Businesses and SMEs

Baroness Couttie Excerpts

Thursday 6th July 2017 Lords Chamber

[Baroness Couttie (Con)]

My Lords, I too add my thanks to my noble friend Lord Leigh of Hurley for bringing this debate to the Chamber today and for his speech, with which I heartily agree.

Several speakers today have rightly recognised the value that small businesses bring to the UK, both in terms of supporting the economy and supporting the communities through the jobs that they create. I saw this at first hand during my time as leader of Westminster City Council. Westminster is the most important economic area in the UK, producing nearly £56 billion of GVA each year, substantially more than the City of London. It is also a larger economy than nine European countries and yet over 80% of the businesses in Westminster employ fewer than 10 people. Therefore, during my time as leader, I made getting to know the businesses located on my patch an important part of my work. I became well aware of the multiple difficulties that particularly face small businesses.

There is no doubt that, for a variety of reasons, small businesses face challenges that cease to be issues for larger businesses. It is hard for them to win and bid for contracts with large organisations, be that from government or other businesses, and they frequently suffer from procuring bodies playing it safe and working with other large organisations. When small businesses are successful in winning a large contract with a substantial firm, the excitement and joy in the achievement is sometimes eclipsed over time as small firms all too often find themselves on the end of poor payment practices that can force them to the brink of, or even into, bankruptcy.

Small firms can find themselves in a vulnerable position when they have one large client dominating a substantial percentage of their cash flow and for whom they have had to make a significant investment. This can be abused by unscrupulous firms through either late payment of invoices or even refusing to pay the full amount owed despite no suggestion that the goods or services were not of the required standard. A minority of organisations are aware of the difficulties that smaller firms have in seeking legal redress in these circumstances in terms of time, legal costs and the cash flow implications of waiting for the legal process to complete. They use this leverage to persuade smaller firms to agree to settle these kinds of disputes, so paying less than the original contractually agreed amount.

Smaller businesses, because of their limited resources, are not in a strong position to deal with disputes as effectively as many would like to. Disputes are time-consuming and cost a business far more than the amount under dispute. Typically, for every £1 under dispute, a business incurs a wider cost of 94p. These figures represent a significant amount of inefficiently allocated resource that could otherwise be utilised by small businesses to invest, grow and boost business competitiveness.

Research by the Federation of Small Businesses shows that 70% of small businesses have experienced at least one commercial dispute over the period 2010-2015, 72% of which related to payment issues. This equates to 2.4 million small businesses suffering in this way. That 72% is made up of 42% of firms experiencing late payment and 30% experiencing non-payment such as that I have just described. The cost to smaller businesses of this type of dispute is estimated by the Federation of Small Businesses to be around £11.6 billion each year. This is a substantial figure by anyone’s judgment. There are, of course, wider costs, with the FSB suggesting that, based on European Commission research, poor payment practice leads to 50,000 business deaths a year—a figure I found so substantial and surprising that I got the FSB to double check it.

I was therefore delighted when I heard in the Queen’s Speech that legislation would be brought forward to modernise the court system through the courts Bill, which would introduce digital services to allow businesses to pursue their cases quickly, enabling them to recover debts more easily. I hope that this is a reference to the online court and that when drafted the Bill will have an eye to the kinds of disputes that smaller businesses experience and enable them to take full advantage of the new system.

If different procedures are required for disputes deemed to be of differing complexity, complexity should not be judged simply by the size of the dispute, as it is now, when deciding whether a claim is suitable for the small claims court. It is, after all, quite possible to have a dispute over a large sum where the arguments in the case are simple.

A number of other elements would need to be in place in order to give confidence to smaller businesses to use an online court system for dealing with payment or other contractual problems. Any fees need to be affordable and simple. I would like to see a single fee at the start of the process rather than differing fees for different aspects of the process, as currently exists in the civil courts system.

Judgments need to be fully integrated into an enforcement regime that gives a strict timetable for payment, with real teeth to ensure compliance. I would also like to see judges empowered to impose substantial fines on firms which have behaved vexatiously and sought to exploit their dominant position to, for example, force businesses to accept a lower payment than contractually agreed or to impose longer payment terms on them. This will place all businesses, big or small, under the same financial imperative to avoid these types of dispute.

Alongside these changes needs to be a comprehensive information campaign so that businesses fully understand the courses open to them should they be unfortunate enough to find themselves in a dispute. At the moment smaller businesses are not fully cognisant of their options and those which have had some experience of the current procedures are sometimes unimpressed, particularly in relation to ADR where experiences differ widely across the country.

All of us in this Chamber recognise that small businesses are the backbone of our economy and we quite rightly wish to do all we can to ensure the best possible operating environment for them to help them thrive. Modernising the courts system as proposed will be important for everyone who uses the court system but it is smaller businesses that could benefit most from the proposals if they are developed correctly,