Self-classification creates low quality data

Businesses in the UK are classified into different sectors using standardised industrial classification (SIC) codes. Companies select their codes when they incorporate at Companies House. They then tend to forget about them.

Companies don’t often update their code – they’ve got bigger and better things to worry about. In fact it’s so uncommon that the only way to do it is to file a Confirmation Statement.

Even if we were comfortable using SIC, this situation leads to businesses being wrongly categorised. It’s another reason why SIC is a low quality data input for industrial analysis.


Why would a business want to update its code?

Business owners might want to if their company has changed its focus or industry. They might have chosen the wrong SIC Code when they first established their business. It’s hard for new businesses to find the right code. They’re often vague and unsuited to the new economy having last been updated in 2007. This is something we’ve covered previously on our blog.

Some businesses amend their code when they expand into new sectors. However, Companies House doesn’t penalise, or even contact, companies that have the wrong SIC Code.

Finance and credit

That said, there are some circumstances when choosing the correct code does become important.

For example, companies in the property sector need to choose a relevant code for mortgage finance purposes. Interestingly, SIC 68209 (Letting and operating of own or leased real estate (other than Housing Association real estate and conference and exhibition services) n.e.c.) is the most searched code in Google. Possibly a result of the use of special purpose vehicles (SPVs) as a popular way to invest in property.

They are also important for credit purposes. Agencies compare the performance of businesses using SIC, despite there being a mix of very specific codes (e.g. 14141 Manufacture of men’s underwear) and general codes (e.g. 63990 Other information service activities not elsewhere classified). If a company has more than one SIC code, the agency uses the first to base credit ratings comparisons on.

Using SIC to inform a business’ credit rating seems extraordinary, but that’s a topic for a different day.

Unreliable data

Beyond these particular circumstances there is little reason for a company to update its code. This often means that companies that started doing one thing, before diversifying or innovating in another industry, are classified under the wrong code.

The reliance on businesses to keep their classification up to date makes SIC an unreliable data source for industrial analysis, investment or policy development. A self-maintaining system, based on taxonomies produced in collaboration with sector experts , is far superior as an alternative.

That’s why we’ve put a different data source at the heart of the technology we use to classify businesses in real-time. More on that topic here.

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