§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Boscawen.]
§ 12.5 am
§ Mr. Graham Bright (Luton, East)In recent years the contribution that small businesses make to the prosperity of our country has become increasingly apparent. Many right hon. and hon. Members on both sides of the House have sought ways and means of encouraging and supporting firms in this sector of the economy. The reasons for that have been straightforward enough. Small businesses employ about one-quarter of our work force and produce one-fifth of our output. They provide the most fertile source of new services and new products in the economy. They allow managerial innovation. Both executives and skilled workers from large industry can use their skills and expertise to create a company of their own and new jobs for others. Because it is a more labour-intensive sector, small businesses play a proportionately greater role in providing essential new jobs.
In asking the Minister to recognise the vital contribution that small businesses can make to our future prosperity, it is right to suggest that the restrictions on them by way of taxation and of a bureaucratic nature be lightened as well. That seems to be the most sensible way to stimulate their growth and to reduce unemployment.
It is unfortunately true that small businesses have been subject to a long-term squeeze in Britain. Their share of manufacturing output and of employment has been almost halved since the 1930s. Our competitors have been much more successful in creating new small businesses and in enjoying the benefits from the jobs and wealth that they provide. Three years ago, for example, West Germany, whose population is only 10 per cent. larger than ours, had 40 per cent. more small firms, and the rate at which new small businesses were created in the United States of America was three times as great as ours. The vast majority of new jobs and of new products came from small firms in the last decade in the United States of America. The figures speak for themselves. Eighty-eight per 1115 cent. of new jobs in America came from firms less than 10 years old, and 66 per cent. of new jobs were created by firms employing fewer than 20 people. Surely, there is a clear lesson for us to learn. The most effective way of stimulating economic growth in Britain is by stimulating our small businesses by helping them with their problems.
I believe that we should consider selective measures to cope with the two biggest problems that small businesses have to face—the problems of taxation and finance on the one hand, and the burden placed upon them by the bureaucratic demands of the State on the other. It is really quite extraordinary that capital transfer tax should prevent family firms from passing from one generation to the next because its annual gifts exemption limit is set so low at £2,000 a year. I hope that my right hon. and learned Friend the Chancellor of the Exchequer will consider having the courage to redeem the pledge that he made at Norwich in March 1976
to repeal the tax and to redesign a simpler and fairer pattern of capital taxes as a whole".There should be measures to prevent capital transfer tax and capital gains tax from being levied on one transaction in some circumstances, which appears to me to be most unfair. Because of inflation, capital gains tax poses an ever-growing threat to the integrity of family firms. It is doubtful, too, whether the provision to offset the losses incurred by small businesses in their first three years against income in the preceding three years, introduced in 1978, is generous enough.The burden of collecting taxes such as VAT imposed on the small business man is a surprisingly effective deterrent, as I believe studies conducted in the Department of Industry have shown. I do not think that we should for one moment underestimate this deterrent effect. The feeling has been indicated to me by dozens of small business men in my constituency.
The demand for information by the Inland Revenue, the Customs and Excise and other Government Departments—particularly the effects of form filling—consume time that could have been more profitably spent by small business men in running their businesses and creating wealth. But I have no doubt that the 1116 most formidable obstacle of all is finance for new small businesses—an area in which the clearing banks seem relatively weak, and where no other institutions, least of all the Government, are properly equipped.
I recognise, of course, that my hon. Friend the Minister is aware of the problems. Some action has already been taken. I welcomed and supported the income tax cuts last year and the rise in the investment income surcharge threshold level to £5,000. The blight imposed on so many areas by the threat of development land tax has been alleviated by raising the threshold from £10,000 to £50,000. Small firms are looking forward to the reform of planning procedures, envisaged in the Local Government, Planning and Land (No. 2) Bill now before the House. I would appreciate some comments about that from the Minister. They appreciate the relaxation that there will be of the previously stringent requirements of the Employment Protection Act on dismissals and redundancies.
There is also the prospect that a future Companies Bill will allow small firms to protect their vital commercial information by creating proprietary companies. Some reduction in the volume of information demanded by the Government has already occurred. By granting stock relief in the last Budget, and by raising the qualifying profit limit for corporation tax from the level of £60,000 to £100,000 a year, the Government have relieved the tax position of such companies.
I have been most encouraged by the experiments that the Department of Industry has been conducting in establishing small workshop units in shipbuilding areas, free from some of the restrictions on factories, and by the contacts that it has encouraged between its small firms service, the Post Office staff superannuation fund and small business men in the Eastern region. Each of these steps is welcome as a move towards fulfilling the Conservative Party's manifesto commitment to help small businesses in particular.
It is only right to press my hon. Friend to consider taking further measures. As a small business man myself, I know how important are the points that I have mentioned. If capital transfer tax were to be abolished that would do more than any other measure could to preserve our exist 1117 ing small family businesses. At the very least, provision ought to be made for paying the tax within a gift. This is an anomaly whereby if provision is made for the tax on a gift, the whole is taxed, thereby always leaving the recipient the problem of finding further money for taxation. I am sure that there is an overwhelming case for raising the threshold for corporation tax to take account of inflation. The VAT exemption threshold should also be raised.
There are good grounds for extending the right of small businesses to offset losses in their early years against income tax previously paid from three to five years. There is no reason why we should not at least consider introducing tax incentives of the kind introduced in France in July 1978, but to encourage investment in small businesses. Perhaps the figure of £1,000 a year could be looked at in this respect.
Some thought ought also to be given to preventing very large firms from achieving a dominant position in any market served by a large number of small or medium-sized firms. This may soon be demanded by law in West Germany and would be an appropriate duty for the Monopolies Commission here.
It may well be that the unfair dismissals procedure under the Employment Protection Act should be applied after two years rather than one year, or alternatively that a moratorium should be introduced for businesses with fewer than 25 employees.
Far too many statistical demands are still being made on small businesses, and the authority under which they are sought is often unclear. I think that the suggestions that have been made whereby a mandatory form would be clearly marked would assist.
Most important of all is the need to create a viable loan guarantee system—which could be better described as a small business credit insurance—to support the creation of new small businesses. The clearing banks and other institutions have the money; the Council for Small Industries in Rural Areas and the Department of Industry's regional small firm counselling service have the expertise. We have the examples of America, France and Japan in running such schemes.
1118 Creating such a scheme would be the key to invigorating the entire small business sector. Small businesses would respond with a sense of adventure if we could offer them the right opportunities. We need to ensure that small businesses with the capacity to produce a wider range of goods or services can find the money for expansion. I am sure that the necessary machinery could be set up.
I am equally sure that it is possible to design a self-financing scheme. Loans could be made to small businesses on straightforward commercial grounds. How much could be lent would depend on their existing assets and their capacity to meet the interest charges and capital repayments from the business's cash flow.
I think that it is quite wrong that we should always require personal guarantees or second charges on the private home of small business men. It would be right to include a small element—say. 2 per cent.—to cover possible losses. But I am certain that by using the banks and by confining the Government to an advisory and regulatory role, the administrative costs could be kept to a minimum.
The growth in business activity, in jobs created and in tax revenue generated would almost certainly more than meet any costs sustained. I can think of nothing more likely to change the climate in the small business sector for the better than to create a loan guarantee scheme. If we could open up the avenues of opportunity and free small businessmen from the burden of pledging their homes and savings, we would make the biggest single contribution to our country's economic recovery. I urge my right hon. Friends to consider this at the earliest possible moment.
There is no aspect of life in any business that is more resented than the provision of information and of taxes to the State at the expense and in the time of the taxpayer. This is a particularly heavy burden on small businesses where resources are limited. But there is an additional burden on them that I believe requires immediate relief.
Under the Finance Acts of 1972 and 1976, the Customs and Excise officers responsible for collecting value added tax and the officers of the Inland Revenue were granted sweeping powers to enter 1119 premises, seize documents and require information. Although these powers are not identical, I believe that there is an irresistible case for regulating these powers by formulating a code of practice for the officers of the two services that can be enforced in the courts.
It is outrageous for any citizen to be subjected to dawn swoops, to the search of his personal papers and those of his family, right down to school reports and cross-country results, and to questioning without knowing what information is being sought or why. My hon. Friend the Member for Bournemouth, East (Mr. Atkinson) raised this whole question in an Adjournment debate on 21 December 1979.
There is no defence for tax evasion, but there is no justification for the abuses committed by the Customs and Excise under the shadow of statutory authority. I suggest that before any entry is made or papers seized the officers of the two services should establish a prima facie case in writing before a High Court judge for supposing that an offence has occurred. They should identify the people whose activities they wish to investigate.
If a warrant is granted by a High Court judge it should specify the premises they may enter, the papers they may require and the times during the day—say, 9 am to 5 pm—during which they may call. A copy of the warrant should be handed to the person whose premises are to be entered for search when entry is undertaken. Copies of any papers removed must be supplied to their owner within seven to 14 days. No one should be questioned without knowing what he or she is being questioned about and without the opportunity of having his or her solicitor present. If members of the owner's family are to be questioned, they should be over 18 years of age and have an interest as an employee or a director of that business. The questioning of staff should take place only in the presence of a representative of the proprietor.
A code of practice based on the principles that the suspected offence be defined, that the grounds and terms of entry and seizure be known to all parties, that the conduct of the inquiry is strictly confined to the alleged offence, and that the questioning of relatives and employed employees is controlled, would 1120 eliminate the indefensible behaviour that has occurred in too many cases.
In the short time available to me I have tried to spell out some of the problems of small businesses. There are many more. I profoundly believe that if some consideration could be given to helping with these problems the country would reap much reward. I look forward with interest to my hon. Friend's response.
§ The Under-Secretary of State for Industry (Mr. David Mitchell)I congratulate my hon. Friend the Member for Luton, East (Mr. Bright) on having raised the vital subject of small businesses and their effect on jobs and the long-term wealth-creating capacity of this country. I am delighted to see that he is being supported by the presence of my hon. Friend the Member for Surrey, North-West (Mr. Grylls), whose considerable interest in and concern about this matter are well known to the House.
My hon. Friend has raised this matter at an appropriate time—I do not mean at this hour of the morning, but after nine months' gestation of this Government's policies, We are now able to see a little modest progress along the road down which my hon. Friend wishes us to move.
My hon. Friend asks for confirmation that the Government recognise the benefits of small businesses for this country's economy. I do so with enthusiasm. These benefits are often taken for granted by the public. The small firm provides a degree of service, choice and diversity for the consumer which is of enormous benefit, and we should not take that for granted.
Of far greater importance to the national economy is the fact that small firms are the seed corn from which larger firms of the future will come. When one looks at the national economy, one sees that businesses have a life cycle. Like human beings, they get old, tired, out of date and die. Their places are taken by the young, the thrusting and the vigorous with new ideas, new products, new technology and new ways. We are in a phase of contraction in which many of our older industries must concede the take off of younger, newer businesses. In a decade's time some firms will die, and others will take off. Some small businesses will 1121 become middle-sized family businesses, and even the giants of the future.
My hon. Friend referred to the fact that there are more small businesses on the Continent. Germany is considered to be the median of Europe. If that country has 40 per cent. more small firms than we have, it must follow that the European average is 40 per cent. more. There is no excuse for our being so far behind. There is no excuse for it, particularly in the light of the massive increases in imports into this country, not from the low-cost countries of the Far East but from Europe. There is no reason why British manufacturers should not identify products coming here and set up in business to satisfy that market.
My hon. Friend referred to the MIT study in America by Professor Birch, which showed that on balance new jobs were created in businesses with fewer than 20 employees. He is right. It is an interesting and slightly disturbing fact that that study also reveals that the largest number of the new jobs were created not in manufacturing industries but in service industries. We must recognise in future a greater emphasis on the job-creating role of service industries.
It is interesting that the study in America has been in some measure confirmed by the study undertaken in Cleveland in the United Kingdom. The study indicated that on balance the larger companies were losing jobs and that the smaller businesses were gaining them.
My hon. Friend asked why there were a relatively small number of new businesses in Britain compared with the Continent. He sketched a series of changes that he wished to see. Our analysis is that there are so few new businesses in this country because Parliament, under Governments of both main parties, has piled on more and more burdens for small businesses to carry. More and more hurdles have been placed in the way of those who start a business. Successive Labour Governments have increased taxation. The hurdles have become higher and the incentive to jump them has become less and less. As a consequence—I believe that people act logically in these matters—it has been reasonable for the logical person not to start a business.
1122 My hon. Friend divided his appeal to the Government to deal with the problems into three areas—taxation, burdens and cash within the business. I shall endeavour to deal with as many of the matters that he raised as possible in the time available.
Tribute has been paid on previous occasions to my right hon. and learned Friend the Chancellor of the Exchequer for the changes that he made in his Budget in 1979. The factor that has not sufficiently been recognised is that he not merely reduced the top rate of tax from 83 per cent. to 60 per cent., but more than doubled—from 17 per cent. to 40 per cent. —take-home pay for the man who really succeeds. That is a shining star for the man who seeks to start a business to aim for. He knows that if he really succeeds it will be worth while.
My hon. Friend referred to capital transfer tax and capital gains tax. I join him in believing that we are dealing with the most human of motivations, namely, that a man builds up a business with a view to passing it on to the next generation of his family.
There is in many of us—this may not apply to all—what I describe as a dynastic streak. That is what my wife calls it. It is a desire to ensure that one's family will continue with the business and that what one has spent so much time building up will continue. That desire can be destroyed by capital transfer tax and capital gains tax.
Labour Members are not present this morning because small businesses do not interest them that much. If they were here they would speak about the problem of the young man who is brought up with a silver spoon in his mouth. I do not think that it is particularly good for people to be brought up soft and easy. The trouble is that Labour Members seek to throw the baby out with the bath water. They destroy the motivation for the man in his forties, fifties and sixties to continue to build up his business and create Britain's wealth as he does so.
My hon. Friend asked for the VAT exemption to be lifted from the present £10,000 to £50,000. I have vivid recollections of doing a VAT return in my own business before I came to my present post. My hon. Friend drew attention to 1123 the benefits of such a change in reducing the burden on the business man. How ever, unfortunately, the pass was sold by the Labour government, who entered into an agreement with the Common Market Commission that the exemption would be no more than the original £5,000 indexed for inflation. That took us to £10,000 two years ago, and I suppose that it would be about £12,000 this year. The only way in which we can get out of that is to ask the other members of the Common Market to agree to what my hon. Friend wishes. The prospect of obtaining their agreement is negligible because we have the highest exemption rate in Europe. The arrangement that was entered into is a legacy that we cannot escape from.
My hon. Friend made the interesting suggestion that we should apply the French system, under which £600 of one's gross income is allowed for tax if it is invested. My hon. Friend suggested a figure of £1,000 for the United Kingdom. But there are some practical difficulties. The law in France applies only if one invests the money on the stock exchange in a quoted company. My hon. Friend suggests that that should be done in the private business, and not through the stock exchange. The difficulty is that the proprietor of a business, because he would be allowed to invest in his own business, could draw out £17,000 of his salary, pay no tax on it, and put it back into the business. He could go on doing that. Applying such a provision not to quoted companies, as in France, but to close family businesses, would open up a massive area of evasion. However, if my hon. Friend can suggest a way in which that can be circumvented, I shall be very glad to hear from him.
My hon. Friend has raised many points with regard to burdens. I could talk for a long time about the changes that we have made affecting VAT and industrial development certificates, the sweeping away of ODPs, the ending of price and wage controls. changes in development land tax, the ability of the Council for Small Industries in Rural Areas to sell its freeholds, and the way in which the Department is selling the freeholds of its factories. A massive number of burdens have been lightened and a massive number of hurdles have been 1124 pulled down.
Time is rushing on, and I do not want to fail to talk about the important points that my hon. Friend made about the loan guarantee scheme, which is one of a number of matters that we are examining in connection with the requirement of a business to have cash within it for its development.
My hon. Friend said that the banks had the money. At present they have not. They are caught in what is known as the corset, the restriction on their lending, so that at this time even if one were to agree that a loan guaratneee scheme was the right solution it would not be appropriate to tell the banks "While you cannot find enough money to lend to you rexisting customers, we want you to lend to others". I think that my hon. Friend would agree that a matter of timing would be involved.
There is another problem. I hope that my hon. Friend will take it away and come back to me with a solution. There is nothing to be gained if the banks simply say "We would have lent to this person, though we would not have been very keen, and it is on the margin but now that the Government will take the risk for us we shall put it in the loan guarantee scheme", because one would then have substitution rather than additional lending. I am sure that my hon. Friend and I would agree that our purpose, if one were to move along that road, would be to ensure that there was additional lending rather than substitution of lending which the banks would have done of their own volition.
It would not be true to say that a loan guarantee scheme is something about which we are about to make a pronouncement. It is one of a number of alternative ways of assisting the financing of small businesses that we are examining.
My hon. Friend drew attention to an important initiative that we have recently taken with a trial scheme, in which we find a firm that needs investment and bridge the gap between one of the big pension funds and the small business by using our counselling service to assess and monitor whether it is worth while. That means not that we have given an artificial advantage to the small business, but that we have removed the artificial disadvantage, in that it is as expensive for a big 1125 institution to assess a £5,000 or £10,000 investment as it is—
§ The Question having been proposed after Ten o'clock on Monday evening and 1126 the debate having continued for half an hour, Mr. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
§ Adjourned at twenty-five minutes to One o'clock.