Introduction

Quality-focused assessment

1.1 This is our second pilot quality-focused assessment, using the quality framework we have developed. The framework examines four key areas to determine the quality of the statistics: whether the statistics are produced using suitable data sources; appropriate methods; transparent quality assurance; and whether the statistics are sufficiently prioritised and resourced proportionately to their use. We also consider whether the statistics are internationally comparable; and whether the statistics meet the quality needs of users and are not misleading.

1.2 To further test our framework, we selected two complementary statistics for review, the Profitability of UK companies and Gross Operating Surplus of UK private non-financial corporations (GOS). This enabled us to test the feasibility of completing more than one assessment in parallel, making more-efficient use of resources, while providing due care for the burden the assessment would place on statistics producers.

Relationships between GDP, GOS and PNFCs

1.3 Gross Domestic Product (GDP) is a measure of the size and health of a country’s economy over a period of time (Bank of England). ONS has three different approaches to estimating GDP: the output approach, the expenditure approach and the income approach. To produce its best estimate of GDP, ONS reconciles data from the three different approaches. GOS is a component of the income approach and in 2022, the PNFCs GOS accounted for 17% of GDP.

1.4 Private non-financial corporations (PNFCs) produce goods and services for the market and do not, as a primary activity, deal in financial services. These are businesses trading in the private sector as opposed to the public sector and are the focus of this assessment.

1.5 Henceforth when we refer to GOS, gross value added (GVA) or other aggregates, we refer only to PNFCs sector of the economy.

The profitability of UK PNFCs

1.6 The Profitability of UK companies is the net rate of return on capital employed for UK PNFCs related to their UK operations (as defined in the ONS bulletin). Rates of return are presented as ratios of operating surplus compared with capital employed, expressed as percentages. The numerator for estimates of rates of return is GOS and the denominator is capital employed. These ratios measure the accounting rates of return achieved in a particular year from the total capital employed. (ONS Quality and Methodology Information (QMI)). This relationship is illustrated in Figure 1.

Figure 1: Profitability of UK PNFCs

1.7 Profitability measures profits in relation to an economic or financial factor. As there is no internationally recognised definition it can be measured in many ways. Organisations like the ONS analyse the whole economy and high-level industry groups such as manufacturing and services. Thus, they measure Profitability using the return from capital employed and GOS for the whole economy or sector analysis. Organisations such as market consultancies that are analysing profits at a firm or industry level, measure Profitability by estimating profit shares, profit mark-ups and profit margins, these are concepts that align with accounting frameworks. These vast methodological differences make it hard to compare Profitability statistics. This is echoed in the European Central Bank’s research paper titled “Measuring and analysing profit developments in the Euro area” which concluded that “the measurement of profits at a macroeconomic level is subject to a high degree of uncertainty” and noted that “different practices regarding the compilation of profitability statistics make them difficult to compare.”

1.8 GOS is defined in the ONS guide to UK National Accounts as the balance between GVA and labour costs paid by producers. GOS estimates are compiled using gross trading profits (GTP) of PNFCs, adjusting them for income from the rental of buildings and holding gains and losses (which are changes in the value of stocks caused by price changes) and other conceptual adjustments to convert the company trading profits into the economic concept of GOS used in National Accounts.

1.9 Capital employed is company investment added together for all assets that are still in use (based on the estimates of the asset’s life) to give “gross capital stock”. The consumption of fixed capital is the amount of capital resources used up in the process of production in any period. Capital employed and capital consumption data come from ONS’s Capital stock and capital consumption release.

1.10 PNFCs include the UK Continental Shelf (UKCS), the area where the UK claims mineral rights beyond territorial waters and other non-UKCS companies. UKCS companies are capital-intensive and require high levels of capital investment to operate. ONS splits the non-UKCS sector for these statistics into manufacturing companies; companies providing non-financial services; and other industries (including construction, electricity and gas supply, agriculture, mining and quarrying).

Statistics on Profitability and GOS of UK PNFCs

1.11 ONS publishes statistics about the Profitability of PNFCs in the following ways:

• A statistical bulletin with supporting datasets, published around five months after the end of the quarter to which the statistics relate. The package contains estimates of net rates of return on capital for PNFCs, split into UKCS and non-UKCS, manufacturing and services. In November 2023 ONS announced via a notice in the bulletin, that the frequency of this release will be moving from quarterly to annual.
• A dataset which starts from 1997 and provides quarterly headline estimates on: PNFCs total assets; oil and gas; manufacturing and services capital consumption. In addition, estimates are provided for gross and net GOS, capital employed, and rates of return for PNFCs, UKCS, non-UKCS, manufacturing and services sectors.
• A rates of return and revisions tables of UK PNFCs by quarter.

1.12 ONS publishes PNFCs GOS estimates as a quarterly dataset, published around three months after the quarter to which the statistics relate. The dataset includes annual GOS estimates from 1948 and quarterly GOS estimates from 1955.

The production of Profitability and GOS statistics

Data sources

1.13 Estimates of GOS are produced twice per quarter as part of the quarterly National Accounts compilation process. A provisional GOS estimate of “corporations” (including financial and PNFCs) is produced for the quarterly estimate of GDP. A second revised estimate of the GOS of UK PNFCs, which incorporates updated or revised data, is produced for the quarterly National Accounts. The second revised estimate is published as part of the Profitability of UK Companies (PNFCs) statistical bulletin.

1.14 To produce quarterly Profitability estimates, ONS uses contextual data from other GDP data sources as well as data from wider industry to inform a growth figure and balancing process. The Index of Services and the Index of Production are used to ensure a representative split between manufacturing and services. Previously, the quarterly operating profits survey (QOPS) was the key data source for the quarterly Profitability and GOS estimates. QOPS was discontinued in April 2020, due to concerns about the relatively small sample size (approximately 1,650 businesses), data quality and methodology, all of which affected the quality of the survey estimates.

1.15 In addition to the ONS sources, ONS describes in the QMI that it uses additional supplementary anecdotal information (to ensure the estimates reflect current economic conditions) taken from various surveys including: the Bank of England’s Agents’ summary of business conditions; The British Chambers of Commerce’s Quarterly Economic Survey; Ernst & Young’s Profit warnings and Trading Economics Purchases Managers Index. A complete list of data sources used to triangulate quarterly estimates of Profitability and GOS can be found in Annex A1.

1.16 The largest non-ONS source used to produce the annual GOS estimates comes from administrative data on company trading profits. HMRC collects annual information on companies’ gross trading profits (GTP) as part of the tax collection process. GTP includes the part of a company’s income arising from trading activities in the UK. These exclude income from other investments or means, such as earnings from abroad and are calculated before payments of dividends, interest and tax. Over 98% of all industrial and commercial businesses’ data are collected via their statutory tax returns (Profitability QMI). These data provide ONS with an annual benchmark for company profits, after which ONS applies a growth figure to estimate subsequent quarters. ONS receives HMRC GTP with a lag of approximately two years because of the time given to companies to report profits and for returns to be processed by HMRC.

1.17 In addition, ONS uses additional HMRC data to produce annual GOS estimates. For example, Schedule A taxation records are used for data on the taxes on trading income from UK land and data on quasi-corporations (unincorporated partnerships) are sourced from self-assessment taxation records (tax deducted automatically from wages and pensions). ONS uses other sources from specific industries to estimate annual GOS, for example, data about the farming industry are sourced from the Department for Environment Food and Rural Affairs.

1.18 To produce annual Profitability estimates, ONS uses data from the Annual Business Survey to apportion the whole economy GOS estimate between manufacturing and service industries. Oil and gas output and prices data are sourced from the Department for Energy Security and Net Zero (DESNZ) Energy Trends National Statistics datasets and are used by ONS to provide the proportional splits between UKCS and non-UKCS businesses. Data on Natural Gas prices are sourced online from the gas transmission data supplied by National Grid. The data obtained are used to determine total income (total sales multiplied by price) and total expenses. Estimates of UKCS GOS are calculated by the deduction of total expenses from total income. A complete list of data sources used in the production of annual estimates of the GOS of PNFCs can be found in Annex A2.

Methods and adjustments

1.19 HMRC GTP data are collected on a business accounts basis, however, due to the conceptual differences between business accounts and National Accounts, ONS applies a series of conceptual adjustments to HMRC GTP data. In total, over 30 adjustments are made in the production of annual GOS estimates, to align GTP data to the National Accounts concept of GOS.

1.20 In many cases, data used to adjust administrative data such as HMRC GTP data are sourced from a survey. For example, Gross Fixed Capital Formation (GFCF) data are collected via the Quarterly Acquisitions and Disposals of Capital Assets Survey, which collects quarterly information on the value of capital assets bought and sold by businesses in the UK within the private sector. The Quarterly Stocks Survey collects quarterly information on the value of stock held by businesses in the UK within the mining and quarrying, manufacturing and repair, energy, construction, motor trades, wholesale and retail industries. In other cases, data are from multiple sources, for example, interest payable on bonds and loans is sourced from ONS financial services surveys and Bank of England surveys. Data used to adjust insurance premiums, interest paid on loans and bonds and Financial Intermediation Services Indirectly Measured (FISIM) are mainly sourced from ONS financial services surveys, however, these data are supplemented with data from the Bank of England Agents’ summary of business conditions survey.

1.21 In addition to conceptual adjustments, ONS carries out extensive adjustments (relating to issues such as tax evasion and VAT fraud) to account for where the data are considered incomplete, or where it considers companies are over or under-reporting profits. Other factors such as late responses, or new government policies, such as the Energy Price Guarantee, are also considered when preparing the data. Further balancing adjustments are carried out to ensure the final annual GDP income estimate is balanced to align with the GDP output and expenditure estimates. A complete list of the data adjustments can be found in Annex A3.

Systems and processes

1.22 Many of the data used to adjust the administrative data in the annual estimates are sourced from ONS supplier teams via a centralised processing system. The Central ONS Repository for Data (CORD) is used to produce Profitability and GOS estimates, consistent with most National Account aggregates. CORD enables data suppliers from within ONS to upload individual series in a central data repository, allowing other ONS users to pick up the same datasets and variables coherently. CORD is also used for applying adjustments to the data (such as seasonal adjustments). ONS sources are extracted automatically from CORD, while non-ONS sources are inputted to CORD manually.

1.23 The GDP compilation team is responsible for collating quality information on the data series inputs to GDP from other ONS statistics teams. The GDP compilation team is also responsible for disseminating quality information to all ONS compilers.

1.24 There are some automated statistical and analytical processes, within the production process of Profitability and GOS estimates. For example, when estimates from data sources are uploaded into CORD, validation checks are automatically carried out to check for any discrepancies in the data.

1.25 Excel is used to produce the datasets published on the ONS website. It is also used in the quality assurance of data in the form of checklist templates. For example, a centralised Excel spreadsheet is used by statistics production teams to add any queries they have regarding the data.

Quality Assurance

1.26 Documentation such as desk instructions and quality assurance templates are provided to guide new members of staff, which are reviewed and updated regularly to ensure they remain up to date. Included in the desk notes are outcomes from any review meetings (which feature throughout the production process) to identify any known issues and how they should be rectified.

1.27 The GOS production team receives data from administrative sources, such as insurance premium data from the Bank of England, and from other ONS statistics production areas. It is the responsibility of the GOS team to notify these ONS data suppliers of any quality issues affecting these deliveries. Although the Bank of England provides a brief alongside the data, ONS has a designated team that liaises with the Bank to raise queries regarding any anomalies in the data supplied. However, this team acts as a liaison communicating with the Bank, rather than being involved in the quality assurance process.

Uses of GOS statistics

1.28 GOS is a key component of the GDP estimate, accounting for over 17% of the GDP income measure in 2022. Annual estimates of GOS are included in the UK National Accounts Blue Book Quarterly estimates of GOS are produced for month two and month three of the quarterly GDP release and are included in the GDP first quarterly estimate time series dataset. Quarterly estimates of GOS are also included in the UK Economic Accounts PNFC datasets which are supplied to international organisations such as the OECD.

1.29 GOS statistics are used by the Financial Policy Committee (FPC) at the Bank of England to monitor cyclical systemic security risk, as defined in Capital Buffers and Macro-prudential Measures Regulation (2014). The data also feature in the Bank’s financial stability reports.

1.30 GOS estimates are used by ONS in productivity analysis, including capital services, as well as analysing the share of GOS as a proportion of GVA and tracking the long-term labour share trends, making international comparisons. GOS has also been used by the Bank when analysing Profitability in a time of high inflation.

1.31 The Office for Budget Responsibility (OBR) uses GOS statistics to make its profit forecasts, which are supplied to the Chancellor of the Exchequer to inform fiscal policy. The OBR also provides profit forecasts to HMRC, enabling HMRC to analyse incoherences between cash returns compared with National Accounts (accruals) estimates.

1.32 Other government departments such as HM Treasury use GOS for monitoring, informing and delivering well-informed economic policy advice.

1.33 Academics use GOS to analyse the effects of various economic events on the economy such as trade union strikes, the contributions of profit markups to inflationary shocks and the affordability of firms introducing a four-day working week.

International Comparisons

1.34 ONS is one of a few NSIs that explicitly publishes annual GOS estimates for PNFCs. Ireland Central Statistics Office (CSO) publishes annual estimates of GOS using a similar approach to ONS by using administrative corporation tax data as the key source and using survey data to carry out adjustments. Other G7 countries such as Canada calculate GOS as part of its National Accounts process, but it is not compiled explicitly from survey and administrative sources, instead GOS is a residual of GDP income. The US Bureau of Economic Analysis (BEA) publishes net operating surplus, by estimating a rate of return per industry, which gives greater granularity. Separately the BEA publishes GVA for PNFCs, from which GOS can be calculated.

1.35 Given the practical challenges of finding suitable data sources to produce reliable estimates of Profitability and GOS, few counties produce quarterly estimates. Ireland CSO publishes experimental quarterly estimates of corporate profits and Statistics Canada publishes estimates of Profitability every quarter and separately publishes income-based quarterly estimates of GDP, of which GOS is a residual. Annex B summarises the outputs of some other countries’ NSIs.