Small Manufacturing Businesses

Siobhain McDonagh Excerpts

Wednesday 15th December 2010 Westminster Hall

[Siobhain McDonagh (Mitcham and Morden) (Lab)]

This debate is about small businesses and it is also about people. In September 2005, the life of my constituent, Don Wilson, was turned upside down when his son was tragically killed in a rugby accident while serving in the British Army. Toby was just 29 when he died, and he left behind an eight-year-old daughter. Don wanted a new start and a chance to get on with something that would ease his grief. A short while later, the opportunity came along. Don had joined Loughboro Designs (UK) Ltd in July 1984 as a metal fabricator. He rose to be a foreman and worked on high-profile projects for international clients, including New York’s Mayor Bloomberg and the Saudi royal family.

Shortly after Toby’s death, Don’s boss retired and Don was given the chance to buy the company. Given everything that had happened in British industrial manufacturing over the past 25 years, it seemed like a good opportunity. Any high-skills specialist metals manufacturing company that could prosper for so long—the Loughboro name had been trading for more than 50 years—must be doing something right. Don said that when he bought the company, his whole family became involved. He said that it was a way to move forward in memory of Toby.

Not long after 2005, there was the sub-prime mortgage crisis in the US that led to the credit crunch and then worldwide economic meltdown. Over 18 months, the economy in Britain contracted by 6%. It is estimated that our economy is about 10% smaller now than it would have been had the recession not taken place. Inevitably, that has had a major impact on small businesses, particularly on those that are heavily reliant on capital investment for their success, because loans for capital investment dried up. In short, the slump that began with bad lending policies by the banks has hit industrial manufacturing twice as hard because of yet more bad lending policies. Loughboro is one of many firms that is under threat. My first point is about the banks and what they should do to help companies such as Loughboro for the sake of the British economy.

In August, Loughboro’s bank, HSBC, announced half-yearly profits of more than £7 billion. That is the equivalent of nearly £1 million profit every half hour of every day, or of a brand new general hospital, such as St Helier that serves my constituency, every 10 days. Also in August, the Chancellor warned the UK’s banks that they needed to start increasing their lending to businesses. He said that the Government would

“not tolerate banks piling the pressure”

on to small firms. Moreover, the banks have an economic obligation to assist small and medium-sized businesses. However, many small businesses still find that they are unable to get the support that they need from the banks. In Loughboro’s case, despite having worked hard to reduce significantly its loan from £30,000 to £6,000, HSBC cut its overdraft facility from £25,0000 to £5,000. With new contracts due to begin in January 2011, Loughboro’s inability to increase its cash flow and invest in capital puts the future of those contracts in jeopardy.

Reading other reports from elsewhere, it is clear that firms such as Loughboro are not the only ones that are teetering on the edge partly as a result of the banks’ policies. The BBC recently highlighted the plight of a number of similar firms. For instance, Abcoma, a manufacturing company in Oldham, had predicted the economic downturn and had managed to pay off all its debts about four years ago. It complains that even though the downturn is over, it cannot get any working capital from the banks to make the machinery that it needs. That is despite the fact that it has a full order book worth some £1 million and that it wants to employ an extra 10 to 12 engineers. Abcoma says that even though the local bank manager wants to lend money for working capital, the powers above him make that almost impossible, even with security against property.

I have been in touch with the Merton chamber of commerce, which covers my constituency, about these issues. It has done a light-touch survey of its members. Although 45% think that next year will be good for business and 53% think that they will grow, 31% say that 2011 will be worse than this year and nearly half think that they might not grow. One of the key reasons for such pessimism is the banks’ policies. Some 30% of businesses say that their main challenges in 2011 will include constraints on their working capital and 16.5% complain about the difficulty of raising finances.

I thank the Merton chamber of commerce for its help, and praise it and other business organisations for the work that they do in promoting local business. I have also contacted the Federation of Small Businesses—I cannot praise it highly enough—about banks’ lending policies. It, too, made a range of very good points. As small businesses do not have the range of options that medium and large businesses have to raise finance, they rely heavily on banks for support. The FSB complains that small manufacturers have not been able to access affordable finance from the banks, and that that has been holding back the economic recovery. It also complains that many bank managers, particularly those who are distant from the firms, do not understand the manufacturing sector and do not appreciate the kind of finance that it needs from them. Many firms that want loans of only £10,000 to £20,000 are told that £35,000 is the minimum, and that adds unnecessarily to their costs.

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

I congratulate my hon. Friend on securing this very important debate. Small businesses are so vital to economic recovery. May I draw my hon. Friend’s attention to this recent report by IfM Education and Consultancy Services on effective support for smaller manufacturing businesses? The key finding to emerge from all its studies was the common-sense one that effective support has to be carefully targeted at the particular circumstances and priorities for growth of each individual small business. Does not the experience of the firm in her constituency and the others that she talks about bear that out, and is that not something that the Government need to take on board?

[Siobhain McDonagh]

I wholeheartedly agree with my right hon. Friend. Loughboro found that its most flexible short-term access to money, through its overdrafts, was suddenly and arbitrarily cut. The FSB would like to see a broader range of affordable finance to small manufacturers to reduce the dominance of the banks—for instance by creating community development finance initiatives to help small manufacturers. The FSB also wants high street banks to create a central contact point for manufacturers so that they can be supported more effectively, and reform to the banks application systems better to understand the needs of small manufacturers.

I am sure that the expensive lobby firms and the in-house public affairs teams employed by the banks will be listening to this debate or reading it in Hansard. I urge them to tell their chief executives and their boards that they are doing themselves and our economy no favours, and that the British public will continue to hold them to blame. I call on them to listen to the points that our small businesses are making through me today.

Earlier today, nearly a month after I contacted HSBC about Loughboro, and after weeks of chasing, I had a phone call from Andy Grisdale, its head of strategy implementation for UK commercial banking. I cannot say whether it was because of this debate that I finally got the call from HSBC, but we can all draw our own conclusions. I have just been informed by Dee, my secretary, that within the last few minutes I have also received an e-mail from HSBC. I am sorry that I do not know its contents. I was on my way over here and so did not have the chance to read it.

Mr Grisdale said that the reason the bank was not prepared to offer any more money to Loughboro was that the information that it had about the company was out of date. He said that it has not had details of profit-and-loss projections or up-to-date accounts for more than a year, that the bank needs to lend responsibly, and not just throw good money after bad, and that it was not HSBC’s role to help pay off debts to Her Majesty’s Revenue and Customs. No doubt some of those excuses are valid, but small firms are made up of human beings, and sometimes the help that they need is to do with planning ahead responsibly, and the banks have a role there, too. I therefore hope that HSBC will think again about its policy towards Loughboro and work more proactively and urgently with people such as myself to help us, rather than ignoring us or hoping that we will just go away.

If this firm goes over the edge because of a short-sighted approach to lending by banks, yet another little bit of Britain’s manufacturing industry will be gone and eight more real, live human beings will lose their jobs after a lifetime of hard work—real people such as Don Wilson, who have real families. If the worst happens, we in this House will not forget. Almost all of us have met people such as Don and we will not forget the role that banks such as HSBC play in killing their dreams, when they could play a role in keeping those dreams alive.

I think that that is a fair summary of what many Members feel about the approach of the banks at this time. However, I also want to ask the Minister what he can do to put an end to bad practice in the banking sector. It is four months since his right hon. Friend the Chancellor told the banks about their “obligations”. On the ground, however, there is little evidence of increased lending. What can this Government do to make the banks lend and what can they do to help firms directly if the banks will not help them?

Many firms fought bravely through the recession, often thanks to Government measures such as the cut in VAT, but what will be the point of that fight if, now that the economy appears to be stabilising thanks to those policies, the taps are turned off again and the manufacturing sector suffers a double-dip? I believe that there are parallels between what is happening to firms such as Loughboro and what could happen to the wider economy. Perhaps if the tap of investment is turned off too soon in an attempt to end the deficit quickly, the businesses and the human resources capacity that are needed to build a solid recovery will be killed off.

That brings me to my second point. It is not just the banks that are bringing down firms such as Loughboro. In this case, the other and more immediate villain of the piece is the inflexibility of the public purse, in the guise of Her Majesty’s Revenue and Customs.

Once again, I want to take this opportunity to complain about the attitude of HMRC to dealing with Members’ concerns. Just as with HSBC, I have had great difficulty—

--- Later in debate ---

On resuming—

[Siobhain McDonagh]

Just as with HSBC, I have had great difficulty getting anyone at HMRC to answer my calls or respond to my messages. I called for this debate much as a result of how difficult it has been for the two organisations to deal with my constituent’s case with any sense of urgency. Perhaps if they had responded with more courtesy towards me and my constituent, the debate would not have been necessary. We have almost come to expect that the banks, with their billion-pound profits and eye-watering bonuses would behave arrogantly, as if they are untouchable masters of the universe, but it is disappointing that a public body such as HMRC has proved equally uninterested in people’s lives.

The past year has been a continuing struggle for small businesses. In the case of Loughboro, the amount owed to HMRC has been the biggest indicator of that. Over the year, its debt to the taxman has grown to around £60,000. Loughboro has been trying to negotiate with HMRC, but the bailiffs are now involved. Before the debate was announced, the bailiffs were due to go in today, to take away machinery, which would have meant the end of the business. Again, we can only speculate about whether today’s debate is the reason why the bailiffs are not going in after all—HMRC has been particularly difficult to talk to, so it has not been able to tell me.

I understand that Loughboro has written to HMRC today to offer three different payment plans: one to repay the £60,000 over nine months, another over six months and the last over just four months. The last would mean having to pay back nearly £4,000 a week, which would be difficult considering that wages, rents, suppliers and costs still have to be paid, but Loughboro was willing to try.

If HMRC does not behave reasonably, companies will not be able to continue trading. If that happens, not only would the taxman fail to get back all he is owed, but he would not get anything in future—no more tax receipts from the company or its employees—and, indeed, the taxpayer would probably end up having to pay benefits to the workers and their families. Taxpayers would also end up paying the staff statutory redundancy which, as some of them have been with Loughboro for 25 years, is likely to be around £35,000. If I had not secured the debate today, HMRC’s bailiffs could have already taken away Loughboro’s last hope, removing specialist machinery for scrap and putting people on the scrapheap, even though that would cost the taxpayer more in the long run than the machines are actually worth.

The FSB says that there are many ways in which the tax system could be improved to prevent such things from happening. Many small businesses complain that the tax system is too complex and confusing for them—it is a disincentive. The FSB wants the tax system simplified to allow more manufacturers to take advantage of the allowances and reliefs available. It also believes that there is a lack of confidence in the tax system and wants the Government to create a dedicated unit in HMRC to help small manufacturers. As people say, “Tax shouldn’t have to be taxing.”

People whose expertise is in manufacturing rather than accountancy often need help, and they should be given it. Indeed, on occasion, Governments have listened to small manufacturing businesses, to the benefit of all. The Time to Pay scheme for small businesses has been successful, and the FSB is working with HMRC to ensure that it is part of a wider shift to a friendlier approach to small businesses. Time to Pay has been crucial to thousands of businesses with limited cash flow, and more such schemes are needed.

Unfortunately, many small business owners still find the taxman very unsympathetic and obstructive. For instance, some businesses have asked HMRC if they can spread payments but are being told that, if they have paid any dividends during the year, they will be disbarred immediately from any help. That is even though they have done nothing illegal, just arranged their affairs to minimise outgoing payments, and the FSB has told me, forcefully, that that is unreasonable.

I am therefore calling on the Minister to instruct HMRC to be helpful—not to ignore MPs and their constituents, not to be uninterested in businesses that are struggling, but to be helpful. In my constituent’s case, I also ask him please to talk to HMRC and persuade it to take a pragmatic approach towards Loughboro. It might take longer to get the money, but spreading payments over a longer period could save the country money in the long run. I appreciate that the Minister’s bosses have taken a more short-sighted view with the wider economy, as they want to pay back the deficit sooner and quicker than many people believe is sensible, irrespective of the damage that might be caused. However, I hope that he can persuade HMRC to take a longer-term view with Loughboro.

I do not often get contacted by manufacturing businesses—Mitcham and Morden is not a big industrial centre. Firms such as Loughboro do not often appear on our radar, but small businesses make up 99% of the 4.8 million businesses across the UK. They employ approximately 50% of the UK work force and are responsible for almost 40% of our economic output. The manufacturing sector in the UK contributes £155 billion to the economy and employs 2.6 million people.

Even in constituencies such as Mitcham and Morden, which do not seem to be hubs of business enterprise, small firms make a big difference. For the economy to have any chance of emerging successfully from the recession and from the cuts, we depend on the success of small manufacturers, and they should be listened to by the Government. If our small manufacturing firms suffer, we all suffer. We need those firms. If companies such as Loughboro cannot be helped to survive, how will we persuade people such as Don to take them on in the future? Why would anyone want the grief? Yes, they are businesses, but they are full of human beings and, if they struggle, the cost is a human cost.

Don Wilson has already been through many difficult times in his life. He is a human being who did a good thing. He worked hard and took over a company employing local people when the previous owner retired. He kept it going and brought in new contracts. However, Don Wilson told me:

“I have had to lay men off, I have literally halved my work force and still have found it hard to continue. Some mornings, I don’t want to get up and go to work, but I think of my son and the people who are depending on me and this is what drives me on—my wife, my children, my family.”

Now that it looks as though we are coming through the worst of our economic troubles, I hope that we will not let him, his family or his employees down. They are good people, the sort that this country badly needs, and the banks, HMRC and Ministers should stand up for them, just as Members like me are standing up for them. Thank you Ms Clark, for the opportunity to put their case.