Small Shops Regulation

Andrew Smith Excerpts

Wednesday 2nd November 2016 Westminster Hall

[Craig Mackinlay]

There is a ratchet effect. One at a time does not seem too bad, and individually these regulations are often imposed for good reasons, but when they are put together as a framework for how small businesses and retailers have to operate, they become a true minefield of problems.

Adding to that minefield, small retailers face the new burden of pension auto-enrolment for their staff. I have no criticism of the Government’s great ambition: auto-enrolment is essential so that people can build their own retirement funds in excess of the state pension. The roll-out thus far for larger business has been successful—I am a member of the Select Committee on Work and Pensions, which has looked at that—but for the smaller employer, and notably the smaller retailer, I have asked for a free software tool that overlays the freely available real-time information software for payroll management, and HMRC has steadfastly refused.

It is good to note that the latest figures, published just last week, show the greatest ever increase in the salaries of the lowest paid due to the rise in the minimum wage. However, for smaller shops there are concerns that as hourly rates increase ahead of inflation in the years to come, the owners of these businesses might earn less than the staff they employ.

Of all tax and regulatory reforms, business rates relief has been the most welcome among smaller businesses. There has been small business rate relief, charitable rate relief, rural rate relief and enterprise zone relief. However, because of the high value of business premises in London and the south-east, new valuation assessments are in some cases creating huge increases to the business rates of businesses that are already paying higher salaries.

A real problem on the horizon that is causing much concern to the Institute of Chartered Accountants in England and Wales, the Chartered Institute of Taxation—I am a member of both—and, I am sure, the other accountancy institutes is the proposed roll-out of Making Tax Digital. If the underlying desire is to advance tax cash flows to quarterly, the Government should simply say so. People go into small business to run a business and earn a profit. They do so for aspiration and lifestyle reasons, not to spend time complying with additional administrative burdens. The Making Tax Digital programme should simply be scrapped until HMRC can prove itself capable of dealing with existing workloads to an acceptable standard. It should at least start with bigger businesses—those above the VAT threshold—that are more able to cope.

Adding together the last few years of real-time information, in which businesses have to provide monthly returns for payroll, and the software costs of auto-enrolment, and now Making Tax Digital, the Federation of Small Businesses estimates the compliance cost in software and professional support to be £3,600 per business per year. That is some way in excess of the well received employment allowance of £3,000 a year that every business can claim against its national insurance contributions.

Finance raising continues to cause difficulties. We have seen the welcome expansion of new forms of lending driven by the internet, such as peer-to-peer, but banks remain cautious, requiring guarantees and often over-zealous security coverage requirements. The reality is that family and friends are still often the primary source of seed financing. In February I obtained a written answer from the then Financial Secretary to the Treasury, my right hon. Friend the Member for South West Hertfordshire (Mr Gauke), about the take-up of the seed enterprise investment scheme. I learned that the amounts raised nationwide were extremely and worryingly low: just £168 million for 2013-14. I will not go into the flaws in the seed EIS application process or HMRC’s labyrinthine rules on getting such applications approved, but it is clear to me as a chartered accountant and chartered tax adviser that we need a lighter-touch regime to encourage more of the “friends and family” type of investment.

For many of our shops, which are often located in historic town centres, planning regulations can prove a barrier to sensible growth and plans for the future. We have the rather daft situation in which a conservation officer in one local authority will have an entirely different view from a conservation officer in the authority next door. That adds to uncertainty and costs.

Government Departments and local authorities have large procurement budgets, but bureaucratic rules still exist, particularly on contracts over a certain size and when EU procurement rules come into play. Those rules make it close to impossible for smaller retailers and businesses to even consider facing the cost and complexity of applying for lucrative bids.

My hon. Friend the Member for Bury North (Mr Nuttall) mentioned cigarettes. I have been working closely with the Tobacco Retailers Alliance and the National Federation of Retail Newsagents on the issue of illicit tobacco. For many shops, tobacco sales drive footfall and lead to other sales, but the Tobacco Manufacturers Association suggests that because of the increasingly draconian rules on tobacco sales, plain packaging, hidden counters and the tobacco taxation escalator, 30% of UK smokers now buy from illicit sources. That is hardly surprising when a packet of cigarettes costs 50p in the Ukraine and still hovers around the £2.50 mark in much of eastern Europe. Local retailers are losing not only turnover from tobacco sales, despite the low margins, but other turnover through lost footfall.

[Mr Andrew Smith (Oxford East) (Lab)]

I congratulate the hon. Gentleman on securing this important debate. I agree with the thrust of his argument and with his specific point on illicit tobacco sales. Is he aware that his debate is well timed because it coincides with the excellent “Freedom from Fear” campaign by the Union of Shop, Distributive and Allied Workers, which is aimed at protecting shop workers from abuse and assault? Does he agree that small shopkeepers and their staff are all too often in the frontline of such attacks and that stronger deterrent sentences are needed to protect them?

[Craig Mackinlay]

Just last week in Ramsgate, I invited the Kent police and crime commissioner to a retail crime forum to address that very point. It was quite worrying how many small shopkeepers in the room had suffered attacks in the last year or burglaries of what is often very high-value stock. Consideration could be given to tax incentives to encourage small shopkeepers to beef up their security, not only for themselves but for their stock. The right hon. Gentleman’s point is very well made.

A Ramsgate newsagent who came to my crime forum last week estimated that his turnover is down £150,000 per year because of illicit tobacco sales. That is happening on every shop on every high street. It means less taxation on what is an entirely legally derived profit, and it means a vast cash windfall for illicit tobacco traders. HMRC estimates that the loss to the Exchequer is £1.8 billion per year; the TMA estimates that it is closer to £2.4 billion. We need a grown-up debate about the taxation of tobacco, because we have reached a tipping point that is promoting unregulated, potentially dangerous purchases of unknown tobacco products. That completely flies in the face of what are sensible anti-smoking public health measures.

I will finish a little off-key, on the issue of insolvency, on which I have listened to many smaller businesses, including retailers. Hon. Members may have to listen carefully, because the chain is quite complex. When a primary contractor in a supply chain fails, having not been paid by the head client, the insolvency practitioner who is appointed will seek to recover the contract value from the head client, but that usually comes with a negotiated settlement of contracted amounts. That leaves the smaller participants down the supply chain unpaid, and we often see a domino effect of failure and insolvency through that supply chain.

There is a sizeable business in Broadstairs called Blaze Signs. Members can guess what it makes: yes, signs. It is a substantial local employer with a substantial local workforce. It makes 20-foot high signs for Marks and Spencer, Sainsbury’s and McDonald’s—huge signs that can be seen from a few hundred yards away. On the failure of the primary contractor in the chain, Blaze Signs has been left completely unpaid, despite its signs having being delivered and erected, because the insolvency practitioner has sought payment from Sainsbury’s, M&S or whichever company is at the top of the chain.

We need to give some consideration to a technical change to Insolvency Act 1986 rules. In the instance of unpaid bills at the top of a supply chain, where there are identifiable elements further down the supply chain supplied by participants who have been part of that final unpaid contract, the rules should be changed so that the payment bypasses the failed company in the chain and the smaller participants receive their money for goods properly supplied. That would almost be akin to putting a Romalpa-type clause on a statutory footing.

I am confident that the Government fully understand the challenges that smaller retailers and businesses face. I seek the Minister’s reassurance that the commitment to deregulation will continue and that the old mantra of “one in, two out” is realised. I will be pleased to hear from her how we can improve the business environment in this country still further.

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Margot James)]

It is a pleasure to serve under your chairmanship, Mr Gray. I congratulate my hon. Friend the Member for South Thanet (Craig Mackinlay) on securing this debate on small shops regulation. He has brought his detailed knowledge of and passion for retailers in his constituency to the attention of the House, and they are fortunate to have such a champion.

As someone with a business background, I am acutely aware of the impact of regulation, which not only imposes costs on businesses but often diverts resources from more productive activity. As we heard from my hon. Friend, small shops play a unique role in the fabric of British social and economic life; he cited several statistics from the “Local Shop Report” organised by the Association of Convenience Stores that really explain the benefit shops bring to our high streets. Small shops are the lifeblood of any community.

I agree with my hon. Friend that it is easier to regulate than to deregulate. I am finding that in my new role, and I might add that I am constantly vigilant against that instinct. We are recognised as a world leader in deregulation. Over the last Parliament we delivered savings to business worth more than £10 billion through what was then the one in, two out initiative. That made a real practical difference for small shopkeepers through, for example, reduced audit requirements and the simplification of health and safety requirements.

We are committed to delivering a further £10 billion of savings in this Parliament through deregulation. For the first time, that target will include changes in national regulators’ policies, as well as laws. For instance, we are working with the Financial Conduct Authority to review the way we combat money laundering. I hope that that will deliver more effective controls on criminals and simpler financial services for small businesses, including retailers. We are making good progress against our new target, and have made almost £900 million-worth of net savings through the measures already implemented since the last election.

Deregulation is of course only one part of easing the burden on shopkeepers. We are trying to create one of the most internationally competitive tax systems, which is why we have complemented the national living wage with radical tax reforms to boost the take-home pay of the lowest-income workers. But, of course, we need to help employers to put all this into action, so we are cutting taxes and employer national insurance by increasing the employment allowance and reducing corporation tax. The increase in the employer allowance from £2,000 to £3,000 will benefit up to half a million employers and mean that a business, such as a small retailer, will be able to employ up to four people full time on the new national living wage without paying national insurance contributions.

As well as earning a proper wage now, it is vital that people save for their retirement. My hon. Friend mentioned the issues relating to auto-enrolment. So far, more than 6.7 million people have been automatically enrolled into a workplace pension by more than 250,000 employers. We understand that small employers may find complying with automatic enrolment challenging, which is why the Department for Work and Pensions and the Pensions Regulator are working to make automatic enrolment as straightforward as possible for them. For example, as part of that work, the Pensions Regulator has launched an interactive step by step guide on its website—I think my hon. Friend mentioned it.

[Mr Andrew Smith]

Will the Minister respond to the very sensible proposal made by the hon. Member for South Thanet (Craig Mackinlay) about software that will help small shops to cope with auto-enrolment?

[Margot James]

I thought that was a good idea. I am obviously not a DWP Minister, but I shall write to the Minister responsible, mentioning the idea proposed by my hon. Friend the Member for South Thanet. It seems like one of those simple steps that the Government could take to facilitate an improvement.

My hon. Friend spoke about insolvency. Of course, sometimes, no matter how hard people try, businesses unfortunately fail. That can be very difficult to live with, particularly when a small business fails as a result of the ripple effect from an insolvency further up the supply chain. The law already allows for retention clauses to be enforced in the event that a customer to whom goods have been supplied fails and those goods can be recovered. My hon. Friend suggested that any money subsequently recovered from the “head client” by an insolvency practitioner should be shared down the supply chain to particular suppliers. It is, though, a basic principle of insolvency law that unsecured creditors should be treated equally.

There is a narrow range of exceptions to that principle, but any extension to those exceptions could prejudice the interests of other creditors in an insolvency, who may also be small businesses. The regime has to balance the interests of many different stakeholders, including lenders, employees and suppliers. Returns to creditors can be improved by ensuring that the insolvency process is as efficient and cost-effective as possible. To that end, I am pleased to say that a new set of insolvency rules for England and Wales will come into force next April, which will further reduce the costs of insolvency by removing some of the unnecessary regulations and driving the increased use of technology.

On the business environment and tax, I reassure my hon. Friend that the Government are committed to creating one of the most internationally competitive tax systems for small businesses. Earlier this year, Her Majesty’s Treasury made the Office of Tax Simplification permanent. The OTS will advise the Treasury on how to further simplify the tax system. This year has seen the biggest ever cut in business rates in England, worth £6.7 billion. Some 600,000 of the smallest businesses, many of which are retailers, will not have to pay business rates again. Although there have been fluctuations in the annual investment allowance, it is now at its highest ever permanent level. We have announced that we will cut the rate of corporation tax to 17% by the end of the Parliament.

My hon. Friend said that there was a great deal of disquiet among small retailers in his constituency about the programme to make tax digital. I have heard such disquiet in my meetings with the Federation of Small Businesses and discussed it with the Financial Secretary to the Treasury. There are some signs of progress. There is no chance of the programme being rowed back or changed radically, but the Treasury is consulting on changing the threshold and removing unincorporated businesses entirely. It is also consulting on delaying its introduction for one year for businesses of a certain size, and there is even the possibility of some financial support for very small businesses. So the Treasury is listening. I think the consultation deadline is fast approaching, so I urge my hon. Friend to make haste in contributing his views on behalf of his local retailers.[Official Report, 3 November 2016, Vol. 616, c. 1-2MC.]

As we have heard, the trade in illicit tobacco robs small shops of the income they deserve, in addition to causing a tax loss for Government. In 2015-16 we lost £2.4 billion-worth of revenue because of that illicit trade, so I thank my hon. Friend for his work to counter it. In March last year, the Government published a refreshed strategy called “Tackling illicit tobacco: From leaf to light”, which outlines how we will continue to target, catch and punish those involved in the illicit tobacco trade. By joining up all interested parties throughout the Government and leading the way in the international fight against illicit tobacco, more than 3.5 billion illicit cigarettes and more than 599 tonnes of hand-rolling tobacco have been seized in the past two years alone.

In conclusion, I thank all the right hon. and hon. Members present for their excellent contributions to the debate. Small shops remain a crucial part of our local and regional economies, creating jobs and injecting billions of pounds into our economy. I am passionate about supporting the sector—indeed, I am chairing a round-table of retailers this afternoon—and want to see it flourish. I thank my hon. Friend the Member for South Thanet again for securing this important debate.

Question put and agreed to.