Small and Medium-sized Enterprises: Government Policy

Earl of Erroll Excerpts

Thursday 17th June 2010 Lords Chamber

[The Earl of Erroll]

My Lords, I thank the noble Lord, Lord Sugar, for introducing the debate, especially as I am chair of the All-Party Parliamentary Group on Entrepreneurship. I endorse the comments made by the noble Baroness, Lady Gould. There has been a series of events over the past couple of years concerning enterprising women and entrepreneurship. It is interesting to see that some of the things which are perceived as women’s issues are generic to everyone. However, some barriers exist, and a lot of it is due to people’s mindset. Being married to a highly enterprising woman, I have certainly encountered people who see her as a “little blonde”. Someone said to her on a building site the other day, “Goodness gracious, you do know what you’re talking about, don’t you?”, when the job in question was being made a complete mess of.

One of the reasons why I am very interested in this area is that, to me, SMEs are the country’s engine of growth and innovation. The successful SMEs get larger, and larger companies, which tend to rationalise and downsize, swallow them up, which gives the entrepreneurs money to start something else. Big businesses rationalise and downsize SMEs to try to make themselves more efficient. SMEs are not necessarily the most efficient organisations because they are concerned with getting the job done and with growth. Therefore, they do not have time to get involved with tons of regulation and risk.

I wish to break up this subject into four areas: regulation, finance, mentoring and incentive. A lot of what I intend to say applies to all small and micro businesses. They are not all entrepreneurial; many of them are sole traders, one-man bands, but they all have similar characteristics. I often hear it said that about 3 million people are employed in these businesses. That is a very large slice of the taxpaying population and we disadvantage them at our peril. Many of these bodies are not incorporated; they are not limited companies. Therefore, many of the breaks available to limited companies do not apply to them.

As regards regulation, these businesses are terrified of inspections, with all the HSE issues. They may not be aware of all the regulations in relation to their VDUs, offices and the disabilities Act, but they are meant to be complying with them. What is worse, they do not know what it is that they do not know. As regards contracts of employment, they may not be able to write an acceptable use policy for computers. They may not know their rights regarding monitoring and what they should put in place to protect themselves should inappropriate material be sent out via their e-mail address. All sorts of issues arise that small businesses may not be aware of. Moreover, the staff are concentrating on running the one thing on which they are expert.

As a result, people such as my wife who would have expanded their businesses to a far greater extent do not dare risk employing people in order to do so. They do not know whether they will say the wrong thing when conducting a job interview and be sued. That is very easy to do. You do not take someone on to become an extension of the social services; you take them on to work for you and to help you try to build a business. You are told that certain exemptions apply to companies that employ below a certain number of employees, but does that refer to head count or full-time equivalents? If you are a sole trader and you employ someone to do the garden or help clean the house, are such domestic employees included in your head count of employees, even if they are non-business staff? Where will you find out that information? It is too detailed. The procedures for getting rid of someone who does not fit in or do the job are totally inhuman. If they have a problem such as depression and the employer sends them an official letter, what is the first thing they will do? Will they commit suicide? Do you really want to do that to someone? In a small business, you are living on a far more personal level with these people. The procedures laid down by civil servants sitting in large offices just do not work in small businesses.

I entirely agree with what the noble Lord, Lord Sugar, and everyone else has said about procurement. The unintended consequences worry me. For example, the Equality Act says that the Government will drive the equalities agenda by government procurement throughout the supply chain. That is a clear intention. That could wipe out small businesses further down the supply chain. How many small businesses can, or know how to, tick the relevant boxes on equality, climate change, energy, sustainability and all the other bits and pieces and conditions that you are expected to fulfil on a government procurement contract? As the noble Lord, Lord Taylor, said, you cannot get on a government procurement list if you cannot tick the boxes. I think that the noble Lord, Lord Sugar, also mentioned that, and it has been referred to by several other noble Lords. The trouble is that the Civil Service perceive risk as not ticking boxes; it is not about failure. They say, “If you don’t have 14 months of accounts, you are probably not secure enough”. The Government have lost a lot more money with the failure of large systems integrators on the NPfIT, the Rural Payments Agency and several other large contracts than they will ever lose from a few small contractors going out of business. It would be a lower risk to get small innovators in there and to stop wasting huge fees of up to £9,000 per day on consultants who have no incentive to conclude a contract.

A lot of finance for start-ups comes not from banks but from friends and family. People do not really know what to do at this level. There are one or two business angels, but you have to know them personally. Sometimes the Government step in competently in some areas where people are better organised. The Welsh Assembly Government and Finance Wales have helped several people I know to get off the ground and become established there. There is a long way to go, but it is worth it, and there are some good set-ups. It is sad that, in certain other places, RDAs have not been able to emulate that, but it may help local areas.

The Government’s tax regime makes life difficult for cash flow. If you have a really good year, you will have to pay up front half the tax on next year’s possible profit, and that hits your cash flow. If you then want to invest, perhaps in equipment, you will not have the spare cash to do so. It is not taken off your tax in its entirety in the first year. In your first year, you will save only the tax percentage of the depreciation due that year. If your tax rate shoots up to 40 or 50 per cent, it will take you much longer to repay the capital loans that you have put into your business. This happens in any business. You do not think about doing it. It makes such investments uneconomic.

Then, the Government do things like proposing an extra eight days’ holiday. That is equivalent to a sudden 3.5 per cent pay rise. What will you do when these people are not working? You suddenly have to bridge the gap, because you no longer have people to do the accounts. How do you employ someone for half a day a week? Sometimes there are many unintended consequences of measures such as this.

We have talked about the banks. There was a big issue over rebalancing the balance sheet and calling in well secured overdrafts. The banks left the dodgy companies alone but called in the overdrafts of people who were well secured. That bankrupted a few businesses. As for the “know your client” rules and foreign investors, I have been involved in development and I know that it always runs late. People will suddenly need a cash injection and foreign investors, who are sometimes ex-pats who have made a lot of money, may be willing to take a small risk for £10,000, £20,000 or perhaps more. Have you tried to get money into a company in such circumstances? Perhaps you are setting up a new company with a foreign investor and trying to get past the “know your client” rule. I have seen companies go bust while waiting eight weeks or more, which is normal. Does that really prevent money laundering, as it is supposed to? Of course it does not.

The Government should invest heavily in infrastructure. We must have a good IT infrastructure if small businesses are to flourish from wherever they start. They are situated all over the place and are frequently not in town centres.

Mentoring is vital. Enterprise UK, the Chartered Management Institute and the Worshipful Company of Information Technologists mentioned to me that they have helped in this area. I highly recommend that noble Lords look at what these organisations have done. Many entrepreneurs are visionary. The trouble is that they often do not know how to run things. You need someone who knows how to dot the “i”s, cross the “t”s, talk to the bank and put together a business plan that has roots in reality somewhere down the line. That is difficult. I am delighted that Business Link has taken a huge turn for the better. Its image was that failed business people tended to end up there. It is wonderful to hear that it is getting better.

At the end of the day, this issue is all about incentives. It is sad that we have a tax structure that forces our highly successful people to go abroad into tax exile while we are a tax haven for other people. The answer is not to tax the foreigners but to have a favourable tax regime whereby our successful people can stay here to redistribute their wealth locally. That will boost employment and diversify skills. Such people do not sit on their cash; they either reinvest it or spend it. That employs more people. If you want to get the economy going quickly, allow people to keep some money. The Government will employ people on the big, heavy stuff and for the box ticking and paper pushing. Entrepreneurs who make money will spend it on other things—skills and the arts, including craftsmen and high-value people, and not the cheapest possible labour.

Finally, there are two other types of business. Some people are building lifestyle businesses, as the noble Baroness, Lady Gould, said, while others are building up businesses to sell and restarting again. Make sure that you let them keep their money so that they can restart here.