Small Business, Enterprise and Employment Bill

Lord Flight Excerpts

Wednesday 7th January 2015 Grand Committee

[Baroness Neville-Rolfe]

I thank the noble Lord for his helpful intervention. Indeed, like him, I feel that we need greater awareness of the potential of GOV.UK and the internet for communicating with business, especially small business, in a much simpler and easier way. That is exactly Matthew Hancock’s intention. The plan is that this website, if it does not do so already, will cover all the sorts of things that you are talking about. Do have a look at it and if you feel there are other things that we should do, I am sure that we can. I am sorry about the parliamentary impropriety of referring to the noble Lord as “you”.

That brings me to a couple of final points. Just last month, which is a year since the publication of Small Business: GREAT Ambition, we announced that we had met a large commitment in that document by launching the Business Growth Service, joining up all of our support available for those businesses that have the right level of ambition, capability and capacity to improve and grow. So we are making progress with this overall and trying to bring together the offer for small business, which I feel is a theme that we will probably agree on in the course of this Committee.

The House can look forward next month to a report by my noble friend Lord Young of Graffham, the Prime Minister’s adviser on enterprise, who will produce his definitive paper on what impact the last five years of government work has had on small businesses in this country. I will ensure that interested Lords receive a copy.

Therefore, while I fully agree with the intention behind the amendments, I agree with my noble friend Lady Wheatcroft that we have enough reports. I do not believe that it is necessary to achieve the outcome that the noble Lord seeks in the way that he has proposed. I hope that he has found some reassurance from my lengthy explanation and is willing to withdraw the amendment.

[Lord Flight (Con)]

My Lords, I first declare an interest as chairman of the Enterprise Investment Scheme Association. This issue falls under the Treasury rather than the BIS, so it often gets ignored in terms of its crucial importance in raising equity capital for small businesses. Once you have the equity capital, you can gear up with borrowing. EIS, under Governments of both main parties, has raised more than £12 billion since it started; over the past three years, the amount raised has doubled in each of those years and is now well in excess of £2 billion for the current year. When the present Government came into power, one of the constructive things that they did was to go back to negotiate with the EU to widen the parameters of the EIS, which had been unhelpfully narrowed during the previous Labour Government. Equity finance for small business is almost more precious than debt finance, and there is a wider range of providers of debt finance now increasingly available. I want to register the point on a BIS Bill in a BIS debate today that the Treasury and the EIS is crucially important for small business.

[Lord Cotter (LD)]

Before we move on, I thank the Minister for her response so far. Within the Bill there is this talk about the annual report and the need for the Government to address the issues in that sort of way. On behalf of the small business sector, I feel that we need to continue to look at issues in the Bill—but also particular issues, to one of which I shall refer the Minister. With the annual report, there is a very serious issue with the small business sector and finance, with regard to late payment to them from big businesses. There is a significant issue there, with 50% of big businesses not paying small businesses on time. I hope that monitoring and reporting back on such issues will be something that is ongoing throughout this Bill.

For example, there is a prompt payment code, which is voluntary—or it has been a voluntary code in the past. I very much hope that as part of the annual report Ministers will agree to look at the code and consider whether it is strong enough and whether it has been implemented enough by the businesses involved and by the Government themselves. Late payment is a serious issue when it comes to finance for small businesses; they should have that money available to invest and employ people in the local area.

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This group of amendments comprises effective, proportionate and very workable suggestions which are good for SMEs and those who wish to see growth triggered through the creation of competitive and properly functioning markets. The Government are to be applauded for trying to tackle this issue but it is clear that the Bill is likely to fall short. I hope that they will give full and due consideration to our amendments. I beg to move.

[Lord Flight]

My Lords, Amendment 5, and its sister Amendment 25, have been tabled on the back of some excellent research undertaken by Grant Thornton in its impact assessment of the Bill. The research focuses on the fact that some small and medium-sized businesses qualify as SMEs for the purposes of the Government’s definition of those qualifying for R&D tax credits, but for the purposes of this Bill they are treated as large companies. The amounts and definitions here are interesting in that the R&D tax credit definition of a small company is one with a turnover of up to €100 million, assets of up to €26 million and with up to 500 employees. I draw the Committee’s attention to the fact that I believe that there is a printing error in the amendments and a pound sign was inserted instead of a euro sign. For the purposes of the Bill, the definition of SMEs is enterprises with a turnover of less than £25.9 million, assets of less than £12.9 million and a maximum of 250 employees.

The number of businesses to which this point relates is 2,851, according to Grant Thornton, with a combined turnover of £151 billion, an average turnover of £53 million and some 30,000 employees. The key point about businesses in this sector, which I will define as small SMBs, is that they have played the biggest and most disproportionate role in contributing to economic growth in this country. They have outperformed small companies and large businesses on employment growth, profitability growth, R&D and capital investment. This group is arguably more important than the very small SMEs that the Bill addresses.

The challenge that we face here comes under two different categories. First, as the Bill stands, small and medium-sized businesses will not benefit from the new provisions for providing access to finance and credit information, although they need this just as much as very small companies. Secondly, they will face increased regulatory requirements and costs arising from the requirement to publish reports on payment practices and the rather more demanding and expensive requirements in relation to the public register of significant ownership in businesses.

When the Bill was drafted, I am sure that the Government cannot have meant it to have the unintended consequence of being positively damaging to the most important entrepreneurial sector in this country. I am equally sure that the noble Baroness, Lady Neville-Rolfe, who I believe when she was a senior executive at Tesco railed against the ever-increasing amount of regulation imposed on business, will not want to see yet more regulation being imposed on small and medium-sized businesses.

In essence, Amendments 5 and 25 insert the R&D tax relief definition of an SME. To press home the point, under R&D tax relief it is inappropriate for small and medium-sized businesses to report on payment practices. Late payment for them is as much an issue as it is for small businesses. Indeed, medium-sized business find that it takes on average 48 days to be paid, against the average across the G8 of 42 days and only 32 days in Germany. In addition, such reporting on payments would be a costly and tedious regulatory requirement on what are still small companies. Amendment 5 deliberately sets a threshold of 499 employees and a turnover of £100 million, in line with the R&D tax credit, and Amendment 25 similarly defines a limit for the purposes of benefiting from credit information and credit facilities.

I put in a plea for the Government to consider these points. The Bill has a lot of virtue; it is there to try and help small businesses. Its definition of small businesses is, unwisely, too small for the purposes of what really matters. Small SMBs are not just equally important but potentially more important than small SMEs to the fortunes of our economy.

[Lord Stoneham of Droxford (LD)]

My Lords, I wish briefly to comment on the amendments, particularly following the comments of my noble friend Lord Cotter, who spoke on this issue of late payments.

Obviously, late payments are invidious. They affect small businesses severely, particularly in terms of cash flow. However, in looking at these amendments, there is a balance that we have to get right. There is a danger, certainly in some of the amendments, that we will overregulate. I refer particularly to Amendment 6, which has a requirement for quarterly reports and indicates that all payments to suppliers made more than 30 days after the date indicated have to be listed in some way, unless a formal query has been made on the invoice. The danger is that if one overregulates, all that will happen is that businesses will be inundated with formal queries as a way of avoiding the reporting.

Also important—if one is going to require all this information to be collated—is the reality that in many sectors balancing the payment of bills, whether we like it or not, sometimes protects the cash flow of certain companies that otherwise could be in difficulty. If this information is made more public in detail, there could be consequences for the management of the credit of those companies. So there are problems of overregulation that could be bureaucratic and inflexible, and could damage the businesses that we are trying to help.

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Moved by

[Lord Flight]

5: Clause 3, page 4, line 14, at end insert—
“( ) it qualifies as a small or medium sized business for the purposes of the Research and Development Corporation Tax relief”

[Lord Flight]

My Lords, I am not quite clear what the Minister was actually offering here, but I should stress that it is clearly completely inappropriate to treat companies with a turnover in excess of £25 million and more than 250 employees as large companies, which is what the Bill presently does. These small and medium-sized businesses are as much the victims of late payment as smaller companies. It is clear—and I trust that both sides of the Committee would agree—that the definition needs changing to an appropriate size, whether by using the R&D definition that fits reasonably well and on which Grant Thornton has done the research, or another definition. However, the SME definition is clearly inappropriate. I beg to move.

[Baroness Neville-Rolfe]

My Lords, I have already responded to my noble friend Lord Flight. This matter will be discussed again, not least under some later amendments. We have listened to what he said but, at this point, I would ask him to withdraw his amendment.

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[Lord Flight]

That is not entirely satisfactory but let us wait for further discussions. I beg leave to withdraw the amendment.

Amendment 5 withdrawn.

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[Lord Stevenson of Balmacara]

My Lords, we have a few amendments in this group and I will speak to just a couple of them. Two of them deal with matters to do with the Regulatory Reform Committee, which I think will be dealt with by the Minister when he comes to respond. The amendments would simply implement the proposals that have not already been dealt with by the previous discussions.

Amendment 19 is a probing amendment. In this set of amendments we deal with the third leg of a three-legged stool that tries to address a set of arrangements around the failure to commit to a financing model for small businesses at the individual level. This is a different attack on the same problem we have talked about throughout the whole of this afternoon: why finance does not flow as well as we would all like to this sector of our economy. The amendment is designed to suggest to the Government that there would be merit if one could extract some lessons from the process, whether or not it also includes the proposals just spoken to. That would add another dimension. We will see how the Government respond to that.

In the context of there being a small business in need of financing, a set of traditional lenders to whom it may or may not have applied, alternative suppliers and others who have expertise and knowledge about that, it would make sense for there to be some lessons learnt from these processes. The suggestion is made in the amendment that the Government might wish to think about providing an annual report to Parliament so that we have a sense of how these things operate. This is to some extent uncharted territory. It may feel like another administrative burden. In some senses, being a probing amendment, the wording is not to be taken at face value. However, this is interesting and new ground. We need to learn the lessons from it and to get the information that we gather out to as wide a group as possible. I hope the sensibility of that would commend it to the Government in some way. I look forward to a response on that.

The converse side of this argument is to be found in Amendment 21. This was slightly touched upon by the noble Baroness, Lady Wheatcroft, who I am afraid is not now in her place. I recognised what she said in her intervention on the last group. We would all be worse off if the credit referencing agencies and those others involved in this stool of three legs that I have talked about were fed information that was wrong. There has to be some means or mechanism for those who feel that the information held on them in these agencies is correctable. The noble Baroness was right to say that this has a sense of the googlisation issue, where you might have the right to correct your own information if you do not like it, but that is not where we are here. We are saying that if it is factually incorrect or in some senses paints a distorted picture, there ought to be some redress mechanism.

There are probably already reasonable direct relationships that could be invoked for that. Of course, there is the Financial Ombudsman Service, which plays a great part in dealing with many issues. I suspect that the people we are talking about in the SMEs, particularly the smaller ones, would find it helpful to have a body like the FOS to which they could pray in aid for help to correct information, question whether information held is correct and iron out any problems. The amendment is there as a suggestion, to the extent that there may even be other systems that would be better able to take this on. If there are not, why should the FOS not be invited to do so? The reason for tabling the amendment was that, in researching this, it turned out that there is a rather low limit for the size of institution that can approach the FOS. It would perhaps be helpful if, as a result of this discussion, the Treasury took this back and looked at it again. It seems wrong to cut off an area that is clearly effective in trying to get things resolved and to get the economy moving and things going. I hope that that is a helpful contribution.

[Lord Flight]

My Lords, as I have already pointed out, Amendment 25 really goes with Amendment 5. Very simply, and hence why it comes up in this section of the Bill, it endeavours to slightly widen the size of SME which can benefit from the provisions on credit information availability by substituting the R&D tax credit definition of an SME for the definition currently pertaining in the Bill.

There is quite an important point here, which is that the crucial measure of the ability of a company to command lending services is really its EBITA. Most companies with an EBITA below £5 million have problems in sourcing capital investment finance. Basically, the argument runs that the definition used for an SME is really too small and that small and medium-sized businesses are in just as much need of assistance in sourcing credit and investment as are smaller companies.

[Lord Newby]

My Lords, I begin by repeating that the Government are completely committed to ensuring that SMEs can access the finance that they need to grow and create jobs. That is why the Bill seeks to build on the progress that the Government have already made on this agenda by bringing forward further innovative solutions to ensure that businesses can borrow and succeed. These include ensuring that alternative lenders can access credit information on smaller businesses to help them make lending decisions, and creating a new process for rejected smaller businesses to be offered the opportunity to use government-designated platforms that will help match them with alternative lenders. I will go through the amendments in turn.

Amendment 18A relates to providing financial advice as part of the finance platform offer. The new process provided for by Clause 5 has been designed to address a specific problem affecting smaller businesses’ ability to secure finance: namely, the evidence suggests that a smaller business will go straight to its main bank when it needs to borrow. If the banks says no, the business will give up its search there in the belief that it is already at the end of the road, as the noble Lord, Lord Mitchell, pointed out when we discussed an earlier amendment. However, alternative sources of finance for smaller businesses are coming on stream all the time.

The new process will address this problem by requiring banks to offer businesses that they reject for borrowing a new option alongside making an appeal or going to see a broker. To be clear, going to designated platforms will be a route that rejected businesses can take alongside or in tandem with existing avenues available to them, such as seeking professional advice. It is right therefore that the platforms process remains focused on addressing the issue of access to finance, which is where the real problem is. Of course, platforms will also be able to add additional services on top of the minimum legislative requirements—the Government want to give platforms freedom to compete with each other to offer the best possible service. My noble friend will therefore be pleased to know that the Government’s discussions with the industry have indicated that the majority of providers interested in securing designation intend to support advice for businesses as part of their value added services. However, we do not believe that adding the specific amendment that he suggests is something that we should contemplate at this point.

Amendments 19 and 24 relate to parliamentary scrutiny. I hope that noble Lords will be reassured by, and be happy about, the government amendments that we have just debated, which accept the recommendation of the Delegated Powers and Regulatory Reform Committee to move to the affirmative procedure. The only thing I would say about Amendment 19 is that, in speaking to it, the noble Lord said something slightly different from what the amendment says. The amendment says that the Government should report on the number of times the regulations are used within a year. It does not say that it should be a broader report of the sort that he suggested in his speech. It is unlikely that these provisions will be used many times in a typical year, and the very fact that they will now be dealt with by affirmative resolution means that Members of both Houses will have a much clearer sense of exactly what has happened in any given year, because those who are interested in them will have been debating them.