Lord Mendelsohn
Main Page: Lord Mendelsohn (Labour - Life peer)Small Business, Enterprise and Employment Bill
Lord Mendelsohn Excerpts
Lord Mendelsohn
“( ) For the purposes of this section and section 16, a system for streamlined company registration is a system which ensures that company incorporation and tax registration is approved on the same occasion.”
Lord Mendelsohn (Lab)
My Lords, the purpose of Clause 15 is to set a timetable to streamline the process for companies to incorporate and register for corporation tax, VAT and PAYE online without having to provide the same information repeatedly. The aim is for this to be done “by electronic means”, as defined in Section 1168(4) of the Companies Act 2006—that is, to be able to be,
“sent … and received … by means of electronic equipment for the processing … or storage of data, and … entirely transmitted, conveyed and received by wire, by radio, by optical means or by other electromagnetic means”.
Our amendment, somewhat modestly, adds a target that is desirable and deliverable. Our amendment sets the goal of ensuring that this system should be delivered to make it possible not only to enter all the data required for all the tax and registration requirements at the same time but to ensure that approval for company incorporation and tax registration is provided at the same time. We are pleased to support this clause, as it meets the objectives of reducing burdens on business and encouraging the adoption of new technology and the delivery of more public services digitally.
As an element of policy to support small businesses, the proposed measure is useful, although I doubt that it will be transformational. However, I think that the measure is to be commended because of what, in a sense, it stands for: first, that where we can make it better to establish, grow or develop small businesses, the Government should help—the Government can do more to simplify regimes, even efficient ones, and we think that this is a sensible step; secondly, that the Government must do what they can to act in a way that serves all types of businesses. As a big organisation, government struggles both to have the right horizon and to be sufficiently adaptable to meet the needs of small businesses.
This amendment puts a large stake in the ground. I am sure that the Minister could tell us how many officials in her department, prior to the introduction and design of this Bill, dealt with small businesses versus the number who dealt with, say, the automotive industry. I do not wish to diminish support for the automotive industry, but I am sure that the disparity in numbers says something about the extent to which the department is sufficiently able to appreciate the nature of the main drivers of employment and growth in the private sector economy and how to get the right feel for, and approach towards, legislation and regulation.
We share the ambition to make Britain the best place in the world to start and grow a business. When Labour left office in 2010, Britain was ranked by the World Bank as the easiest place in Europe in which to set up a business. In fact, it was ranked the fourth easiest place to do so in the entire world. I say that not to make any partisan point but to stress that we are all committed to progress on support for small businesses. So it just has to be right that, rather than inputting the same data several times to incorporate and register for taxes, a new company should be able to provide the information just once, digitally, to incorporate with Companies House and to register with Her Majesty’s Revenue & Customs for corporation tax, VAT and PAYE.
The Government’s case is that Clause 15 uses a statutory target to demonstrate, in the strongest possible terms, the commitment to improve the current system and to ensure that it is given the highest priority across government to deliver a solution as quickly as is reasonably possible. I am bound to say that, although we support and understand that, it is rather disappointing that this is not just done but needs legislative support.
I would be grateful if the Minister could reassure us by providing some details on the planned delivery of this measure. For example, given that this is a technology project and given the Government’s record on the delivery of IT projects, it would be useful to know which department will lead the project management and delivery of the work. Will there be a joint procurement and management team? What has been the engagement and market testing with the business community? What expertise is being assembled or commissioned to help with its design?
Also, does this commitment only extend to the development of tools for computer-based formats, or is it pioneering and embracing mobile and tablet devices? Could we get some idea of what we can expect from the reporting procedures between now and 2017? What progress should we expect by, say, March 2016, and what steps will businesses see between now and then? I am sure that, as with any similar project, there are already ideas of what the milestones will be. After all, how could the 2017 date itself be established without them?
While I know that the Minister’s colleague in another place was reluctant to be drawn on details, I wonder whether the few months between his comments and our deliberations have allowed more details to be forthcoming. The Minister in another place said:
“I want us to be able to deliver a complicated IT project. Government IT projects are difficult enough to deliver on time without having to hit a description written in Hansard of what we now expect to happen”.—[Official Report, Commons, Small Business, Enterprise and Employment Bill Committee, 23/10/14; col. 231.]
I need hardly remind the Minister of the useful advice of Dr Martin Read, with whom she served in the Government’s Efficiency and Reform Group. Martin Read, an outstanding IT leader and businessman, had previously looked at IT procurement and delivery in government and given some excellent advice, which I hope the Government will follow in the delivery of this project. However, to indicate that they are entering into a project without any sense of desired outcomes, costings, budgets and timings—and especially contracting and project management—would suggest that they did not really heed his advice. It is pretty hard to believe that this is a blank piece of paper and I would be grateful if the Minister would provide us with the courtesy of just some morsels of information.
Finally, in relation to the duty to report, I would be grateful if the Minister would clarify how, when, and hopefully what, it will cover. Crucially, will it cover problems in delivery and will it be possible for it to restate timetables, both positive and, potentially, negative? Interestingly, this measure does not provide enabling powers to facilitate the delivery of the targets and the Government have said that, if they identify the need for such powers, this will be dealt with through another legislative vehicle. I would be grateful if the Minister would set out the Government’s thinking on this and if he would illuminate for us where they might anticipate that such powers may or may not be needed in the future. I beg to move.
Lord Popat (Con)
My Lords, I thank the noble Lord, Lord Mendelsohn, for this very important amendment. I understand his desire to bring speed and avoid duplication of any kind, but I will just go through the reasoning on why this would quite often be difficult. The streamlined company registration is designed to save businesses time, money and effort when registering their details for company incorporation and tax registration. This means that businesses will not need to provide the same information on multiple occasions to incorporate a company with Companies House and to register for VAT, corporation tax and PAYE with HMRC.
Amendment 33B would require company incorporation and tax registration to be approved on the same occasion. There would be some difficulties in doing this, but I am pleased to assure the noble Lord that we would face a whole number of issues in incorporating his amendments. The amendment could be interpreted in two ways: that the incorporation and tax registration are approved at the point when the application is made or that the business would have to wait until the completion of both incorporation and tax registration to receive confirmation.
To deal with the first point, incorporation and tax registration cannot be delivered at the point that the noble Lord, Lord Mendelsohn, mentioned, when the application is made. First, there are processes that need to happen sequentially before all obligations have been met. Incorporation for a company at Companies House is the start of the process before a company can register for corporation tax, PAYE or VAT. Secondly, assurance checks need to be made to prevent fraud. HMRC and Companies House have strong existing processes to counter fraud, which will continue to apply under the new system. HMRC is currently unable to process these assurance checks in real time because they require analysis of intelligence and cross-checks with other HMRC systems. These processes are not automated. However, security aspects will be considered throughout the implementation of this project. HMRC will continue to use expert knowledge and organisational learning to fraud-proof its processes and systems through continuous improvements to system controls and checks.
To deal with the second point, although a single response could be given to customers to inform them of the completion of incorporation and tax registration, this would have to be done at the end, rather than at each stage of the process, which we think would result in a poor customer experience. We believe that keeping customers informed on the progress of their registration and supplying information as it becomes available will enable companies to begin doing business while the process is still in train—for example, by opening a bank account as soon as incorporation is complete. That will also help to generally enhance the customer experience.
The noble Lord, Lord Mendelsohn, mentioned the history of failing to deliver extensive IT programmes and asked how this will be different. The Government have made significant improvements to the way in which IT projects are managed and delivered. This project will be developed using a build, test and deploy approach, which avoids costly errors and the pursuit of inappropriate solutions. That approach is widely used and was successfully used in the development of GOV.UK and new transactional services which have delivered significant improvements for citizens and businesses. That is a major project that is currently taking place.
The other question raised by the noble Lord, Lord Mendelsohn, was what progress would be made by the time of the first report in 2016. It is premature to say exactly how much progress we will have made by the time of the first report to the House. The immediate next step is to begin detailed engagement with a wider range of businesses and stakeholders to refine the delivery options. That will include new businesses and those thinking of starting a business, as well as professional and representative bodies. As a minimum, by 2016 we expect to have developed a working prototype designed and tested with a set of core businesses with a programme of wider engagement which will give us the feedback required to develop the final product. At all times, the focus will remain on ensuring that the end solution will meet users’ needs in the most cost-effective way.
The first thing that people who want to set up their own business from home or from any commercial premises need to do is to register their company. That must be as instant as possible so that they can start trading and open a bank account. They cannot possibly at the same time register for VAT, PAYE and corporation tax. I am talking from my business experience on that—these things take time. The good news is that we are streamlining the process by including information so that future registration for VAT, PAYE and corporation tax becomes much easier. In many ways, it will be faster than it would otherwise be.
I hope that the noble Lord has found my explanation reassuring and, on that basis, I request him to withdraw his amendment.
Lord Mendelsohn
My Lords, I thank the Minister for his reply. It may not have appeared so, but I am somewhat excited about this measure. It is not just the notion of IT programmes which interests and excites me—they do not—but as someone who has declared an interest as an owner, investor and someone who works in small businesses, I may well get to use this system. I am enthusiastic in that regard. It is not my concern about the speed or, in a sense, the relative level of difficulties. I am more than aware of the difficulties that will be faced—especially by HMRC, with its current system. However, what is important to understand about this measure is the opportunities that it provides and the ambition that it demonstrates.
Lord Mendelsohn
“( ) An assessment under subsection (4)(a) need only consider small businesses as defined in section 33(2) and micro businesses as defined in subsection (3) of that section.”
Lord Mendelsohn
In moving Amendment 33G, I will also speak to Amendments 33K, 33N, 33S and 33T.
While we are very supportive of this measure, we have an underlying concern about how it is drafted and how it relates to the central driving and important common objective of supporting small businesses. Our contention about the drafting of some of the Bill is that it does not appear to be sufficiently designed to deal with the particular and unique contours of the very many different businesses that comprise the category of small business. Our amendment seeks to try to probe the Government to be more forthcoming about what they are trying to achieve in the clauses. In the current drafting, “business” has a wide definition.
The Bill proposes that a Minister of the Crown can appoint a reviewer in respect of certain regulatory functions. This reviewer must release a report, including an assessment of the extent to which the relevant regulator’s procedures, particularly handling and resolving complaints and appeals made by businesses to the regulator, are accessible and fair to businesses. Does this mean all businesses? As this is the small business Bill, is that not rather inappropriate?
Baroness Neville-Rolfe
My Lords, I thank the noble Lord, Lord Mendelsohn, for his explanation of these amendments, which I hope I have understood, as I know that they are largely probing in nature. First, I turn to Amendment 33G, which would have the effect of limiting the champion to consider only appeals and complaints by small and micro-businesses. I suspect this is not his intention. It is true that larger businesses generally find it easier to navigate regulators’ appeals systems. That is why we call this policy the small business appeals champions or the small business champion—because the main benefits will fall on small and micro-businesses.
However, large businesses have problems with appeals, too, and fixing those problems can be beneficial in a broader way: smaller businesses having similar issues or facing similar burdens can benefit. It would be a mistake to exclude the experience of larger business entirely from the work of the champions. One can imagine a champion telling a business, “I’m sorry, but because you’ve got 51 staff, I can’t take any notice of the evidence of your problems within the regulators’ appeals system”. Clearly, that is not what we want. What we want is somebody of good quality who will come in and take a critical look at this important area.
Amendment 33K proposes that the guidance for the small business appeals champion should be laid before Parliament. I can tell the noble Lord that it is actually the Government’s intention to show the guidance to Parliament and I am content to consider his amendment further.
Amendments 33N and 33T seek to replace the term “smaller scale businesses” in the business impact target provisions with a cross-reference to the definitions of small and micro-businesses in Clauses 33 and 34. I understand the logic behind these amendments and recognise that use of a specific cross-reference might at first sight provide for a certain legislative coherence. However, I do not believe that the amendment is necessary for the provisions in this part of the Bill to achieve their intended effect. The Government’s view is that, in the specific context of the content of the annual reports required under the business impact target provisions in Clauses 23 and 24, and the expertise of the independent verification body that will assess estimates of economic impact under the target provisions under Clause 25, the term “smaller scale business” is sufficiently clear.
The context for the use of the term “smaller scale business” here is very different from the purposes of the definitions which have been provided in Clauses 33 and 34. Those later definitions are being created to facilitate exemptions from regulations. To achieve that, the definitions need to be precise and workable at a detailed technical level. In contrast in this clause, we believe that the term “smaller scale businesses” is sufficiently clear for its own purposes.
The Government’s view is that in practice the term “smaller scale business” will be interpreted in accordance with the EU definition, which we discussed last week, and is therefore consistent also with the definitions provided for in Clauses 33 and 34. The EU SME definition is, of course, widely used on an administrative basis in the UK for a variety of purposes, including statistics, grants, and other policy contexts.
Moreover, the use of a broader descriptive term, rather than something more technical, clearly has advantages in terms of enabling a wide range of relevant issues to be included in the report without raising questions as to whether such issues are within the powers provided for in this clause. This ensures that the reporting can operate flexibly. Similar arguments apply in relation to the expertise of the independent verification body, which we will no doubt come on to discuss.
In addition, there are some legal issues with the operation of this amendment. The definitions in Clauses 33 and 34 are not complete and will require secondary regulations to make them function. While the headcount is defined on the face of the Bill, there are important financial definition criteria which have to be established under delegated powers. Such regulations will not be in place by the time that the target clauses are commenced and in operation—a technical point but I thought one worth making.
Amendment 33S would require the independent verification body to have expertise in the assessment of the impacts of regulation on small and medium-sized businesses, but not larger businesses. That is a narrowing of the current requirement set out in subsection (6) of Clause 25, which requires the independent verification body to have relevant expertise in assessing the economic impact of new regulation on all businesses, including smaller ones. The Government consider it vital that the verification body should have the expertise required appropriately to assess the economic impact of regulation across the full range of business. That is clearly particularly important for regulations that concern activities typically undertaken by large businesses—for example, large-scale manufacturing, or businesses with certain types of pension scheme. The findings of our current version of the independent verification body—the RPC—bring a great deal of light to regulatory proposals and often cause us to pause and ask whether something is good or bad regulation. We are trying to bring that good system on to the statute book in a way that attracts top-quality people to this body. We think that the wording in the Bill is right.
I thank the noble Lord for his probing amendments. There are good practical reasons why we have drafted the clauses in the way that we have. I hope that he has found my responses helpful, including my clarification on the amendment relating to Parliament, and will be willing to withdraw his amendment.
Lord Mendelsohn
I thank the Minister and am very grateful for her response. While small businesses will be the disproportionate beneficiaries, and although some of these issues affect companies of different sizes, there is the potential for small businesses to be squeezed out in certain circumstances. I accept that the drafting is elegant, and certainly has a lot more legal validity than our amendments probably have. However, it is important to consider how the measure will operate in practice. I cannot help feeling that we may return to these issues time and time again as the relevant balance is difficult to achieve.
We are very encouraged by the Minister’s response on Amendment 33N. We will certainly take careful note of what she said and consider how the measure will operate. We are very grateful to her for her constructive response but will want to consider whether we are sufficiently reassured that the measure will disproportionately benefit small businesses—the Bill is about disproportionate benefit to small businesses—or whether we have lingering concerns that small businesses will again lose out—not completely, they will be beneficiaries—to other companies. In those circumstances, and given the Minister’s very helpful comments, I beg leave to withdraw the amendment.
Lord Mendelsohn
Lord Mendelsohn
My Lords, in moving Amendment 33BC, I will speak also to Amendments 33BD and 33 BG. The amendments together would create a total of five definitions in UK law based on the measure of employee headcount. We are trying to introduce the definition of a micro-business, meaning a business with one to nine employees, a small business, meaning a business with 10 to 49 employees, a medium-sized business, meaning a business with 50 to 249 employees, a large business, meaning a business with a headcount of 250 to 1,000, and a super corporate, meaning those with in excess of 1,000 employees.
We very much support the thrust of the clause, and it is excellent to have a proper definition to work with. Our amendment seeks to establish a richer and, in our view, better way to define the different type of businesses. The basic argument for it is pretty compelling. We understand the need to make regulations and legislation as effective an operation as possible. Defining in law what is meant by the terms “small business” and “micro business” will make it possible for future Governments of any colour to exempt enterprises of that nature from new regulatory obligations. In addition, it can help to target particular elements of policy and support to the required businesses.
The definitions are based on the European Commission’s recommendation, which defines micro, small and medium-sized businesses by employees, turnover and balance sheet total—definitions which are already widely in use on an administrative basis. There are arguments to be had about the relative merits of headcount versus turnover and how to blend those numbers. It is widely acknowledged that it will not be straightforward to embrace everything cleanly with those definitions. It ends up as a complex Venn diagram landscape of connected definitions.
Nevertheless, there is a great attraction to making it as simple but sophisticated as possible. We believe that this five-group classification achieves that. It is of course accepted that the definitions are always imperfect, and that turnover is a factor in the size of a business. Nevertheless, there are good reasons to take a broader view than the Bill currently does.
The great merit of the Bill is its defined and single purpose: to focus on small businesses. Our challenge is that it does not go far enough, but we accept—to paraphrase—that a journey of a thousand miles starts with a single step. We believe that we should not stop to congratulate ourselves on starting the journey but remain focused on the future.
Here, we have a chance to do something with our amendment. Other places which have for a long time had very focused small business policy and even agencies are today looking at how they use definitions better to deal with the problems that we are debating now. The Bill represents a chance for us to address matters of the future.
Governments and policymakers in general have always had difficulty in improving the efficiency of markets in which small businesses operate. It is easy to use measures to deal with monopolies, oligopolies and so on, but in the markets in which small businesses operate it is very different. The Government’s role in relation to small businesses is naturally to consider how to establish political and economic stability, how government spending can trigger markets, setting interest rates in different places, forms of regulation, but also—and decisively—the role of market catalyst. Among the measures and levers that the Government have, it is important to recognise the diverse needs, aspirations and potential of businesses.
Small businesses are a key source of jobs in any economy. There are those start-ups which will have the ambition to become global players and will recruit in great numbers, but most small companies are small and will stay that way. Tax credits for hiring new workers are of great importance to a company on the threshold of a decision on whether to increase by one more employee or a small number. For aggressive start-ups with great confidence and belief in the future, the high-growth culture will make them more concerned about visas, immigration and the condition of education.
It is not just about growth. There are also great distinctions between companies relating to their ages and their relative requirements based on how long they have been in business and the challenges that they have had. Providing policy incentives, encouragement and exhortation can be done better if the type of business can be defined better. That is even now a strong debate in places such as the United States, with the Small Business Administration, and in other places where they have had long-standing agencies to target small businesses. Today, they are looking at further definitions to ensure that their measures can be as targeted and effective as possible.
In our view, this welcome area of the Bill would be strongly enhanced by richer and fuller definition. Even if the relevant measures are not introduced at this stage, there is no doubt that such definitions would help us to design much better policy in the future. In this context, I would be grateful if the Minister could reassure us that the Government have considered the Bill’s drafting not just in terms of 2015 but with regard to the future, and can assure us that the policy measures can be appropriately constructed to target different subsections of the small business community. I beg to move.
Baroness Neville-Rolfe
My Lords, I am grateful to the noble Lord for taking us back to the question of definitions in the Bill, which we have already discussed, and for setting out in a wide-ranging speech some of the logic behind his position. I shall read that with great interest when I have a little bit more time to reflect. I would like to go through the amendments that the noble Lord has tabled, which I think are to some extent probing in nature, and explain why we have done things the way that we have.
First, I turn to Amendments 33BC and 33BD. The Government are establishing definitions which will be broadly consistent with the European Commission’s, as I have said before. These definitions are widely used in the UK, and so by following the approach taken by the Commission, we will keep life simple for businesses. We are establishing statutory definitions of small and micro-businesses for a specific purpose, which is to help mitigate disproportionate burdens on smaller businesses, including community and voluntary bodies, by facilitating exemptions or other more proportionate treatment in new secondary legislation. We need to define small and micro-businesses clearly in order to exempt them from regulations where appropriate.
This policy intention explains why these definitions are different from those we have heard in previous provisions of this Bill. These definitions need to be precise enough for businesses to know whether they are covered by certain regulations or not. The rationale for the definitions is clear. It costs a small business 10 times more per employee, on average, to comply with regulations than it costs a large business—that is an interesting statistic to add to the noble Lord’s list. In contrast, medium-sized and larger businesses do not suffer from the same level of disproportionate burdens. For instance, those businesses are more likely to have access to specialist regulatory expertise. It would surely, therefore, be unfair to exempt larger businesses from certain regulations without also exempting smaller businesses. There is, therefore, no need to include larger businesses in these definitions.
The Government are committed to reducing regulatory burdens on all businesses, including medium-sized and large businesses, but the specific purpose of these proposals is to mitigate the disproportionate burdens that are most acute. I hope that the Committee can agree that, based on our policy intention, extending the definitions to include medium-sized and larger businesses is not required, and, indeed, could undermine the strong focus on mitigating burdens where they are most severe.
Turning to the detail of the definitions, I welcome the noble Lord’s support for the use of headcount. However, as he said, financial criteria can be an important adjunct to staff headcount in order to reflect the true scale of a business, and therefore the extent to which it suffers from burdens. If a business has the resources of larger businesses, those resources will mean that it is unlikely to suffer from the same disproportionate burdens, even if its headcount is relatively low. For example, such a business would be able to buy in specialist expertise to assist with compliance. For these reasons, in my view it would not be right for them to be treated as a small or micro-business for the purposes of this definition.
As regards Amendment 33BG, which I regard as probing as the noble Lord did not explore it, this Government believe that it is appropriate for the small and micro-business regulations to be subject to the negative procedure. The regulations will make detailed, highly technical provisions, which may require periodic minor changes. For example, the financial thresholds could need to be updated in line with EU definitions. I welcome the fact that the Delegated Powers and Regulatory Reform Committee accepted the Government’s judgment on this issue. I know that the House has great confidence in the views of that committee.
I am grateful for the debate on these provisions, and for the support that we have heard for the Government’s intentions in relation to small and micro-businesses. I hope that the noble Lord will withdraw his amendment.
Lord Cope of Berkeley (Con)
My Lords, I want to reinforce some of what my noble friend the Minister has just said with regard to these definitions and whether they should include any financial criteria as well as the headcount. It is very important that they do, and I was disappointed to see that this amendment left out the financial provisions. If the Committee looked through the list of businesses that we were looking at the other day, while considering the amendment of my noble friend Lord Flight, your Lordships would see that some very large businesses with huge turnovers—or, for that matter, huge balance sheet totals—nevertheless have very few people working for them. They have very few employees and are not small businesses by any normal criteria. It is important to include financial criteria within these definitions.
Lord Mendelsohn
I thank the Minister for her reply. The noble Lord, Lord Cope, made an important point about the size of businesses and the financial criteria when evaluating the different areas to look at. One has to take note of the huge imbalance that there is in the volume of businesses with very small numbers of employees and characteristics. You could distort that by the introduction of certain financial measures but, as I said, it is not that we believe that there is an absence of financial figures. If you are looking at where you can target policy, that is so but we want to illustrate a point within this—that there is a common interest in the promotion of small businesses and in trying to create measures to do that.
Considering the deregulatory issues about burdens and other sorts of things is one side of it—my noble friend Lord Stevenson outlined some of our concerns in relation to them—but this Bill is not just about removing burdens of regulation. It has to be about being able to promote small businesses, and people who are engaged in the activity of developing them, by easing their burdens and making their commercial activities much stronger and more successful. In that context, when we talk about regulatory burdens, every single poll of small businesses here, in keeping with those in other places, will demonstrate strongly that those issues are dwarfed in significance for them by the problems of payments—access to credit, cash flow and other sorts of things.
Within that context, we are also looking at the challenges which small businesses have in relation to competing in markets dominated by larger companies. On the issues that they have about access to markets, turnover thresholds and employment and other sorts of things, we are keen to think about how you can use these measures to try to design policy, support and other sorts of levers for the future. With a sense that the Minister will reflect carefully on that side of the coin, I beg leave to withdraw our amendment.
Lord Mendelsohn
“( ) Those who represent businesses with 10 to 49 employees and are purchasing goods or services for use within their commercial activities will be considered consumers with all the rights acquired by the Consumer Rights Act 2015”
Lord Mendelsohn
My Lords, in moving Amendment 33BE I will also speak to Amendment 33BF. For veteran observers of BIS matters, this debate will be quite familiar. These issues were raised during the course of the Consumer Rights Bill and the Government’s approach steered us towards considering this matter under the rubric of this Bill. This debate cuts to the heart of the level of commitment behind creating a framework that truly supports the backbone of our private sector in this country, and whether government are really willing to appreciate and tackle the market dynamics that favour bigger businesses over smaller businesses, as other countries have done successfully in stimulating small business. Indeed, small businesses are already treated as consumers in many parts of the European Union and many of the regulatory areas in our own country.
I will briefly set out the context and drivers behind the amendments. The argument is pretty straightforward. Small businesses, especially micro-businesses, have very little bargaining power because they are not making large-scale purchases. These companies do not have any more time or specialist knowledge than individual consumers. They do not have specialist procurement functions, procedures or external support, or even in-house accounting and legal expertise. We believe in extending protections to micro-businesses in the sale of goods and services.
My noble friend Lady Hayter meticulously spelled out these issues when she said that,
“we might expect a small hairdresser to know what they are doing when they are purchasing shampoo or hair-dryers, but they are not in any stronger position than any other individual consumer when they are getting a window cleaner in or buying a type of floor cleaner or purchasing electricity. Similarly, a small café that happens to offer wi-fi to its customers may be as vulnerable as the rest of us to poor service or being fobbed off by a wi-fi supplier. Similarly, small landlords may let out perhaps only one or two properties but some of those landlords will be classed as business and will not be able to enforce their rights when they are dealing with utility suppliers, or indeed the Post Office or anyone else, that they may deal with as a business”.—[Official Report, 13/10/14; col. GC 2.]
The Government have had some historical objections to such measures. First, they argued that small and micro-businesses are already protected under the Sale of Goods Act and the Supply of Goods and Services Act. That is why they directed us to this Bill, as opposed to the Consumer Rights Bill. That was reasonable and I agree with the point that these protections exist and are essential. However, they are not enough. The core problem for small businesses is that, in general, the level of protection afforded to business customers is significantly lower, reflecting a view that businesses ought to be in a position to look after themselves. A culture of caveat emptor, or buyer beware, is typically considered sufficient protection for business customers, other than in extreme circumstances. Moreover, very small-scale businesses are excluded from a range of commercial opportunities and proportionately penalised and treated as cash cows by a range of suppliers.
Secondly, the Government objected that it is an unnecessary and unusual intervention, but the truth is that it already exists. A number of regulators already treat micro-businesses as consumers. The Legal Services Ombudsman and the Financial Ombudsman Service both treat micro-businesses as consumers for their complaint handling. Ofcom extends consumer protection to micro-businesses and requires providers to apply an alternative dispute resolution scheme for dealing with unresolved complaints from domestic and small business customers. The Communications Act 2003 specifies that small businesses should be classified with domestic customers, as long as they do not employ more than 10 people or trade in the telecom sector. The Federation of Small Businesses has reminded us that small businesses also count as consumers in breaches of competition law; the FSB can act as a super-complainant in such cases. Small businesses will also be covered under Clause 80 as regards redress under competition law, where the opt-out provisions will cover small businesses; the Federation of Small Businesses can be party to that. What we are asking is therefore not that unusual. In fact, it is usual for this provision to be made to ensure the proper functioning of markets.
Thirdly, an objection has been made that business does not support it—even that the Federation of Small Businesses does not support it. This is both true and untrue. It is true that some big businesses do not want it. The Government have previously quoted consultations from the CBI. I can only say that, in my experience, some are good and some are bad: some react positively to deliver as if small businesses were protected as consumers, and others—this is really the main part of my experience—use the difference to provide inferior and costly service to the smallest commercial entities.
What is true is that the Federation of Small Businesses wants this measure. I know that this has been a matter of contention before, so I checked before speaking today. I think that last time there was a misreading of a report whose purpose was to inform the federation’s recommendations as being the recommendations themselves. When it comes to negotiating business contracts, the Federation of Small Businesses has identified four areas that add up to real detriment for those businesses. It talks about a “lack of expertise” in purchasing policy, high opportunity costs of time spent making purchasing decisions, low benefits, and little bargaining power. The Federation of Small Businesses firmly supports this recommendation.
Finally, the argument is made that there is no evidence that the measure helps, and that it could be bad in terms of how small businesses are treated by big businesses. I am bound to say that, while I am fairly new at this, it has not gone unnoticed that this has not seemed to stop government before. Indeed, I would even go so far as to say that some of the consultations on the Bill may well confirm the thrust of this argument, and the way in which the evidence is gathered can be quite narrow and sometimes give the appearance that our final evidential base is unlikely not to have unintended consequences as a result.
In my view, the argument about whether the Government can measure the impact of treating small or micro-businesses as consumers seems to be a minor objection. It is very easy to model an answer and I am sure that the department’s officials have grasped that or have used the time between this and the previous debate to get this right. I hear the argument about changing the legal framework for 4.7 million businesses without a full and complete understanding of the impact, but that is a rather false construct. I strongly reject the argument that we should avoid doing this because larger businesses will act with retributive force, or that they should be allowed to maintain a power imbalance because they do not like meeting proper business standards. I think that we also had that debate within the context of payments and access to finance. I also reject the argument that there is any meaningful and real business opposition. Would they suggest it? No. Do they really have any meaningful objections? I believe that they do not.
I hope that the Minister will be the bearer of some good news on this. There were some very encouraging statements in the other place and by Ministers on these matters. In fact, the Government’s response to the report by the Federation of Small Businesses into the consumer issues facing smaller firms and sole traders was also encouraging. I hope that the Minister has come here today with some additional measures strengthening the rights of these businesses, or even perhaps with the remarkable news that she will support our amendments. If my optimism is to be dashed, I hope that the Minister could place on the record—given all that has gone before—a reasonable exposition of the work the department has done to review the evidence in this area and create an evidence base, and say whether the Government categorically rule out amending the law in the future. If they do not do so, why not support the power to ensure that this can be done quickly and efficiently now?
If there is still a chink of light, given that this distinction is already made in statute law, regulator policy and other EU jurisdictions, would the Government be amenable to discussing how the Bill could clarify what is already a clear fragmentation in law and a mixed message to small businesses? I beg to move.
Lord Deben
My Lords, I ask my noble friend to take very seriously the issues which are raised here. I look at it in a rather different way from the noble Lord, Lord Mendelsohn—that is, from the point of view of a small business itself. As my declaration of interest shows, I chair a number of small businesses. I have been recategorising them while reading through the amendments, so I also chair a medium-sized business. On the basis of this discussion, I am hoping that it will become a large business. I look forward to that. I do quite a bit of mentoring of people starting businesses. It is very hard for them to start a business. However, we know that innovation comes more from small businesses than anywhere else and that the bigger a business becomes, the less innovation there is. It is a crucial part of improving employment and the economy. We have to recognise that.
How do people start small businesses? Very often, they do not start it as a small business but as a person or customer. You begin something and realise that you have a kind of business, and then you try to make it into a business. It is a much more haphazard operation than those who have never started a business sometimes think. I hope that the civil servants present will not mind my saying it but one of the problems with all this is that nobody who writes this stuff has ever run a business or understands how a business is run. Having done the job as a Minister, I recognise that I was pretty unusual because I came from the business community. Most Ministers had not done that. We have here a Minister who is very well equipped, because she has played a major part in what can only be called a megabusiness, in the circumstances.
Lord Mendelsohn
I thank the noble Lord, Lord Deben, for his powerful speech in Committee. I strongly agree with his central thrust about the operation of markets and what we have to do. There is a clear importance to the vibrancy and general benefit of very strong consumer-driven markets, and where we can get the asymmetries out of markets. That is something to be looked at in the general context of the Bill.
The noble Lord’s speech reminded me of research I read in relation to the Bill from the Brookings Institution, which talks about America, the custodian of great enterprise and small businesses. A piece of research indicated that although there were a number of innovative, high-tech businesses, there was an attrition of the traditional entrepreneurial culture of mom and pop businesses in America, and the measures they were going to have to introduce to try and deal with the problem. It strikes me that the problem we have with parts of the Bill is that, while it is hugely welcome and to the Government’s credit to have put it through and to be saying something specific about small businesses, the scope of ambition is a bit too narrow.
We have a huge challenge to encourage such businesses and this is a great opportunity to do so. Even in circumstances where it may not be possible—the drafting might be problematic, there may be synchronicities in policy, or all sorts of things—it is still important to maintain the sense of ambition, so that we can put into place now strategic anchors or even some of the exhortations or ambitions we have for small businesses in the future.
It is in that context that, while being hugely encouraged by the excellent speech of the noble Lord, Lord Deben, I was a tad disappointed by the Minister’s response. It contained a lot of things that I believe are, bluntly, utterly bogus. I just do not buy the notion that the western economy is going to collapse because micro-businesses are going to be given this protection. I do not buy the impact story. It does not ring true to anyone in business and I cannot believe it was presented. It is just not right. It is not right to believe that we can accept that the chilling impact of these things is going to be the principal reason why businesses are going to suddenly not transact. We know, even from our discussions, that within the context of late payments it does not have the same impact. If the Government accept what we are suggesting on the definition of micro-business and on late payments, we will have sufficient velocity in the markets for the cash flows to be less distorting and more encouraging.
I was also disappointed that there did not seem to be any real change or progress, or much work done, between the Consumer Rights Bill and the current position, even to the point of talking about the context of the FSB’s research on regulators, which concerns some of the other measures we talked about on previous amendments—the consultations related to the Consumer Rights Bill and other things. It did not look at the context of trying to use these measures to encourage and trigger small businesses.
We say very clearly that this is not about big businesses being bad. I do not believe that big businesses are bad; they are very important for this country for all sorts of productive things. However, we have to try to ensure that we push the fundamental context of small businesses: the market dynamics, the enterprise and the entrepreneurialism in which they exist.
On the statistics that the Minister gave us about the number of small businesses and the number of people who they employ, I have to say: do the maths. Most of these people are consumers, who, when they try to buy something for themselves rather than in the context of their businesses, have an easier time or more rights. I do not think that that is sensible.
I must ask the Minister to reconsider, to rethink some of the points made by the noble Lord, Lord Deben, and some other things about what we can do to achieve greater outcomes for small businesses. We also ask her—at least for my benefit—to spend some time scrutinising some of the work that has taken place since the Consumer Rights Bill until now to try to get some sense that we have properly assessed this and done some work as to whether or not they should reject this amendment. On the basis that I know that she will do that, I beg leave to withdraw the amendment.