Guest post by Pedro Madeira. This article is republished with the permission of the original author at Beauhurst, the leading source of deep data on UK growth businesses.
SIC sector classifications are used by companies to describe their business activities within Companies House filings. For example: a company that operates hairdressing salons would select SIC code 96020, which refers to “Hairdressing activities”.
SIC codes are bad and unfit for purpose. Here are some of the main reasons.
1 – SIC codes are too broad
Software development is a huge sector in the UK, with many branches: mobile <apps, SaaS, server software, etc. Yet all software development companies belong to one generic software development sector (code 62012). This is why many companies belong to unhelpful umbrella sectors that include in their name “Other” or “n.e.c.” (not elsewhere classified).
2 – SIC codes lump together sectors in a strange way
Biotech (72110) and software development rely heavily on IP. But biotech belongs to a sector group called “Professional, scientific and technical activities”, which means it has strange bedfellows like PR (70210). And software development belongs to a sector group called “Information and communication”, which bizarrely includes sectors like “Motion picture distribution activities” (59131).
3 – SIC codes aren’t just about sectors
Some SIC codes classify companies as dormant (99999) or non-trading (74990). Why is this odd? Because it’s like asking a zoologist whether an animal is a leopard or a tiger, only to receive the answer that it is dead. “Being dead” is not a species. Likewise, “non-trading” is not a sector.
The underlying reason why SIC codes are bad is that they were always meant to describe activities rather than sectors. If you think of it this way it’s no longer surprising that there are really specific sectors like “Ceiling coverings made of plastic (manufacture)” (22230), or that all technical activities get lumped together irrespective of whether they’re technological or not, or that there are SIC codes that classify companies as dormant. (It still doesn’t explain why some sectors are too broad – the simple reason for that is that SIC codes haven’t kept up with economic and technological development.)
If SIC codes are bad and everyone knows it, why does Companies House use them? Firstly, inertia. SIC codes have been used for a long time and it would be no small hassle replacing them for something better. Secondly, usage across other public bodies. It may in certain respects be more natural for HMRC and the ONS to think in terms of activities rather than sectors.
SIC codes make it hard to have a clean and modern view of the sectoral composition of British companies, without which it is hard to assess how the economy is doing and what the business fabric of the country looks like. Even if you don’t care about that, you almost certainly care about your own sanity.
Having to deal with SIC codes every day (like I do) is not conducive to mental well-being.
I suspect it is BIS (the Department of Business, Innovation and Skills) that has the final say on whether SIC codes stay on, or go from, Companies House filings.
So let’s all tell BIS what everyone else already knows – SIC codes need to go. For the sake of our sanity if nothing else.