Micro-Businesses

Jeremy Lefroy Excerpts

Wednesday 25th January 2012 Westminster Hall

[Anne Marie Morris]

My hon. Friend makes a very good point. Such businesses need the freedom and flexibility to do what entrepreneurs do extremely well. Her intervention is absolutely en pointe.

Turning to the UK, I am pleased that the Government have introduced a three-year exemption on new regulation, and they are to be commended for that. The real challenge for the EU and the Government is what do we do about the pages and pages of existing regulation. The Government have introduced the red tape challenge, and I commend them for that. They have already looked at 12 sectors, and there are five more to come. I believe that they will report in three months or so, which will be valuable. Will the Minister adopt the EU mantra, “Think Small First” when he considers what can be got rid of? The EU has also gone through a simplification procedure on a number of occasions, but at the end of the day, we need to move faster and further.

The Minister has already looked at one area that needs further review from the perspective of micro-businesses: employment law. The British Chambers of Commerce has raised the issue with Ministers and in its various reports, but recruitment and dismissal procedures are onerous for very small businesses. No one wants to take away an employee’s rights, but the overall protocols and processes are complex. The second issue that small businesses have raised with me is health and safety. Lord Young has done some valuable work, and I look forward to it being implemented so that low-risk businesses can be excluded from much of the burdensome regulation and a more pragmatic approach is taken to those in higher-risk categories.

Still under the heading of regulation, I want to raise some issues about taxation. Paying less tax is clearly something that we would all be happy about, but it is the burden of the process that causes real pain for very small businesses. First up is fuel duty. I would, wouldn’t I?—I have been approached by a number of small businesses—plead with the Minister not to implement the fuel duty rise in August and to look again at a price stabilisation mechanism, because that would make the cost of petrol affordable and predictable for the smallest businesses. Both things are equally important.

Turning to national insurance, the Government have a good record on the rate and the holiday that they introduced for new businesses, so that they would have relief from employer national insurance for their first 10 employees. I suggest that we could allow mini-micro businesses—we have so many definitions on the table at the moment, but those with fewer than five employees—who take on up to four employees, so those with a total work force of four, not to pay employer’s national insurance for the first year, although employee contributions would stay in place. That would enable them to assist with the cost of the training and general upskilling of those new employees.

The group employing one to four employees represents 7% by turnover of the private sector, so it is not a small group for which I want to the Government to provide support. They are already considering the challenge of aligning PAYE with the national insurance regime, and I look forward to the results. May I encourage the Minister and his Cabinet colleagues in the Treasury to look at simplifying the classes, because there are so many that the average bookkeeper is totally confused?

I turn now to business rates. Again to the Government’s credit, they extended the small business rate relief and said that the scheme they were introducing would apply for a further year. I suggest to the Minister that that becomes a permanent feature, or lasts at least until the end of this Parliament. It is valued by small businesses, and that really would make a huge difference. However, business rates give rise to process issues, the first of which concerns valuation. Why do so many of the large business players, such as Tesco and Sainsbury’s, seem to be paying less than the smaller players? There is something wrong with the way in which the valuation criteria work, and they might sensibly be reviewed. I am often approached by small businesses that believe that they are suffering hardship and are frustrated by the appeals procedure. It is so bureaucratic and takes so long from start to finish that generally they are out of business by the time that they have finished the process, which simply cannot be what the Government intend.

My final point on business rates concerns empty properties. I accept that an incentive is needed to bring such properties back into use, but allowing six months, or three months for retail, to do so is not long enough, and the penalty for leaving them empty longer than that is disproportionate.

I turn now to VAT—a tax that is necessary and without which we would not be able to take this country back into the black. None the less, it has some wrinkles that the Minister and his Treasury colleagues might helpfully look at. We have on a number of occasions talked about the possibility of reducing rates for restoration and repair of houses, bringing the rate down to 5% rather than the full 20%. It seems to me that, given the pressure on the Government to increase the available housing stock, now is the time to look at that again.

Colleagues have considered a reduced rate of 5% for the accommodation charge for bed and breakfast and in hotels. Given that this is our Olympic year, why do we not set the rate at 5%, just for this one-off tax year, and let it be part of our marketing campaign to get people to visit the UK and enjoy the Olympics?

Perhaps one of the biggest challenges is the VAT cliff: once a business is earning £73,000, it has to register for VAT, and if it provides services to individual customers who are not VAT registered, the increase in profitability that it has suddenly to achieve is significant. I suggest that we look at introducing a ratchet mechanism or a VAT rebate, which will ease the situation so that the full force of VAT does not affect the business in the first year.

[Jeremy Lefroy (Stafford) (Con)]

Does my hon. Friend accept that in some cases the VAT threshold—the cliff edge—acts as a disincentive to growth?

[Anne Marie Morris]

My hon. Friend makes my point extraordinarily well. It prevents growth, and if we can find a way of easing the burden, that would be well worth while.

My final point on VAT concerns the enforcement challenge. Only last night a small business came to me saying that it was one week late with its VAT and had been asked to pay £955 as a penalty on an original bill of £6,370. Clearly, we want people to pay, but that business was only a week late and the penalty seems disproportionate.

The third issue is access to finance. The challenge is how to make better use of what we have and how to find new sources and new organisations to provide money to very small businesses. Under the existing arrangements, the problem for the banks is that they are in a cleft stick. Given the capital adequacy requirements, if they offer a loan to what is inevitably a risky start-up business, they have to do so at very high rates, so the loan might not be accepted. Can we consider capital adequacy adjustment for the banks—just for loans to micro-businesses, not for the rest? The Government schemes to provide equity, debt and so on are aimed at the whole SME community, ranging from those with no employees to those with 250. Banks are in business to make money and are targeting most of their help at the larger businesses with good, clear business plans and a track record. We need some ring-fenced schemes specifically for micros. The Minister might like to consider that with his Treasury colleagues when we get to credit easing.

The Government are consulting on new sources of finance until the end of this week. The Federation of Small Businesses has looked at other sources of funding and will share its findings with the Government. I recommend that the Government look at what is going on in central and eastern Europe, in Asia and in south America—countries that have more experience than we do of different funding mechanisms.

I have an additional suggestion. One of the challenges faced by most small businesses is that, when they start up, they cannot separate the risk and the liability of the business from personal assets and find themselves having to mortgage their house and give personal guarantees. Can we not consider extending the limited liability partnership?