Small Firms Expansion (Inquiry) Bill (Hansard, 6 March 1981)

I beg to move, That the Bill be now read a Second time.

I bring the Bill forward as chairman of my parliamentary party's smaller businesses committee. It is a particular pleasure to see my hon. Friend the Member for Norfolk, South (Mr. MacGregor) in his place as the Minister responsible for small businesses. It is perhaps hard on him to have to reply this afternoon to a Bill that inevitably contains financial suggestions when the Budget is so very near. We appreciate the constraints placed on him. However, I hope that I may reasonably look forward to a sympathetic hearing from him on behalf of the Government.

The Bill is designed to create a Conservative strategy for employment. We believe that we can create 1 million more jobs than reflation would bring about in the economy, mainly from new and fast-expanding small firms but partly from medium-sized firms. It should be remembered that in Japan"the miracle" has been based upon the small and medium-sized businesses. On 1973 figures, they had 5.4 million small firms and we had only 1.3 million. On a population basis they have twice as many as we do. That is the heart of our comparative decline, and not only in comparison with Japan. Similar figures are available from the United States, West Germany, Holland and France. All those Governments help their small business sectors with specific measures, some of which are contained in Bill. I ask our Government to do the same.

In 1973, the Wilson report showed that under 2,900 firms in manufacturing industry had from 100 to 199 staff, compared with 71,000 firms with up to 99 staff. The comparison with Japan is startling. In Japanese manufacturing industry two-thirds of all the jobs were to be found in firms with fewer than 200 staff. In this country the proportion was less than one-third; only 29 per cent. of the jobs in this country were in firms with under 200 staff. The Japanese figure was double that. What a comparison!

Those figures come from the study of seven nations by the Economists Advisory Group. We know from the Massachusetts Institute of Technology survey that in the United States two-thirds of all new jobs were created in firms with fewer than 20 staff, at the beginning of the survey, though it should be noted that some of the firms grew during the period of the survey to hundreds of staff. It is this upsurge that gives the Massachusetts institute's figures such importance, an importance not always recognised, because the figures have been widely misquoted as being for firms with fewer than 20 staff throughout the survey period.

Here we come to the heart of the matter. In this country for some reason—I believe it to be largely due to the lack of Government interest in the small firms sector since the war—our entrepreneurs stop developing and expanding their firms when they grow to about 100 staff. That is true in the main, though of course it does not apply to all entrepreneurs.

In other countries family firms go on expanding up to 200 or 300 staff. The urge remains with the entrepreneurs,584 because the incentive exists. The 50 measures in my Bill are designed to ensure the incentive to carry firms forward beyond the 100 towards the 300 staff level.

It is particularly important to note the vast number of firms in this country that have been sold into conglomerates. Sometimes that is beneficial, but more often the conglomerates naturally tend to regard their purchases as being not for entrepreneurial expansion purposes but as investments that will give them a steady return. That is not how small firms expand or benefit the community. In a conglomerate they are often lost.

Then there is the point that we hear so often, that Britain invents ideas of genius but does not put them into production. Often they are taken up in America, Japan or elsewhere. The very small firms normally cannot afford to develop new production lines out of new science. They do not have the capital. The large firms are often not interested in doing so, because their function is to make their long production lines run smoothly. So it is in the medium-sized firms that the hope of turning science to output lies.

Here, particularly, capital taxation has struck at the heart of the desire of those running firms, particularly family-owned medium-sized firms, to expand. They are afraid to expand, because expansion brings them into a new bracket of massive capital taxation. For example, a firm with capital of £6 million or £7 million owned by one or two persons might well, on the death of the survivor of a man and wife team, face a cash bill to be paid, over the eight years allowed for capital transfer tax, of as much as £2 million. That is not a sum that it is possible for most family-run firms to put their hands on upon the death of the proprietors.

Of course, such people do not want to expand. They cannot insure such sums on their lives, as the premiums are so high, except on a short-term basis. Therefore, the Government need urgently to do something to reduce the threat of capital taxation hanging over these firms.

Cash flow is central to all small businesses. It is a shock to discover that in West Germany bank lending to firms with under 200 staff is more than all the bank lending in the United Kingdom to business and Government combined, according to a recent survey. The comparison with Japan is even more devastating. The Japanese lend £185,000 million to small and medium-sized firms. That represents more than half of their lending to all industries.

In the United Kingdom at the end of 1978—near to the period of the Japanese survey—only £38 billion of total lending to business took place. Of that only a limited proportion went to small firms. In Japan the ratio is 10 to 1 compared with the United Kingdom.

Every survey, including the Wilson committee on the financing of small firms, shows the urgent need for investment money. The committee said in its report published in March 1979—Cmnd 7503—There is a virtual consensus in the submissions we have received that there are problems with the arrangements for financing smaller businesses. That is why my Bill calls for investment, and for an investment Budget next week. Last year's Budget was an encouragement to the small business sector, to some degree. For example, the cuts in taxation and provisions for small factories up to 2,500 sq. ft. were welcome. Perhaps it is an indication of the success of that Budget that last year about 68,000 new companies were formed. That compares with only 6,900 firms which were forced into 585 liquidation. That was the best year for new company foundations since the boom year of 1973 and it was in spite of the present recession.

My Bill introduces several main measures. First, it provides for a loan guarantee scheme underwritten by the Government. The scheme is to be self-financing and three-quarters of the loan is to be underwritten by Government and one quarter is to be carried by the banks. A surcharge over normal interest rates will be charged to ensure that the scheme is self-financing. That is to meet the need of fast expanding firms that lack assets to pledge to the banks but which are doing good business.

Secondly, it provides for investment relief for money invested in small firms. The relief should at least equal the relief given to investment in pension and insurance funds. it is not now worth investing in a small business for many people because of the heavy corporation tax and tax on dividends. It is easier to invest in insurance or other large funds. Thirdly, capital taxes must be cut at least to half their present level in real terms.

Other aspects of the Bill include a revision of the Government's machinery to provide a more purposeful effect for small business expansion. The Bill includes the establishment of a research institute. Many of the figures for international comparisons are in doubt. We need to know why the British small business sector has not developed as well as that of our competitors abroad. Such an institute would be of great help.

The Bill contains 50 provisions. I shall not burden the House with them and I shall not take up the Minister's time by describing them all. I only ask him to give, through his Department, careful thought to each of these measures. They have been fully examined by the officers and members of my committee. I believe that they would bring about the creation of the extra 1 million jobs about which I spoke.

§ The Under-Secretary of State for Industry (Mr. John MacGregor)

I should like to congratulate my hon. Friend the Member for Upminster (Mr. Loveridge) on providing the opportunity for this, alas, all too brief debate on his Bill and for the splendid, lucid and pertinent manner in which he presented it. My hon. Friend gave an admirable resume of the importance of small firms and described some of the ways in which we have perhaps lagged behind since the war in the small business sector compared with some of our more successful competitors. I am sure that he will be the first to agree that these are not the only reasons for our lagging behind. It is possible—research is already taking place into this—that it is one of the reasons.

I should like to pay tribute to my hon. Friend not only for the Bill itself but for the work that he and the committee of which he is chairman have done over the years since I have been in the House to promote the cause of small businesses and to examine the measures that could be carried out to improve their position. During the period when the Conservative Party was in opposition, I had the pleasure of working with my hon. Friend throughout those years on precisely these matters. I am glad that my hon. Friend the Member for Croydon, South (Sir W. Clark) is present to hear the debate. Apart from his distinguished position as chairman of the Conservative Back Bench586 committee on finance, he has always had a special interest in tax matters affecting small firms. These matters feature prominently in the Bill.

The Bill, like my hon. Friend's interest, extends to small businesses as well as small firms. One of the difficulties in talking solely about small firms is that we exclude a lot of people—the self-employed and incorporated partnerships—which do not regard themselves as firms but which are undoubtedly small businesses. My hon. Friend has not only played a part in this House in looking after the interests of small businesses but also has practical experience of the running of what I would hesitate now to call a small business. He has been so successful in demonstrating what can be achieved that he is now perhaps moving into the category of a medium-sized firm.

My hon. Friend has put me in considerable difficulty not for the reason that he gave about the Budget coming forward next Tuesday but because his Bill is so comprehensive and full that it would not be possible to deal adequately with the matters that it raises in the time available to me, or even in a whole day's debate. I am sure that my hon. Friend feels the same. I am, nevertheless, grateful for the opportunity to have my first chance in the House to talk about my new responsibilities in relation to small firms.

I have worked, over the years, especially in opposition on Finance Bills, with all my colleagues in the House, who have a great interest in small business matters. I have a lively and active range of small businesses in my constituency, which is a large one, with which I keep closely in touch. I hope to benefit, in my new responsibilities, both from that experience in the House and from the hard, practical contacts that I make with those in my constituency.

Although this is obviously not the occasion to discuss the role of small businesses as a whole, I yield to no one in my admiration of the work of small businesses. They have the flexibility to be innovative and to indentify new markets and to go for them quickly. They have the determination. They are prepared to take risks. I often think that those who look at some of the rewards obtained from small businesses fail to appreciate the downside risk involved when someone comes out of a position in a big company, perhaps in the public sector, and risks his all to set up a small business.

I have examples in my constituency where these very people are providing employment for many people. They are risking not only their own capital but all that they possess if the business fails to succeed. They are prepared to work all hours of the day and night. If only the spirit that we see in the best of our small businesses were extended to the rest of the economy, we would not be in our present difficulties. I am determined to do all that I can on their behalf while I have the good fortune to occupy my current position.

My hon. Friend will recognise that there can be no doubt of the commitment of the Government to small businesses in general. As he knows, in the short period in which we have been in office well over 50 measures of one sort or another have been introduced specifically to assist small businesses. I pay tribute to my hon. Friend the Member for Basingstoke (Mr. Mitchell), my predecessor in this post, who did so much for small businesses. The 50 measures range over taxation, employment, planning 587 and many other matters, including even form-filling. They are all areas that small businesses have constantly said are obstacles or burdens to them in their attempts to grow.

Although I recognise fully that in the present economic climate many small businesses are struggling to survive and many find it difficult to expand because of the world recession and the many difficulties that we face in pulling round the industrial restructuring of Britain during that recession, I believe that the work that has already been done in the past 18 months specifically to assist small businesses will be of great benefit to them when the economic upturn comes.

My hon. Friend has listed a large number of areas where he believes that we can go further. I cannot make commitments on any of them today, but I am determined to build on the progress that we have already achieved. My hon. Friend picked out particularly the importance of small firms with high growth prospects. I am sure that he will agree that one of the difficulties when talking about small firms or measures to assist them is that we are talking about so many different categories, including the self-employed who do not want to go beyond being self-employed, small businesses that cannot and do not wish to grow and small firms with high growth prospects, especially in high technology. I share my hon. Friend's view that the latter comprise one of the most important parts of the sector. I have often spoken about it and I recognise that the Bill concentrates on that group.

My hon. Friend referred to what has been happening in recent years to diminish the small business sector. He mentioned conglomerates and what I refer to as sellouts—mergers of large companies. I am sure that he recognises that one of the most exciting developments at present is the number of occasions in which that process is working in reverse—what is technically known as management buy-outs. In the two months that I have been in my present post I have been struck by the number of times that that has happened.

I am glad that my hon. Friend drew attention to the large number of companies that have started up in the past year. It is difficult to get precise definitions, but there is no doubt from the statistics and the anecdotal evidence that it is happening on a large scale. That is the good side of the picture of the difficulties that other small firms are facing.

My hon. Friend asked me to give careful and sympathetic thought to the 50 measures proposed in the Bill. As I have been involved with him in discussing and arguing for some of the changes in the past, I shall of course give careful thought to many of the measures. However, I am sure that my hon. Friend recognises the difficulties in the way of his formidable Bill. I appreciate why he has introduced it in this way. It provides a checklist that will be valuable in encouraging further public discussion, though there has been no shortage of that to date.

My hon. Friend will appreciate that there are difficulties for the Government in accepting the Bill as it stands. In the first place, a number of the measures that he is asking the committee of inquiry to look at are already under investigation by expert bodies or are the subject of possible Government action in internal governmental reviews, consultative documents, expert committees, White Papers, Green Papers or otherwise.

588 Alas, time will not enable me to list them all, but I have written in front of me the number of areas in which the Government are acting or have expert reports in front of the public on matters that my hon. Friend has listed. I think that that in itself is a formidable indication of the determination of the Government to go on helping small businesses. It also means that a separate inquiry at this stage, to report within the next six months, would involve duplication and proliferation. I am not sure that that would be the best way to proceed.

Secondly, many of the items have very wide-ranging significance going far beyond small firms themselves. Many, too, would require very substantial costs—