Lord Risby
To ask Her Majesty’s Government what steps they are taking to encourage the growth of small businesses in the United Kingdom.
Lord Risby (Con)
My Lords, the statistics regarding small businesses are truly remarkable. Small businesses account for 33% of turnover in the private sector and employ 12 million people. Of our country’s 5.2 million private sector businesses, those with fewer than 50 people account for 99.3% of the total number.
For many years I have been deputy chairman of the Small Business Bureau. In November, a number of our directors produced an SME manifesto called “Liberating the Entrepreneur” under the Genesis Initiative. I pay tribute to the many parliamentarians of all parties in both Houses of Parliament who have highlighted the needs and potential of our small businesses over the years.
I most warmly welcome the Small Business, Enterprise and Employment Bill, which deals with key areas, such as access to finance, regulation, public sector procurement and filing requirements. This, of course, builds on the Government’s publication, Small Businesses: GREAT Ambition of December 2013.
The increase of over 40% in the overall business population since 2000 has been driven by SMEs. In turn, that figure was driven largely by the increase in the number of businesses without employees—for example, sole proprietorships, run by one self-employed person, or ordinary partnerships, run by two or more self-employed people. Most of the growth in non-employing businesses comes from unregistered businesses. The smaller ones not registered for VAT has increased by 83% since 2000. This trend arises from the possibilities offered by modern technology and communications.
The Government have plans, which I applaud, to extend superfast broadband, but it is a question not only of cover but of the quality of the cover. A note that I received from the City of London Corporation indicated this to me. Many SMEs in and around the City do not have access to the superfast broadband required to boost their growth and, while larger businesses are able to afford dedicated fibre optic broadband, the needs of SMEs have been overlooked by the large telecoms companies. As a result, average speeds for SMEs in the City are half that of the London average. Given that, and considering the particular impact on small and microbusinesses of broadband, I would be grateful if my noble friend could indicate what percentage of the UK will be covered by at least one of the four main networks and by when, and how we deal with areas where broadband infrastructure may not be commercially viable.
Inevitably, following the financial crisis and a change to the regulatory framework, lending institutions became very cautious. Over the years, we had seen the growth of a concentrated banking structure in this country. In 2007, at the peak of business lending, there were perhaps only 100 lenders to business; that number then halved, but today there are at least 300. I greatly welcome the vast number of government schemes and assistance under the umbrella of “providing finance and support for your business”. However, many feel that all that can be confusing and time-consuming for a small business owner. Therefore, the issue is not only the availability of funding but awareness and access; a recent survey indicated that only 6% of SMEs are fully aware of the whole array of borrowing possibilities. Is my noble friend confident that the now vast range of funding available for business is being made available on a clear, easy to access basis, and does he envisage some further improvements in enhancing access and clarity of information?
While it is true that interest rates remain very low, and general corporate profitability has much improved, the issue of late payment remains a continuing burden. The FSB has indicated that some half of the invoices of its members are paid late, persistently. Additionally, of course, suppliers remain nervous about pursuing larger businesses, for very obvious reasons. It is good to have a new reporting regime to help small business to identify best payment practices, with attendant benchmarking. However, it is very daunting for a small business to deal with the might of a major purchaser. Is my noble friend satisfied that, by giving smaller businesses more rights to challenge unfair terms, that problem will be reduced? While I greatly welcome the strengthening of the prompt payment code, would it not be advantageous and very reassuring for SMEs to have a small business conciliation service to resolve those disputes?
With their Red Tape Challenge, the Government have sought to address needless regulatory pressures. It is gratifying that the World Bank’s Doing Business 2015 report showed us as eighth out of 189 economies—up two places—as domestic regulation has been reduced. However, given the considerable impact of EU legislation on businesses, can my noble friend confirm that the Government are pressing for an annual statement of the true cost of EU regulation and legislation? That would certainly be advantageous to all EU members in a generally static European economic environment, which of course impacts on us, too.
I salute the substantial increase in direct lending finance by UK Export Finance and the package of support for first-time exporters. As somebody who is involved with UKTI, I find the new and functionally improved emphasis on highlighting what is available to support SME business activity abroad most encouraging.
In 2014, the House of Commons BIS Select Committee identified business rates as the main threat to the survival of existing retail businesses on the high street, and the biggest obstacle to entrepreneurial new retail businesses starting up. Business rates on the retail sector account for 25% of taxes on domestic property, and many small businesses pay more in business rates than they do in rent. The introduction of the 2% cap in 2013 certainly recognised that. The next revaluation is due in 2017. There have been suggestions that property revaluations should be more frequent. Perhaps my noble friend can comment on whether there are any thoughts in place for a long-term reform of business rates, particularly for small companies.
SMEs feel better supported today than at any time—which is absolutely excellent news. As I know from personal experience, starting a business is very daunting, and to grow that business requires confidence in both economic environments and growth, and a pro-business atmosphere. It is significant that this country has been such a magnet for many young people from neighbouring countries where youth unemployment is shockingly high, and where in some instances anti-business sentiment and policies apply. Tech City is a brilliant example of attracting business-minded young people from all parts of the United Kingdom and abroad.
Of course there have been differences, but essentially a message has gone out from this Government and from the previous Government that Britain is open for business, and that spirit has prevailed in debates about current business legislation and in the export debate last week. Recently, however—I feel compelled to say this—some senior political figures have taken to attacking business and successful businesspeople. Those comments have been ill judged, and I hope will cease on sensible reflection, because they undermine the vitally necessary pro-business message in this country and, quite frankly, they are profoundly counterproductive.
Lord Cavendish of Furness (Con)
My Lords, the House is indebted to my noble friend Lord Risby for introducing this short debate. As he said, the contribution that small business makes to our national life is now, finally, well understood and appreciated. As the Federation of Small Businesses points out, 99% of our nearly 5 million businesses are small or micro—another point my noble friend made.
In contributing briefly this evening I declare an interest. I recently relinquished the chairmanship of a group of small businesses based in south Cumbria, details of which can be found in the register. Perhaps more importantly, I will not disguise from your Lordships the fact that these family ventures will be seeking strenuously to participate in the very considerable investment that is being directed towards the Furness peninsula, where I live. It is anticipated that over the next decade some £40 billion will be spent in the area, including civil nuclear, biopharmaceuticals and energy projects, and providing national security in the shape of the next generation of attack and deterrent submarines.
The question is: will small—or indeed medium-sized—businesses benefit from those large investments? That is not an idle question; in the past, very little indeed has trickled down, and there has been a pitifully small number of consequential start-ups. Part of the problem is cultural: big corporate businesses feel naturally more comfortable dealing with organisations of comparable size and structure. We must all seek to change that. There is also an ugly element, which can be found especially, in my experience, among what I might term the large private monopolies. They dread small, agile competitors muscling in on their territory, and resort to sometimes quite ruthless measures to see them off.
Local participation is reliant on the agencies set up for the purpose of promoting growth in the local economy being in good shape. South Cumbria has had the benefit of such grants. Most recently, I thank my noble friend Lord Popat for his role in supporting Furness Enterprise’s bid for money from the Coastal Communities Fund. That has been crucial in allowing that simply excellent organisation to continue with the work it does for small businesses.
In one area especially, it is my contention that there is scope for government to influence procurement policy and help the local economy. BAE Systems in Barrow has made some encouraging statements in respect of local involvement and has been extremely approachable. However, once the tendering process gets under way and outside contractors become involved, my fear is that the interests of the local economy become diluted. In the case of the expanding and modernising of the shipbuilding facility, I understand that the Ministry of Defence has a substantial direct investment. Therefore, will my noble friend ask his colleagues in the Ministry of Defence to ensure that their own guidelines in respect of local procurement are followed?
The benefits of these policies were described very well by my noble friend Lord Shipley, who I see is in his place, in a compelling contribution that he made on 23 October last year, when he pointed out that,
“profits accrue locally, training is provided locally and local labour is recruited—there is a local legacy”.
He went on to ask,
“whether the Government are content with the current operation of framework agreements”.—[Official Report, 23/10/14; col. 784.]
I hope that I have not pre-empted too much but I think that that very important point bears repetition and I hope that my noble friend will press the point.
Good practice in the matter of procurement really can deliver enduring benefits to an area and provide strength and resilience against the ebbs and flows of global economic conditions.
Lord Shipley (LD)
My Lords, I welcome this opportunity to say something about the importance of small businesses to our economy and to growth, and I shall be saying some things very similar to what was said by my noble friends Lord Risby and Lord Cavendish of Furness. I want to address in particular issues around business rates, public procurement policies and problems caused by late payment, all of which can be barriers to local growth. I declare my vice-presidency of the Local Government Association.
On business rates, I think that we would all agree on the vital role that small businesses play in their local economies. It is clear that some small firms and businesses feel penalised by business rates in their current form, not least in the retail sector, where they can face enormous competition from the internet. Retail businesses trading from premises rather than online can be unfairly penalised by business rates, particularly at their current levels.
I noted the announcement in the Autumn Statement of a review of the future structure of business rates, which is most certainly needed. I hope that we will get a much more flexible system that would allow councils greater discretion to support the economic growth of small businesses.
On procurement policy, I agree entirely with what my noble friend Lord Cavendish of Furness said, and I hope that the Government do not plan to use powers in the Small Business, Enterprise and Employment Bil1 simply to centralise procurement more and introduce a one-size-fits-all approach. That would not help local government's support for local small businesses and voluntary organisations. We should note that half of local government’s total procurement spend is with SMEs, compared with around 15% for central government. We have already seen the impact of centralised procurement in some areas, such as construction, which can advantage national companies rather than regional or more local companies, which employ and train a long-term local workforce.
I share particularly the concerns of my noble friend Lord Risby about late payment. I know that the Small Business, Enterprise and Employment Bill currently being considered in this House is attempting to address some of the problems of late payment, which can impact on the viability of small businesses and in turn on their growth potential. I note that there will be a requirement for companies to report payment practices towards their business suppliers. I am pleased, therefore, that the Department for Business, Innovation and Skills is now developing a better understanding of the payment practices across different industrial and commercial sectors and is assessing whether to take action sector by sector to encourage better payment practices. At this point, I welcome the work of the construction industry in its fair payment commitments, with its clear plan for delivery of reduced payment timescales over the next 10 years. I wish them well. This is not a matter just for central government; it is the responsibility of everyone. In some cases, the pressure placed on the finances of businesses can be so great that it can result in bankruptcy.
I would like to draw attention, at this point, to the valuable role of the North East Institute of Business Ethics, which was established in May 2013 as an independent regional resource to encourage responsible business behaviour. It encourages regional firms to adopt a fair and ethical approach towards their supply chains. I welcome strongly the Pay Fair campaign; through the Journal newspaper, the local press is encouraging north-east companies of all sizes to take a responsible and ethical approach to paying firms within their supply chain. The problem is that, in a contract with 30-day terms, some will inevitably pay late. In the UK, the average payment was 15 days late. The Federation of Small Businesses says that, on average, its members in the north-east of England are owed around £40,000 and are waiting eight working weeks to get paid. It also tells us that it costs in the region of £100 million a year for small businesses to chase payments. Clearly, if more companies paid on time, it would really help other companies and the economy more generally.
Baroness Byford (Con)
My Lords, I thank my noble friend Lord Risby for securing this Question for Short Debate. I will not repeat the figures that he gave at the beginning but I agree with him that Britain is open for business. I have a farming business in Suffolk, which would be considered small; as my noble friend will know, more than 50% of small businesses are based in rural areas.
The Government should be congratulated on the way in which they have encouraged small business. The Autumn Statement announced some £400 million through the venture capital funds investment and some £500 million through new bank lending and through the enterprise and financial guarantee scheme, which required 75% of bank loan, with the lenders having to put up 25%. I could go on but I will not.
I turn quickly to apprentices, because the growth of small businesses can be enhanced by young people. Again, the Government have put an allocation of £170 million aside for youngsters between the ages of 14 to 16 and between the ages of 16 and 24. That encourages youngsters to get involved in business and to go on from there and, it is hoped, to become involved in small businesses in their own right. In hindsight, nearly 100 years ago, my father-in-law, who was a farmer’s youngest son, set up in Leicester, with two machines and two men, employed in the sock business; he eventually employed just under 2,000 and exported some 50% of all the socks he made. Exports are hugely important to this country and, indeed, to small businesses. Although others have not touched on it, I hope it is something that the Minister will be able to reflect on.
Secondly, as has been referred to by others, the Government, through legislation, are looking at deregulating as much as they can, thus freeing up small and medium-sized businesses to be able to get established in a much sounder way. With that, obviously, comes the question of late payment, which still needs to be addressed. Where breakdowns occur—such as in the farming and food industries—we have the groceries adjudicator. It is a very sad reflection on business that that is actually needed, but a wise move. What we need are powers to fine.
Finally, on the general side, I turn to businesses in rural areas. Many of them start up as one-man businesses and then grow a little, but what is key to all of them is broadband, as has been mentioned. In some areas, it is not a question just of broadband quality; it is actually getting broadband access in the first place. Linked to that is the question of enabling local companies to put in for public procurement tenders, where they will have a chance locally. I think that some opportunity is being missed. On the other hand, there are some very good examples of what is actually being done. The important thing is that people are encouraged.
I congratulate the Government on what they have done. There is still much to do: let us not forget exports—they are the lifeline for us in this country, in the past and in the future.
The Lord Bishop of St Albans
My Lords, there is no doubt that we need to create a culture in which entrepreneurial skill is encouraged and supported. Small businesses form a vital part of our national landscape and are integral to the flourishing of our society. The social capital that we all seek depends on strong partnerships: partnerships between manufacturing, finance and chambers of commerce; between new entrepreneurs and established businesses; and between local and national government and the universities, as well as the voluntary and faith sectors.
Last evening, I was at a social function and found myself talking to Peter Goodman, the president of the St Albans District Chamber of Commerce. It was too good an opportunity to miss so I asked him what he thought about small businesses. In particular, we ended up discussing start-ups. He identified three main problems that small business start-ups were facing in St Albans. First, he said, there was insufficient advice for small business in the early stages. I therefore ask the Minister whether Her Majesty’s Government can help with better signposting of the business advice that is already available, and whether additional specialist resources could make a significant contribution, especially in emerging areas such as the high-tech industry.
Secondly, Paul Goodman said that it is hard to recruit staff with the appropriate qualifications and, thirdly, that there is a dearth of appropriate premises for small businesses and a need for many more “easy in, easy out” licences. These are areas that I hope Her Majesty’s Government will review carefully as we want to support new business start-ups.
Allied to these challenges is the clear need to improve access to start-up capital for small businesses. With the diversification of financial services, social investment has the potential to provide an alternative way forward for many would-be entrepreneurs. Community development finance institutions are among the social finance options available. They provide loans and credit to, among other groups, businesses and entrepreneurs, especially in disadvantaged communities, which are unable to secure finance from mainstream commercial institutions such as banks. Community finance seeks to bring about a range of economic and social benefits and is not limited to a concern with profit margins.
While this is a fast-growing sector, current levels of community finance provision leave a huge gap in capacity, skills, expertise and availability of capital. The Community Development Finance Association’s recent report Mind the Finance Gap highlighted the extent of the disparity between demand and provision.
As well as the DCLG’s work in encouraging social impact investment, have the Government given any consideration to supporting the growth of the community finance sector? In particular, are there ways in which Her Majesty’s Government can further assist in bringing together the banking, public and independent sectors to work more closely with each other in providing funding for small businesses?
Lord Leigh of Hurley (Con)
I congratulate my noble friend Lord Risby on securing this debate. As we have heard, small businesses are the lifeblood of our economy. Small businesses are often worthy of our praise, just as they are deserving of policy support from government. I declare my interests as recorded in the register of interests.
The register shows that I have started a small business which, 26 years later, remains a small business, sadly, but, none the less has a modicum of success and is not to be confused with my noble friend Lord Cavendish, despite the similarity of name. So when I heard the leader of the Opposition suggest scrapping our proposed reduction of corporation tax for large businesses to support a rate cut for small businesses, I realised that the right honourable gentleman had missed the point entirely and had misunderstood the mentality of the entrepreneur and the small businessman. The point is that many small businesses do not want to stay small. They want to grow, open new sites and stores, invest in new products and hire new staff. As anyone who is concerned with the state of the public finances—we on these Benches certainly are—will know, larger businesses pay more tax. I am pleased to say that this Government have recognised this point and introduced a succession of targeted measures throughout this Parliament to assist SMEs. We have seen entrepreneurs’ relief increase dramatically from £2 million a year to £10 million a year in tax-free lifetime gains—or tax at 10% for lifetime gains—meaning that founders and entrepreneurs can keep more of the wealth they have created by taking a risk and starting a new business.
As has been mentioned, the start-up loans scheme has helped thousands of individuals start their own businesses, often moving people away from welfare and into their very first new business. So far it has made 25,000 loans worth some £130 million. As the Federation of Small Businesses has said, this Government have made it easier not just to start a small business but to run one. In particular, the changes in the laws on employment tribunals and extending the qualifying period for unfair dismissal will help individuals by giving them more opportunities to enter the labour market, and mean that employers such as me will take a chance and employ an extra person. We in Britain now benefit from one of the most liberal labour markets in the developed world and one of the world’s most competitive tax systems. The Government have abolished Labour’s jobs tax, cutting employer NI by £2,000, meaning that 450,000 small businesses—that is nearly one-third of all employers—pay no jobs tax in the current financial year.
As has been mentioned, the Government are committed to helping further through their powerful procurement footprint, securing 25% of all spend going to SMEs. But there is still more to be done. I would welcome the Minister’s comment on the recent study by the Association of Accounting Technicians, which has found that the UK’s complex tax system is costing SMEs £9.9 billion a year in compliance, whereas it costs larger firms only £100 million. I note the work of the Office of Tax Simplification—it is looking to simplify our tax code to make it easier—and only encourage it to look particularly at aspects affecting small businesses.
As we encourage people to found and work in small businesses and make them cheaper to operate, we must help them grow by encouraging more investment and, of course, exports. It is pleasing to see the Prime Minister take a personal interest in that in promoting SMEs on all his trade trips. The enterprise investment scheme has been expanded to offer tax reliefs of 30% for the investor— up from 20%—and the aggregate limit to which a single company can take such investment has increased from £2 million to £5 million. Likewise, for companies using money from venture capital trusts, the individual company limit has increased to £5 million, as opposed to £2 million previously, and the maximum number of employees for eligible companies has increased from 50 to 250.
We have incentives and encouragement to start a business, help in bearing down on costs and policies to help businesses grow. This represents a joined-up approach to business policy, one that understands the complete business ecosystem and, in particular, the challenges and opportunities of running a small business that wants to grow and one day become a large one. It is no wonder that businesses are lining up to point out how disastrous a change of government could be for SMEs, the economy and the country.
Lord Empey (UUP)
My Lords, I, too, congratulate my noble friend Lord Risby on securing this debate.
I want to focus on trade issues and the contribution SMEs can make to our economy. A recent statement from the European Commission forecast that the UK is on course to record the worst trade deficit in the industrial world in 2014. Howard Archer, chief UK economist at IHS, said that trade was unlikely to be a major driver for UK growth in the near term.
Even a superficial examination of our trade statistics illustrates that, even with our exports to partners in the European Union, we are achieving a monthly deficit of up to £3 billion, £4 billion or £5 billion a month. This has gone on since the 1980s, which was the last time that we had a trade surplus in this country. If the same statistics were coming out of the health service or our education service, there would be a revolution in this place. We are sleepwalking our way through the fact that we are living and paying our bills by doing two things. First, we are selling our assets. Secondly, we are borrowing. That, added to what we do sell, is how we pay our bills. How long can that go on? SMEs are where the solution lies, because we have proved conclusively that reliance on the large corporations is no solution.
I have asked my next question on a number of occasions but never had a clear answer to it. I hope that the Minister will tell us whether we as a country have any policy on import substitution. If there is one, I would like to know what it is. I have never heard it. We are ignoring something vital. It is not that we support the production of articles that are completely unprofitable but we can do things in this country on the land, in manufacturing and in our services that are done elsewhere that I believe we could do just as well here.
The second thing is really a training issue. We say that we are committed to exports and that we want to see small companies and others take the leap and start to export. But do we? For instance, we train our dentists and doctors. Would you send a car to a garage that had no trained mechanics? However, we are perfectly happy to try to see exports grow in companies where there is no training for people to export. I am a vice-president of the Institute of Export, an educational charity providing training for people in business so that they understand what exports are, how they do them and the pitfalls. Surely it would be possible for government to give an incentive, even through a capital allowance, for people to be trained in export qualifications, so that the small companies at least are encouraged, and so that we send a signal as a Government and a country that we are serious about trade.
These figures, which have now been going for 30 years, indicate that we are not serious about trade. We are prepared to run huge deficits almost indefinitely and pass on a huge burden of debt to the next generation. I hope that the Minister can address those issues in his response.
Lord Freeman (Con)
My Lords, I, too, congratulate my noble friend Lord Risby on securing this debate. He is a former colleague of mine with a long and distinguished record for East Anglia in the other place. I think your Lordships owe him a debt of gratitude for the time to discuss this very important issue. I want to concentrate on advisory support for high-technology companies, particularly small technology companies, for which the failure rate in this country is far too high. It is not about the absence of finance, but about experience and knowledge being passed on, in particular from government. That is the burden of my brief comments.
My experiences in high-tech small companies stem from my chairmanship of Cambridge University’s technology transfer office and my chairmanship of the Security Innovation and Technology Consortium, which has more than 100 members of small firms in the high-technology field. I am pleading on behalf of that small but important proportion of small high-tech companies that fail because of a lack not of finance but of guidance and help concerning their ambitions and the direction of travel that they have chosen. In some cases it may be correct—it may result in substantial benefit to the United Kingdom—but in others it can be misguided.
The burden of my comments is that we need better to capitalise on the tremendous wealth of experience and knowledge of some of our smaller high-technology companies and make sure that they do not end up in a blind alley. I have great admiration for the American Research and Development Corporation in Massachusetts, which over the years has nursed and encouraged smaller firms which have grown to very large entities in the United States. It has a very good track record.
My plea to the Minister is: can he please communicate with the Department for Business, Innovation and Skills and suggest that it might create and sponsor a group of technology experts drawn from many industries, but those that particularly depend on high technologies, to act as advisers and guardians of the technology—not of the wealth of those individuals? They could provide a bit of sober advice to say, “Have you thought about this technology, which might now proceed at a pace in Japan, the United States or on the continent?”. Some of these small companies, which might have a tremendous future in front of them, might fail and fail badly, simply because of that lack of advice. We should emulate not only the United States but Germany, which has the right institutions to cover the point I made: not only financing but the intelligence network of experience in particular fields. We have the brains in this country, but in this case we need a few wise uncles—some from the Department for Business, Innovation and Skills, I hope.
Lord Borwick (Con)
My Lords, I thank my noble friend for raising an important debate. I declare my interests in several small companies. I have run several businesses. I have always found it quite thrilling: the chase after a new customer, a new product or a profit—that is real fun. The best thing that government could do to encourage business is to show that government understands business by running government the way a businessman would. The best thing to inspire business is to get the background of the country right, with low taxes and certainly with underspending, but also with respect for business and enterprise; a supply of smart, numerate school leavers who can read and write; and a culture that applauds success and encourages failures to try again.
The general health of the UK economy is improving, with good figures on growth and jobs. It is interesting, however, to find out exactly where that growth and job creation is coming from. Last year, a report by the Centre for Economics and Business Research, commissioned by Octopus Investments, found that 68% of employment growth and 36% of economic growth was created by just 1% of UK businesses. These businesses are all high-growth small businesses with an annual turnover of between £1 million and £20 million. It is quite remarkable: small businesses really are driving the economic recovery.
The Octopus Investments report suggests several ways in which we can further support the sector. One of those is allowing corporation tax deferral in order to provide more capital investment to support growth, along with other tax breaks. The report also suggests an overhaul of regional funding. I think that low, simple and predictable tax rates for all businesses are preferable to tax breaks and funding through grants.
We could also do more on business rates, which are often higher than rents, and employers’ national insurance, which stops firms hiring more people. Some good things have been done. If, however, we are to implement tax breaks, they should be targeted at high-growth small businesses.
Overall, when I read reports like that of the CEBR and take part in debates like this, I am heartened to be reminded just how entrepreneurial this country is. I want that to continue. A big part of it will be inspiring young people about the world of business. There are great examples of organisations looking to engage young people and interest them in business. Indeed, every year 180,000 young people in England and Wales take on a real business challenge with Young Enterprise, an educational charity that I support. Mentored by a member of the local business community, they find out first hand what running a business involves and how much fun it can be. I have had the pleasure of meeting many of the wonderful young people who have done well in their competitions, and I hope that they all go on to start a high-growth small business. Young Enterprise plans to be in 50% of secondary schools this year. It should be in all of them.
Lord Mendelsohn (Lab)
My Lords, I draw attention to my entry in the register of interests, which includes my current involvement in small businesses.
I congratulate the noble Lord, Lord Risby, on securing this debate, and on his excellent speech. I commend also the excellent comments across your Lordships’ House on a range of issues, including payments, finance and procurement. This has been a very interesting debate and raised important issues.
It is incredible that for a long time we have not had a much greater focus on small businesses. If the past is any guide to the future, in the next decade small firms will create most of our country's new jobs. Research has shown that over the past 20 years small businesses have created the majority of new jobs, and that has really been in businesses with fewer than 50 employees. Small firms have increased their share of total employment, too: their share of jobs was three times that of 1998.
We also need to understand that small businesses are not all turbocharged start-ups ready to explode with growth in the right circumstances and a bit of luck. Of new firms, 75% that start small stay small. As MORI has pointed out, however, some worrying trends are emerging. Surveys have shown that entrepreneurs with high growth ambitions have declined in Britain since 1999. This is very worrying. While the internet has provided for a huge proliferation of commercial activity, it appears that entrepreneurs are worried that the UK is not an easy place to scale from.
To make sure that we meet the requirements for supporting growth companies, we need more attention on access to finance, whether it is start-up capital, growth capital or working capital. We have an unusually low level and small amount of early-stage venture capital and a still sub-par banking sector. We need to use regulation to level the playing field for small businesses that operate in markets with power, economic and informational imbalances and asymmetries. We need a more aggressive use of public sector procurement to trigger the benefits of using small businesses and to support their access to export markets.
We need to look at particular sectors and how they are developing, and to see what we can do. I commend the excellent work of the Creative Industries Council, which has brought forward a very impressive strategy, involving government and industry, to develop the creative economy, which is dominated by small businesses. Of the UK's total workforce, 2.6 million—that is 8.5%—are employed in the creative economy. On average, employment in the creative economy grew over three times faster than in the UK overall. Growth stands at 10%, more than three times that of the UK economy as a whole, and higher than any other industry.
However, initiatives to open employment opportunities to young people are as important—and probably more important—as engines of employment growth. We are very impressed with the Apprenticeship Ambassadors Network and the work of its chair, David Meller, who has helped to make apprenticeships more accessible to small businesses.
Government should not be afraid to be a market catalyst, to provide an economic and political framework of stability and pro-business character. We must not, however, make the mistake of believing either that one size fits all or that we can intervene in every market. Public policy must make sure that local businesses with more modest ambitions and dynamic start-ups both get the sort of bespoke and customised attention that they require.
The Labour Party's adoption of a more assertive and aspirational role for public policy in supporting small business is really the legacy of Nigel Doughty, who led the Small Business Taskforce, established in 2011. Nigel tragically passed away nearly two years ago today, on 4 February. He was one of the most accomplished and visionary businessmen this country has ever had, and his tragic passing has robbed this country of someone who would have made an extraordinary and even greater contribution. His report remains required reading. It also shows how far we have drifted behind key international competitors in responding to current challenges and the type of agencies that would make government more effective.
We all welcome the Government’s small business Bill. The discussions we have had on that have shown that we all agree that it is a good start. However, I hope that the Minister takes this discussion as encouragement, as we move to Report, to strengthen its provisions in some key areas.
Lord Popat (Con)
My Lords, I am grateful to my noble friend Lord Risby for initiating this important and timely debate. He speaks from great experience and I commend his interest in small businesses. It is an honour and a privilege for me to respond to a debate on my favourite subject and I commend organisations such as the Federation of Small Businesses and the British Chambers of Commerce for the work that they do.
Perhaps noble Lords will permit me a moment of self-indulgence. For some 30 years before joining your Lordships’ House, I was a small businessman and I am the third generation of my family to start and grow a small business. My grandfather, Haridas Hemraj, was a jute trader. My father, Amarshi Haridas, was a shop owner with a sub-post office. I initially followed in my father’s footsteps as a sub-postmaster before a career in accountancy, specialising in business and corporate finance, so business is very much in my DNA.
It is one of life’s great satisfactions to start and run a business and I am proud to have been a member of a Government who have done so much to support small businesses. This Government recognise the importance of small businesses, which are the engine of our economy. The UK economy is recovering from the biggest financial crisis in generations and I would like to share what we have done so far and what we are doing to help small and medium-sized enterprises, which I will refer to as small businesses from here on.
Let me talk first about the fiscal incentives. We have cut corporation tax from 28% to 21% and announced a further cut to 20% by 2015, the joint lowest rate in the G20. For small employers, there is a £2,000 cut in national insurance bills with the employment allowance. We have extended the small business rate relief for a further year from April 2015. Small businesses that are starting up or relocating to an enterprise zone will qualify for enterprise zone relief. They can get up to 100% business rate relief for five years, up to a maximum of £275,000. In the last Budget, the Chancellor doubled the capital allowance from £250,000 to £500,000 until December 2015.
Moving to banking, a number of noble Lords mentioned concerns over finance for small businesses. For too long there has been an overreliance on our four biggest banks, which between them account for 85% of business current accounts. We have introduced many measures to help small firms to have access to finance. We have increased competition in the banking sector, we have increased the availability of credit through the Funding for Lending scheme, and we have finally established the British Business Bank. On competition, two new banks are being spun from Lloyds Bank and RBS, while other challenger banks such as Metro Bank, Aldermore and Cambridge & Counties are also growing. There are a further 20 applications for new banking licences in the pipeline, so it is hoped that with more competition, our SMEs will be able to access finance more easily than they are able to do at the moment.
The Financial Services (Banking Reform) Act has created a payment systems regulator to ensure that the UK has a payment infrastructure that supports a competitive banking sector. The Government are also taking very practical steps to help small businesses to access alternative sources of finance. The Autumn Statement announced an upgrade to the seven-day current account switching service to include 99% of all small businesses. Provisions in the Small Business, Enterprise and Employment Bill will require the banks to refer small business customers who have been declined a loan to alternative lenders via designated platforms. So far, the overall lending picture is encouraging. Gross lending to small businesses in the year to the end of 2014 was up by 25% on the equivalent period in 2013. Some 66% of new finance applications from small businesses are now successful, from a low of 33% in the first quarter of 2013.
We have also launched the British Business Bank, which has facilitated a total of more than £890 million of new lending and investment to over 21,000 small businesses in the year to the end of September 2014. Last month the Prime Minister announced the 25,000th start up loan, which means that more than £129 million has been lent to people of all ages who have made the leap to start their own business.
As the noble Lord, Lord Empey, has just said, one of our long-standing economic weaknesses is our record on exports. We do not export enough to pay for our imports. I can recall that in 1971, when I was a 17 year- old, Harold Wilson wanted Edward Heath to resign because we had a deficit of £14 million. I am glad to have shared over dinners and discussed in corridors what more we can do to help in the export effort. Currently, one in five SMEs exports, but if we can change that to one in four, we will be able to clear our trade deficit.
When I came to your Lordships’ House, one of the first things I did was set up an ad hoc committee, chaired by my noble friend Lord Cope, to see what more the Government could do to help SMEs export more. The committee, of which the noble Lord, Lord Empey, was a member, took evidence from all over the country, and went to Brussels. The committee published a report in 2013, to which the Government responded positively and they have since launched a number of initiatives. In the last Autumn Statement, the Chancellor announced further financial support for UKTI. In 2013-14, around 48,000 businesses were helped by UK Trade & Investment trade support services; nearly 90% were small businesses. This support helped generate additional sales of more than £49 billion and created or safeguarded more than 220,000 jobs. The Government have also provided a further £20 million to help companies export for the first time. UK Export Finance also continues to support exporters with a network of regionally based export finance advisers who help businesses with risk and trade finance issues. UKEF’s trade finance and insurance solutions products have provided more than £1 billion of support to UK exporters of all sizes.
The Small Business, Enterprise and Employment Bill, which I have enjoyed debating with the noble Lords, Lord Mendelsohn and Lord Stevenson, and on which I have had the pleasure of working closely with my noble friend Lady Neville-Rolfe during its progress through this House, contains measures that will open up new opportunities for small businesses. More specifically, the Bill will support small business in a number of areas including improving companies’ payment practices and helping to tackle the issue of late payments. The noble Lord, Lord Shipley, had strong views on this. I am pleased to confirm that a summit was held this morning at Downing Street attended by the Federation of Small Businesses and the CBI. The Bill will also improve access to finance. It will assist small business expansion overseas and streamline public procurement to help small businesses gain fair access to the £230 billion public procurement market, which my noble friend Lord Cavendish mentioned. It will cut down on red tape and will also help to support home businesses and streamline small company filing requirements. The Bill will reduce the barriers that can hamper the ability of small businesses to grow and compete and will pave the way for Government to be more supportive of, and less burdensome to, small business in the UK. I look forward to the support of the Opposition when the Bill has its Report stage.
Infrastructure investment will help small businesses, which need to be able to operate in an environment that allows them to flourish. The Government are trebling investment in major roads schemes by 2020-21, the biggest investment in roads since the 1970s. Under way is the largest programme of investment in the railways since Victorian times. Crossrail, electrification, HS2 and HS3 all show our commitment to secure a step change in Britain’s connectivity.
My noble friend Lord Risby remarked on broadband in relation to SMEs and micro-businesses. The Government are working hard to put the UK at the forefront of the digital revolution and are committed to 95% of UK premises having access to superfast broadband by 2017. Five community projects are currently being funded to help improve connections to remote locations. My noble friend Lord Freeman mentioned commercialising ideas in Cambridge. I will write to him on the points he raised. Many ideas in the technology sector in Cambridge are supported by venture capital, which was mentioned by my noble friend Lord Leigh. Angel networks play a particularly important role in providing finance and guidance to small businesses in some of our fastest growing industries.
In summary, there were a record 5.2 million private sector businesses at the start of 2014. That is an increase of 760,000 compared with the start of 2010. At the start of 2014, small businesses employed 15.2 million people, 60% of total UK private sector employment. The Government have worked hard to support small businesses. Time has prevented me from mentioning many other initiatives, such as local enterprise partnerships, but we know there is more to do. The Government are committed to fostering and assisting the entrepreneurial spirit that thrives in the UK. We have continued to lead the way in our support of small businesses because we want to make Britain the best place in the world to start and grow a business.
I have covered a few of the questions that were raised, although not every one. My noble friend Lord Risby asked whether the Government will review the structure of business rates. We will report by Budget 2016 and the Government will publish terms of reference in due course. We will certainly review it. My noble friend was right that in some cases the rates exceed the rent. My noble friend also raised the issue of prompt payment. We are improving public sector payment practices through the Small Business, Enterprise and Employment Bill.
Once again I thank my noble friend Lord Risby for initiating this debate and all noble Lords who took part in it.