focus is on the firms, the entrepreneurs and the employees that perform these services. The study is part of the framework project Do branch-specific tax reductions promote growth? and is similar to our previous analysis of the RUT tax deduction for domestic household-related services.¹
Seen over the whole survey period of 2010–15, the percentage increase in the number of ROT specialized firms is slightly lower than that of all firms in Sweden. Moreover, the results show that the number of firms increased most rapidly at the beginning of the period. Looking at changes in employment in ROT specialized firms during the corresponding period, the annual increase was relatively small over the entire period, except in the year 2014. We can see that the percentage increase in employment in the ROT specialized firms has been markedly below the general trend of employment growth in Sweden.
During the implementation of the ROT reform, the positive employment contributions in the ROT specialized firms were most prominent at the beginning and the end of the period. Over time, employment contributions in the ROT specialized firms have been almost entirely dependent on the employment changes that have taken place in existing firms and not on an influx of new firms.
ROT – a labour market policy measure based on an employment and economic policy perspective
Similar reforms have been introduced in a number of limited-duration stages to primarily stimulate economic activity in the construction industry. With the introduction of the present ROT reform on 30 June 2009, tax reduction was for the first time a measure that was intended to be permanent. The main purpose of the reform were to counteract undeclared work and increase the supply of labour. The ROT deduction was valid retroactively from 8 December 2008. The major difference from previous instances of ROT deduction was that private individuals were allowed to deduct 50 per cent of the labour costs of ROT work in their tax returns up to a maximum of SEK 50,000 per person per year. In 2009, the so-called invoice model was introduced, which means that the firms deduct the tax reduction directly in the invoice to the customer and then apply for the remaining amount from the Swedish Tax Agency.
In this study, the Swedish agency for growth policy analysis (Growth Analysis) has chosen to study the reform mainly from an employment and economic policy perspective, which can be justified because the services are carried out by firms. The focus of this study is on firms that have performed ROT services from the invoice model's introduction up until 2015. Changes that occurred between 2016 and 2017 in the form of reduced amounts and services for which deductions can be made are therefore outside the scope of this study. The study is based on detailed register data on the firms, the entrepreneurs and the employees.
The report's approach and limitations
For this paper, Growth Analysis has performed a descriptive statistical analysis of the commercial and employment changes that have occurred in the context of the implementation of the ROT reform during the period 2010–15. We have analysed the development of ROT firms, the entrepreneurs and the employees that perform the ROT services. We can thus get a better picture of how these firms develop and how employment for different groups has changed in the context of the ROT reform. We are not at present able to express an opinion on the specific effects of the reform, since there can always exist a number of underlying factors that influence the results. However, we wish to emphasise that at this stage we have studied the relevant changes in the context of the ROT reform and not the effects of the reform. In order to give an opinion on the causal effects of the reform on firms and employment, we need to perform an impact assessment. This study is planned to be carried out during the autumn of 2019.
Increasing numbers of firms, primarily in municipalities adjacent to cities
The report's results are based on an analysis of ROT specialized firms according to the Swedish Tax Agency's definition.² This specific group of firms is strongly linked to only a few industry sectors, primarily to five sectors in construction. Our main results show that the ROT specialized firms increased by about 6,000 firms over the course of five years. The majority of this increase occurred at the beginning of the period and then stabilised at a relatively regular increase each year. This can be explained by the relatively high entry of ROT specialized firms in relation to those existing in 2010. The location of ROT specialized firms is relatively stable over the course of time. Approximately 80 per cent of the firms are located in a metropolitan municipality or in a municipality close to a city. The survival rate among firms is high, higher than for firms in general. Most ROT specialized firms are individual firms but this proportion decreases as the number of limited companies increases over time. The firms are relatively small, most often micro firms with 2–9 employees and the small firms increase over the period. Less than half a per cent of firms have more than 50 employees.
The ROT-related activities continue to be male dominated with few foreign-born entrepreneurs
The ROT-related activities are heavily male dominated. Almost all of the ROT specialized firms are run by men and only a few of the entrepreneurs are women. However, we can confirm that the proportion of firms run by women has increased slightly during the study period of 2010–15, from 3.0 to 3.6 per cent. There are few foreign-born entrepreneurs in ROT firms in comparison to the RUT firms. The proportion of foreign-born entrepreneurs in ROT firms is 10 per cent, while the corresponding number for RUT firms is 30 per cent. Furthermore, the foreign-born ROT entrepreneurs have been in Sweden for 17 years on average. In terms of the level of education of entrepreneurs, statistics show that the majority have an upper secondary education. We can also observe that an upper secondary education is more common among men in the group of ROT entrepreneurs compared to women. The proportion with higher education is relatively low, about 10 per cent, among men but significantly higher among women where around 30 per cent have such an education. More male entrepreneurs had a low educational attainment (about 20 per cent), compared with the proportion of women with a low educational attainment which was 10–15 per cent.
More employed in ROT specialized firms, especially during 2014
The number of persons employed in ROT specialized firms represents almost 3.3 per cent of all employed persons in the country (2015). The number of persons employed in ROT specialized firms increased from 128,000 in 2010 to 154,000 in 2015. Most of the persons employed are men, but we have seen an increase in the number of women employed from just over 10,600 (in 2010) to 15,400 (in 2015), meaning that the proportion of women employed increased from 8 to 10 per cent during the study period.
By studying the previous employment status of those who were employed in the ROT specialized firms, we get an idea of whether they come from another job or from unemployment. The results show that, of the sub-population that did not have a job in a ROT specialized firm the previous year, 74.5–79 per cent came from other employment during the study period. About 10 per cent of the new employees were not employed the year before and about 5 per cent of employees were students the year before. The rest of the new employees were either on parental leave or retired. The proportions of previous employment status are relatively stable over the course of time. Compared to those employed in RUT firms, a relatively low proportion comes directly from non-employment where the corresponding share for the RUT-firms is about 20 per cent. We can also see that a higher proportion comes from other employment when employed by a ROT specialized firm than is the case with employment in a RUT specialized firm.
¹ See Tillväxtanalys, RUT-reformen – en deskriptiv analys av företagen och företagarna, PM 2018:12.
² The total amount for ROT services in one year shall amount to at least 10% of salary payments in the same year.