§ 7.34 p.m.
§ Baroness Farrington of Ribbleton
My Lords, before we commence the debate standing in the name of my noble friend Lord Harrison on small and medium-sized enterprises, it may be for the convenience of the House to know that the Speakers List was reissued earlier today and that the time limit for Back-Bench speakers has decreased to six minutes. I apologise for any inconvenience this may cause.
§ Lord Harrison
rose to call attention to the economic and social conditions necessary for the success of small and medium-sized enterprises; and to move for Papers.
The noble Lord said: My Lords,Businessmen are corrupt, cunning and cynical … dishonest, dumb and duplicitous … unethical, unprincipled and villainous to boot".Not my words but a quotation from a book of literary criticism published in 2000 entitled The Representation of Business in English Literature. This fascinating essay analyses why business gets such a bad press in English literature, a cultural view which is itself replicated in all walks of British life and stifles our better appreciation of business. According to the book's authors, only in 1429 soaps like "Coronation Street" and "EastEnders" is an alternative vision of business people offered, where many of the soaps' main characters are depicted as utterly respectable smaller business people making wonderful contributions to all the lives around them.
I want to highlight the wonderful world of the smallest businesses, populated by sole traders, family and micro-businesses; to suggest that we must tackle the prejudices which give the negative view of business that I have mentioned; and to point to how we might all work together to disperse that cultural fog which disguises the true potential of small businesses in Britain today.
Perhaps I may give an example of how the contribution of small businesses is sometimes overlooked in our cultural life and in our policy making. The subject of corporate social responsibility in big business has rightly and recently become a fashionable study, highlighting the need for businesses to work sustainably and ethically within the local communities in which they find themselves. But small business people have been doing this for years. They give of their own free time to help local charities, to sit on local councils and to befriend both their customers and workforce. They are already in and of their local communities. We should acknowledge their pivotal role in local Britain today and their potential for fostering beneficial change.
I am proud that the Labour Party has itself undergone profound change in its attitude to business and to small firms in particular. Such change was needed and has manifested itself in the outstanding record of the Government since they came to office. They have promoted not only a fair society but a society with flair—1.3 million small business start-ups since 1997; SME survival rates the strongest for a decade; UK small firms enjoying the highest pre-tax profit margins in the European Union as a whole; and, according to the World Economic Forum, the UK is the eleventh best place in the world to start up a new business. The Government have also set up the pioneering Better Regulation Task Force to shred red tape under the former chairmanship of the noble Lord, Lord Haskins.
Chancellor Brown's handling of the macroeconomic environment, in which small businesses prosper, has been unparalleled. It was pre-figured by his bold stroke of handing interest rate decisions to an independent Bank of England. His recent budget combined macro-economic stability with specific measures targeted to help small firms as part of the Government's sensible strategy of developing public services of health, education and transport to strengthen the business environment. That in turn provides the profits to re-invest in those very same, life-enhancing public services—a virtuous circle that improves all our lives.
However, there is a caveat. I ask my noble friend the Minister whether the Budget decision to increase national insurance contributions was the wisest way to generate new finance for this much needed public investment? Raising income tax was less likely to affect 1430 labour intensive small businesses taking on new employees. In like vein, the very welcome cuts in corporation tax reward growing small and medium-size enterprises, but we should not forget the micro or sole trader who typically reports profits less frequently than larger SMEs. They also serve who stand and wait on local communities.
Splendid as the Budget was, we need to deepen further our understanding of the smallest businesses and of the enormously important role that they play in advancing other government objectives. For instance, the Government rightly laud the pivotal role of local shopping centres in keeping alive and vibrant local communities across Britain today. The painter, the plumber and the pizza-maker are all instrumental in holding together our local communities at greatest risk; and the local corner shop takes a place of pride in Britain—that happy island of Napoleonic shopkeepers. We must do everything that we can to help such SMEs to assist us in building vibrant villages in the countryside, successful suburbs and active inner cities.
Another tangible success of the Labour Government has been the setting up of the Small Business Service, ably led in its first years by David Irwin. With his departure, will the Government take the opportunity to see whether the SBS's culture is appropriate for future successes and challenges? For instance, the Small Business Service's promotion of small high-tech firms helpfully highlights their great potential for growth and development. But the SBS should also be zealous in defending the family business and the sole trader. Can my noble friend reveal the Government's thinking on the right balance that needs 'to be struck?
Welcome, too, is the strengthening of the powers of the Office of Fair Trading under the Enterprise Bill. The promotion of fair competition is vital for all good businesses. But will my noble friend accept that there has been a perception among the small business community that the OFT supports big business, sometimes at the expense of small firms, which also need guardian angels of fair competition. Similarly, it has been put to me that the Official Receiver has exercised his role with an over-legalistic approach, which sometimes neglects to understand the human frailty of small firms.
The Government rightly exhort Whitehall, in respect of the development of cross-cutting policies which might adversely affect SMEs, to "think small first". Will the Government ensure that that useful nostrum is spread, say, to the heads and governors of our schools, colleges and universities? Perhaps I may give an example. I have had occasion over many years to regret the absence in the classroom and lecture theatre of the role models of small firms and business people. When business is represented, the representatives are normally drawn from the larger business community—good in itself, but not the whole story. Some enlightened schools now invite in the local butcher, baker or candlestick-maker to tell their Miller's Tale of running small businesses. The object is to tutor and inspire the next generation in the noble art of small business.
1431 Will the Government give further encouragement to mobilising this vast army of visual aids for the young—Britain's small businesspeople? Recently, my 16 year-old daughter, participating in the Young Enterprise Scheme, selling goods on the evening of the school play, was confronted with a customer who wanted to buy her remaining stock on display. No problem—except that he had only euros on him with which to make any purchase. My daughter—suffering a father who is a euro-anorak—quickly closed the deal, knowing exactly the exchange value of the euro for the pound.
I tell this story not only to show that the euro is entering Britain slowly but surely, but also to suggest that the small business community itself must undergo cultural change. Hitherto, SMEs have been the most sceptical group in society concerning the advent of the single currency. This must stop—and so, too, must their scepticism about Europe and its blossoming single market; otherwise, fleeting opportunities to open up new markets for British goods and services will be squandered and lost. Happily, there is evidence that the SME community is now engaged in hand-to-hand trading with our European rivals and partners. The May 2002 survey of small business by the Federation of Small Businesses testifies not only to the good, rude health of Britain's small firms —essential at a time of some economic slow-down—but also to the fact that 22 per cent of them export into the EU, an encouraging increase on the previous survey.
The Government must foster this renewed spirit of enterprise, and must build upon Prime Minister Blair's pioneering work at the Lisbon Council in establishing the European Charter for small businesses. In particular, the Government must ensure that the development of the single European market—the direct through-ball for British jobs and prosperity—is a fair and level playing pitch for small, as well as big businesses. I give as an example the proposed prospectus directive, which rightly wants to improve the access to cheap money for business. As currently formulated, however, it may destroy its own desirable objectives. Making listing on the aim market prohibitively expensive is not a way to help small businesses gain access to new sources of finance.
Will the Government also listen to the thoughts of the CBI's small firms service on effecting tax changes whose purport will be to enhance the raising of equity capital as an alternative to traditional bank loans?
Perhaps I may also ask my noble friend, apropos of the single market, how successfully the Government believe their legislation regarding late payment on commercial debt is operating. To what extent will British legislation need to be re-fashioned to make it compatible with the relevant EU directive? As my noble friend will know, the Forum of Private Business, among others, canvassed assiduously for the implementation of this Act and of the directive.
Finally, I congratulate the Government, in the form of Patricia Hewitt and Nigel Griffiths, who are doughty advocates of changing the culture of our high street banks to make them more SME friendly. Would 1432 they, and my noble friend the Minister, turn their attention to the problems of finance for small businesses in deprived communities, as highlighted by the excellent Bank of England ninth report, published in April, on the financing of small firms? Here we learn that lending to small firms and deprived communities in 2001 grew at a slower rate than in the general population of Britain's small and medium enterprises; that the average lending margin was higher; and that the total amount lent was smaller than the average amount lent in the country as a whole. These problems are compounded by the fact that proportionately more businesses in deprived areas lie in sectors such as retail, transport, and some service sectors, which, regrettably, do not attract eligibility for the small firms loan guarantee scheme. Can the Government respond to this problem? If they can, it would mark a genuine partnership of purpose. Helping these particular small firms will help the Government's general regeneration policies—in this instance providing the wattle and daub for building a weatherproof economic strength.
The Government are a friend of small business. But they need to deepen that friendship even more, and to understand the sometimes mercurial culture that informs Britain's large army of small business entrepreneurs. Novel and innovative policies, combined with sound financial management, have long put paid to the fiction that this Government are inimical to business, and to small business in particular. We are now well past the opening chapters and into the heart of the text that the Government are writing for Britain's small firms. Fortunately for us, SMEs are now literally at the heart of a page-turning Britain, and are leading in an epoch-making Europe. My Lords, I beg to move for Papers.
§ 7.49 p.m.
§ Lord Brooke of Sutton Mandeville
My Lords, it is my privilege for the second time today to be the first noble Lord participating in a debate to congratulate the initiator of the debate, in this case the noble Lord, Lord Harrison. I shall in a moment query the Labour Party's logic and motivation in holding this debate. However, I salute the noble Lord for the enchanting way in which he started it.
My sole qualification to speak in this debate is that for 18 years, between 1961 and 1979—when I joined my noble friend Lady Thatcher's first government as its most junior member—I worked in a small business. It employed 10 people in three countries when I joined it in order to create the fourth country office, but it employed 200 people in 12 countries when I left on what turned out to be indefinite leave of absence. Throughout that period, I met a monthly and ascending payroll and was monitored by profit budgeting. For the first 13 years, I was in a business dominated by its founder, who held 65 per cent of the stock. For the final five years. I led the outcome of a management buy-out in which 50 colleagues refinanced the business in order to buy out the founder. He will be 80 this year. The firm still bears his name and it now employs 700 people. So it is still a 1433 medium-sized enterprise, and it is one of the four largest firms of its kind in the world. We must have done something right.
I cannot help feeling that the Government Benches are leading with their chin in this debate. Perhaps they believe their own rhetoric about their relationship with business. Perhaps they do not realise that business is gradually turning against them. They are of course great ones for deadlines, as Dr Johnson once said of a convicted man. Just as Mr Campbell was saying that spin was out and just as some of us were beginning to forget the Treasury verdict on Hugh Dalton's Budget leak and consequent resignation in the 1940s which the Treasury regarded as a sign of the divine providence which watches over the affairs of this country, the wires were loud with serial Budget leaks about all the goodies business were going to enjoy from this year's Budget. Perhaps I may use this debate to give a First Reading to "Brooke's Law" that serial leaks of small concessions to business are harbingers of a much larger but still undisclosed whammy yet to come. The Treasury overdid itself this year with forecasts of miniaturised largesse, and of course I acknowledge that some of it was welcome. Perhaps the miniaturised largesse before the whammy is the cause of this debate today. Perhaps it is the low interest rates and the low inflation.
Last month, on 22nd April, the Financial Times—for which, more than 40 years ago, I used to work as Swiss correspondent—said:Ms Hewitt will on Monday tell employers Labour has delivered low inflation, low interest rates and 1.5 million new jobs".In the government of my noble friend Lady Thatcher, it was of course recognised that stable and helpful economic conditions were necessary for economic success. However, credit for the jobs was given to the businessmen and the employers. When long ago in London I went from one other employee besides myself to three, and then to five, and then to seven, it seemed to me that it was I who was taking the risk and not the Lords of the Treasury. However, as 1.5 million new jobs is a round number, I cannot help noticing the red tape bill in Labour's first term as calculated from the Government's own regulatory impact assessments and by the British Chambers of Commerce. That figure is £15 billion, also a round number, which does not even include the financial cost of the national minimum wage.
The casualty in my speech, from suddenly being slimmed down during the last debate from eight minutes to six, was the passage devoted to the NIC consequences for the self-employed of the recent Budget. Happily, however, the noble Lord, Lord Harrison, has dealt with that for me.
I turn briefly to the competition White Paper which underlay the provisions in the Enterprise Bill now before Parliament. The CBI has pointed out that the White Paper proposals will lead to divergence from the EU system. Speaking as one who laboured on the Committee stage in another place on the Competition Act 1998, where Ministers emphasised that that 1434 legislation would bring us into line with Europe, I am bound to wonder why we bothered. Less politely, the CBI said the divergence was "particularly confusing and unwelcome".
While on the subject of the 1998 Act, I recall with rich irony an evening when the All-Party Parliamentary Paper Industry group was dining with the industry and one of the Labour MPs present said generously that he would happily lead an all-party delegation to see Ministers on some aspect of competition policy as it affected the paper industry. I did remark quietly as a representative of another party that before I joined such a delegation. I would like to hear Labour Members explain why, at all stages of the Competition Bill in the Commons, they had voted for penal fines for some offences amounting to 10 per cent of the sales of the offending company. Answer came there none.
Finally, at the heart of any small business is the single mindedness an entrepreneur has to display if his business is to thrive. I close with a quotation from David Arculus, the successor to the noble Lord, Lord Haskins, as chairman of the Better Regulation Task Force in April this year. He wrote in the Financial Times:When researching our report we asked a Government department that already gives advice to employers whether it could also cover employment regulations. It replied it could not possibly know everything there was to know about employment regulations. Yet that is exactly what government expects of employers. That is the crux of the problem: too few Government policymakers know what it is like to run a business".In more senses than one, I rest my case.
§ 7.56 p.m.
§ Lord Graham of Edmonton
My Lords, I thank my noble friend Lord Harrison for giving us this opportunity. It is also a pleasure to follow the noble Lord, Lord Brooke. I think that he and I hold a record in the other place. In 1981, we served in Committee for eight months continuously, taking both the Education Act 1981 and the Local Government and Planning (Amendment) Act 1981 through the House. It was a pleasure. He takes great pride in the support that the Conservative Party has given to small business. The trouble is that many of them were large businesses that were reduced to small ones by the previous government's policies. However, I cannot generalise or plead that small businesses are wholly content with the Government's policies. Small businesses are never wholly content, and never will be.
Before I was the Chief Whip, I was the parliamentary consultant to the Federation of Master Builders and to the National Market Traders Federation. I should therefore like to quote to the House, and ask the Minister to take note of, some of the matters concerning those organisations. The Federation of Master Builders is very concerned about the effect of the black economy—cowboy traders—on its business. Master builders are very proud, independent and successful people; they are survivors; and they will survive. However, they believe it grossly unfair that cowboy traders are able to quote prices 1435 exclusive of VAT to people wishing to build a new extension or new house. They have therefore asked me to call attention to the fact that they would very much like the VAT rate on repair, maintenance and improvement—known as RMI—to be reduced to 5 per cent. They believe that that would eliminate the commercial advantage enjoyed by traders who do not pay VAT.
I ask the Minister to comment, if not today then later, on the comparable situation in France. Following the labour-intensive industries route, the French Government have reduced VAT on RMI to 5.5 per cent. The increase in the total RMI output of bona fide firms since August 1999 has created 54,000 new jobs. I think that noble Lords can appreciate the difficulty facing legitimate, honest and reliable builders having to compete with others who, although perhaps equally good builders, do not pay VAT. Builders in the federation are not asking to be let off scot-free; they are asking to pay a sensible amount. I ask the Minister to tell us whether that is possible. The federation also tells me that the UK Government brokered the Isle of Man's wish to reduce VAT for RMI work, as in France. If they can do that in the Isle of Man, I think that they can do it elsewhere. The federation has asked me to draw attention to the Construction Industry Scheme and to employment status. The Government should have a single view of the employment status of individuals within the construction industry rather than the Inland Revenue and Employment Services taking different views as at present. I should like the Minister to comment on that matter if possible.
About two weeks ago, the noble Lord, Lord Skelmersdale, helpfully drew attention to the lack of consultation procedures for the building industry. I am sure that the Minister will have noted that that is an aggravating factor. Builders have drawn my attention to the enormous increase in legislation over the past 10 years, especially as regards health and safety, employment and social issues. Many of the objectives are laudable but they have not necessarily led to improvements, just to more red tape.
Members of the National Market Traders Federation are depressed due to the 24 hours a day, seven days a week trading which occurs in large, out-of-town outlets and which damages town centre trading. The federation would like to see the Government encourage local authorities to spend a little more effort on keeping alive a declining markets industry. I attended the market traders' annual conference two or three weeks ago. They will survive. Everyone here delights in walking round a town market, but the conditions under which they operate are deteriorating. Market traders want local authorities to invest more money in markets to smarten them up. I hope that the Government will take on board in their interdepartmental discussions the fact that the market industry needs if not to be loved, at least to be respected and encouraged. I believe that that would go a long way to encourage many small businessmen and businesswomen to realise that the Government are on their side.
§ 8.2 p.m.
§ Baroness Byford
My Lords, in the simplest terms the economics of any business consist of income and expenditure. In a business large enough to have waged or salaried staff the expenditure will include wages, salaries and associated on-costs. Some of those will be direct: employers' contribution to pensions and employers' national insurance bills. Others will be indirect: the cost of administering PAYE; sickness benefit, maternity benefit and so on. We must not forget the indirect costs of keeping up to date with new Acts, statutory instruments, European directives and government regulations, all of which have to be studied lest they affect the businesses concerned.
Last year alone some 4,642 new regulations were introduced. I remind the Minister that when he responded to a debate in May 1999 the average figure was around 3,300. Even if 80 per cent of them replace old regulations, they still have to be read, the subtle nuances of government-speak appreciated and their message implemented. Those which are completely new require specialist—for which I read "expensive" — clarification and costly implementation. I refer, for example, to the physical agents directive or the forthcoming regulations on battery cage construction.
In May 2002, the report of the Better Regulation Task Force—my noble friend Lord Brooke has already referred to that body—found it necessary to recommend that civil servants dealing with employment law should spend time finding out how regulations impact on small businesses. I refer also to very small businesses in that regard. I hope that the Minister will clarify the Government's definition of a small business. Presumably the members of the task force feel that civil servants do not understand what they are doing.
The Country Land and Business Association has been warning for years of the counterproductive effects, both direct and indirect, of the proliferation of regulation. Moreover, rural small businesses miss out on some of the benefits open to their urban cousins. Mark Pendlington, writing in that association's Agenda magazine put it very well. He wrote that,by definition the rural business can be isolated and miss cut on support because of a real or perceived lack of access to the assistance that urban based businesses may take for granted".I wish to discuss particularly food and agriculture. British farmers have to rear their animals in accordance with animal welfare laws which do not apply in many other countries. British farmers have had to absorb the cost of removing and scrapping specified risk material and of cattle passports and animal traceability schemes. They have to comply with the rules on pesticide use, slurry disposal and sheep dipping which are not enforced throughout the world.
I wonder whether noble Lords are aware that just recently the Women's Institute has been caught up in this maelstrom. The Financial Services Authority has increased the registration fee from £25 for each market to £240. The reason is that hitherto it was a nominal charge as the Government subsidised market regulation. Now the Financial Services Authority is 1437 entirely self-financing and the WI is in effect paying to maintain its limited liability status. What are we coming to when we penalise not-for-profit organisations? Does the Minister accept that a rise from £25 to £240 is unreasonable?
Most British farmers qualify as small businesses both in terms of numbers of employees and issued share capital. Most of their output, however, goes to processors and retailers, many of whom are quite large and are definitely not small businesses. Yet they do not have to source their purchases according to the rules under which British farmers have to operate. For example, there is no rule which restricts all imported pork to that produced under similar welfare restrictions here, nor any specification that imported chickens must be reared in congenial conditions. Imagine my disbelief when I read that the Food Standards Agency is planning a survey of salmonella contamination of eggs but has specifically excluded imported eggs.
All our farmers' output is subject to inspection and testing at every stage of the process. They do not mind that but we know that such rigour does not apply in foreign countries. I refer your Lordships to parliamentary Question 8099 answered on 21st May in which the Minister admitted that the European Commission's Food and Veterinary Office did not carry out a further inspection on poultry meat production in 2001 in France despite having found irregularities in the procedures in 2000.
I should like to add my thanks to the noble Lord, Lord Harrison, for giving us the opportunity to air our concerns and to express our support for small and medium-sized enterprises both rural and urban. I believe that we all acknowledge their importance within their local communities.
§ 8.8 p.m.
§ Lord Mitchell
My Lords, I, too, thank my noble friend Lord Harrison for introducing this timely debate. I stand before your Lordships as an unreconstructed serial entrepreneur. I have the right background for the job—second generation immigrant, chucked out of school at 16 plus an unquenchable desire to be my own boss.
Many believe that entrepreneurs are driven solely by the desire to make millions. That is why taxes should be low and incentives high. However, I can tell noble Lords that as regards my own experience independence has been my constant motivator. That leads me to my main point. Entrepreneurs are the very antithesis of corporate man. Where the corporate man wants structure, logic and well produced business plans, the entrepreneur thrives on risk and expects commensurate rewards. Few entrepreneurs start off writing business plans—what they know in their guts does not need to be committed to a paper. That is why I feel just a little sceptical when I hear politicians, journalists and civil servants pontificating about an entrepreneurial society when they are the last ones who would ever consider putting their own necks on the block.
1438 I must confess that I was surprised to read the announcement this weekend about the newly appointed independent board members of the DTI. Their supposed job is to introduce innovation and creative thinking into the department. One might have thought that our outstanding entrepreneurs would have been much more suitable to do the job. Not a chance. With a couple of notable exceptions, it is the same old corporate placemen—the non-risk-taking establishment and the professional committee men and women. How many of them have risked their own capital starting their own businesses?
Being an entrepreneur means taking an extra mortgage on your house. It means borrowing from friends. It means putting your very future at stake. It means sleepless nights and panic attacks. It means being passionate about your company. And nothing can describe that gut-wrenching feeling that all entrepreneurs will recognise, when meeting the current month's payroll looks shaky, when a major customer is late in paying or when the bank manager gives you that disbelieving look and asks for even more security. And, my Lords, if you have not been there, you cannot imagine it.
I have run many businesses. Some have failed; one of them—a restaurant in Soho—failed spectacularly. But three have been successful in the IT services sector and one of them became a fully quoted company on the London Stock Exchange. In each case I was there at the beginning—buying stamps, brewing coffee and making hundreds of phone calls a day. The best moments come from watching something small and vulnerable turning into a market leader, or watching young people seizing responsibility and growing by the day. For those with the nerve it is a wonderful experience.
This debate involves the social issues surrounding small to medium-sized enterprises; I would like to address a couple of them. In the corporate world and in the public sector, I see fear of failure as a prime inhibitor. Today, if you are a senior manager on a good package, with a fully provided pension and a large Jaguar in the garage, why take chances? Keep your head down and your nose clean and do not get into trouble.
Entrepreneurs think differently. Even when they are successful they are still prepared to take risks. You have only to look at Sir Richard Branson to recognise that he thrives on new opportunities and eschews the corporate world. Perhaps that is the reason why immigrants are such enthusiastic creators of new businesses. They do not understand the established world and have no interest in the status quo; plus the fact that many corporate avenues are barred to them because they are newly arrived, lack the contacts or the proper education or are even discriminated against. So they do it themselves.
There is also another social attribute that helps to make many entrepreneurs successful—I suspect that it may come as a bit of a surprise to noble Lords. It is the lack of a university education. Just look at some of our famous entrepreneurs: Sir Alan Sugar and Sir Richard 1439 Branson and, in America, Bill Gates, Michael Dell and Larry Ellison of Oracle. Not a university degree between them. Indeed, it was Larry Ellison who, addressing the graduating class at Yale University last year, called the class a group of losers. He stated:a cap and gown will keep you down",and said that they will never get really rich. Of course, he slightly had his tongue in his cheek. However, the thrusting dynamic entrepreneur—the man or woman who dreams of making billions—cannot adjust to sitting in a university lecture room when they could be out there moving and shaking.
On a micro-level, the Government have done much to promote entrepreneurial business. Corporation tax has been reduced and tax thresholds have been raised. And from my own selfish point of view, the introduction of capital gains tax taper relief has certainly been fantastic.
Hold shares in a qualifying company for two years and under a Labour government you will pay 10 per cent CGT. Now that is something that any entrepreneur can relate to. We should just remember where CCT was in April 1997: 40 per cent, and that from the so-called party of enterprise.
Equally, on a macro-level, the SME businessman has much to thank the Government for. Nothing can encourage risk-taking and investment more than the confidence that has emanated from the low inflation, low interest rate and consistent growth economy that has prevailed in this country.
I read a lot about the so-called negative effects of regulation but I am not sure how valid that is. Of course, regulation is a pain but every country is regulated—even America—and we are much less bureaucratised than many of our European competitors. My view is that dealing with red tape is like dealing with London traffic—you factor it into the equation.
One of the greatest entrepreneurs in this country is James Dyson, who has built up an amazing business in the domestic appliances sector. Using lateral thinking technology, he has taken on the global leaders and has emerged as an international winner. His biggest plea to the Government is to make tax allowances on research and development even more beneficial.
Another entrepreneur who I know well is Edward Atkin. The grandson of an immigrant, Mr Atkin has created the Avent baby products range, which has been highly successful.
The Government have been a good friend to the entrepreneur. Business taxes are low, the gains from taking risks are rewarded and appreciated and the economy is as predictable and encouraging as at any time in my lifetime.
§ 8.15 p.m.
§ Lord MacGregor of Pulham Market
My Lords, I, too, warmly congratulate the noble Lord, Lord Harrison, on introducing this debate. I warmly support and endorse the sentiments—and many of the policies—that he expressed. However, I must tell him that none of that is new.
1440 About 20 years ago, I was Minister for Small Businesses—or, as some people described me, the small Minister for businesses. At that time, the atmosphere and culture was wholly hostile to enterprise, businesses and the self-employed. The history of this country has been somewhat hostile. I remember going round the country talking to loads of people, all of whom said, "Why are you putting the emphasis on small businesses? It will not create any new employment. New employment is created by the public sector, big companies or nationalised industries". I remember going to schools and finding that no career officers would encourage anyone to become self-employed or to go into small businesses. We had to change the culture, adopt a new tone and take many policy decisions that would change the whole atmosphere.
I am pleased to say—I am sure that the noble Lord, Lord Harrison, will acknowledge this—that, in contrast with that time, most new jobs are currently created by the self-employed or small businesses. Much of our economic competitiveness has been brought about by very small businesses, by growing businesses, by venture capital and so on. The policies that we adopted were the type of policies that the noble Lord discussed. We started the small firms service, adopted many of the relevant tax policies and started the necessary work in schools. I am delighted that in time that has changed the culture.
I acknowledge that the Government have accepted that the culture has changed. But—my goodness—I do not think that 20 years ago we would have heard speeches from the Labour Party along the lines of those delivered by the noble Lords, Lord Harrison and Lord Mitchell. I am delighted that that culture has changed and that we brought it about.
Sometimes the tone is not that which we have heard this evening. I fear that rather too often Ministers make comments ranging from a lack of sympathy and understanding of small businesses to aggressive attitudes, attacks and outright hostility. That tone is important, as we have seen in other areas in which the Government have gone wrong.
I want to concentrate on the policies and to discuss examples in which the position has become cumulatively worse during the past five years. The first example is that of tax. Some tax increases—stealth taxes—slowly have an effect on businesses. The best example that I can think of is that of the removal of ACT and the effect on pension funds—there was a withdrawal of £5 billion a year from those funds. I know that other factors are involved but we are now seeing the cumulative impact of that £5 billion a year on pensions. There are increasing costs on employers, who are changing their pension policies, which makes it more difficult to provide pensions for employees in future. That is an example of a tax whose immediate effect was not noticed but—my goodness—it is having a big effect now.
Another example is that of successive increases in fuel duty. It was not until the outburst from road hauliers last September—most road hauliers are still 1441 small businesses—that we became aware of that. The impact of those increases on hauliers over a period became so heavy that there was that enormous campaign, which caused the Government to change their mind. It was only when that happened that tax policies changed.
There was also a good example in this year's Budget, which was briefly referred to earlier. I recognise and applaud some of the many new measures that will help small businesses, including the reduction in corporation tax and the enterprise and innovative measures. Next year, they add up to tax relief of about £800 million. The impact of national insurance contributions on employers and the self-employed amounts to £4.5 billion. The increase in employees' national insurance is a cost to employers because it will encourage employees to ask for higher wages. Therefore, there is an increase of £8 billion and a reduction of £800 million. No wonder many businesses are now complaining that this was an anti-enterprise Budget.
The other area to which I want to refer is regulation. It has already been mentioned. Recently the Institute of Directors, of which I am a council member, carried out a survey of its members. It asked:How do you assess the changes in the burden of red tape relating to PAYE and other payroll matters over the past five years?Fifty-three per cent thought that it was much heavier; 31 per cent, a little heavier; and 2 per cent thought that it was lighter. With regard to employment law other than payroll, 75 per cent believed that it was much heavier; 18 per cent, heavier; and only 2 per cent lighter.
We have already heard quoted the estimates of the British Chambers of Commerce. The Institute of Directors said that the total burden on employers of some recent regulations is, at the minimum, £6 billion, and that is based on the Government's own estimates. These are huge figures. We have already heard about the 4,642 extra regulations brought in last year. Some of them are massive. For example, one that I have just come across—the TSE (England) Regulations for farmers—has 89 pages of detailed legislation. No farmer will ever be able to cope with all that. And a cumulative burden will be coming. Therefore, I believe that the Government's heart is in the right place but that too many of the measures that they are introducing will bring about the reverse of what they intend to achieve.
I finish with the following point. When I was Secretary of State for Education, there was great concern among head teachers and teachers in schools about the amount of material that came from the Department of Education in connection with the introduction of the national curriculum. My officials always said to me, "No, Secretary of State, they are wrong. There isn't very much". I decided to put every document that was sent to schools from my department and others on my window shelf. The pile grew and grew by the week. It was a very good illustration of what my noble friend Lord Brooke was 1442 saying; that is, far too often governments and civil servants do not understand the difficulties that they create for small businesses. That is why I believe that, although great progress has been made with regard to the culture, there is still much to be done in relation to the policies.
§ 8.22 p.m.
§ Lord Borrie
My Lords, I look forward, in a few weeks' time, to welcoming the Second Reading in this House of the Government's Enterprise Bill. I believe that it provides valuable strengthened powers for the competition authorities. Like my noble friend Lord Harrison, who so helpfully initiated the debate tonight, I believe that that will be beneficial for both consumers and business and, in particular, for small and medium-sized enterprises.
Having watched or read the proceedings in the other place, I was sorry to notice that in the briefings for the Bill the CBI adopted a very negative attitude towards a number of the Bill's proposals. Even in 2002, the CBI seems to find it very difficult to get away from the old image of representing the interests of big business rather than business in general. It seems to me that SMEs need a truly competitive environment. If small and medium-sized businesses are to make headway in an industry where one or two major firms are dominant and intent, through exclusionary practices, to keep out as far as possible new rivals, a positive competition policy, enforced by strong competition authorities, is essential.
In Part 4 of the Bill, greater powers are given to the Office of Fair Trading to scrutinise markets throughout the economy to see whether or not competition is working well and, if it is not, to take appropriate action, such as making references to the Competition Commission. What does the CBI say? Does it welcome that? No; it expresses anxiety that,an enlarged and empowered OFT will cast its net far and wide looking for any possible behaviour or structure that could be construed as anti-competitive".The CBI wants, and wants its spokesmen in the Conservative Party in the other place—I hope that it will not happen here—to put shackles on the Office of Fair Trading. In doing so, I do not believe that it is speaking for small and medium-sized enterprises, which are obviously those which suffer most from anticompetitive practices.
I now turn to a matter with which, I know from experience, small and medium-sized enterprises were most concerned during the 1980s and 1990s; that is, the attitude towards them—unhelpful, as they would often describe it—of the banks and, in particular, the clearing banks. I am so glad that within a year of the Labour Government being elected in 1997, my right honourable friend Gordon Brown initiated the Cruickshank inquiry. Cruickshank reported in March 2000. He said that, while the market for personal banking services was getting better from the customer's point of view, the market for small business banking services was much more problematic, with 1443 very little prospect of effective competition. He advocated a full-blown inquiry by the Competition Commission. Significantly, he added,with the possibility of structural remedies".By "structural remedies", he meant "divestment".
My right honourable friend Gordon Brown made the recommended reference more or less immediately after Cruickshank reported in 2000. As your Lordships know, the large, if not huge, report of the Competition Commission was published in March this year. I believe I can say that the Government accepted the commission's recommendations in full. We are fortunate that the Minister who is to answer the debate tonight himself repeated the Chancellor's Statement in this House on 14th March.
I believe that over time small and medium-sized enterprises will benefit from the commission's detailed recommendations: for example, that charges should be more transparent; that switching accounts from one bank to another should be facilitated; and that banks should provide a portable credit history which the customer can carry from one bank to another. The most controversial proposal was the transitional requirement that banks must pay small businesses a minimum interest on current accounts which at present would be a modest minimum interest rate of 1.5 per cent.
There were, of course, squeals of horror from the banking community. But I also noticed that their share prices went up. It reminded me of the old saying that if you see a banker jump out of a window, jump after him—there is bound to be a profit in it. However, I have some sympathy with the banker who was reported as saying that the minimum interest rate on current accounts that banks had to pay amounted to price regulation and had nothing to do with promoting competition.
The big question is whether the other changes—some of which I have mentioned—will somehow be enough to entice into the market new providers of banking services so that small businesses have some choice and do not need to put up with the bad treatment that they received for several decades. I know that very few of the old building societies which have converted into banks over the past 10 years have wanted to enter the small business market. I know that the Woolwich, of which I was a non-executive director throughout most of the 1990s, certainly did not want to do so.
What will entice alternative providers into the market? Governments, government agencies and competition authorities can create improved conditions for new entrants and can make competition more feasible in practice; but they cannot produce new competitors out of thin air. They cannot ensure that new, effective competitors will emerge. As a question principally to my noble friend the Minister, I wonder whether at least one of the proposals mooted before the Competition Commission and rejected by it and by the Government would make for more competition and more choice for SMEs—that is, some compulsory divestment of small and medium-sized enterprise banking business to others, just as, I believe, Cruickshank wanted in 2000.
§ 8.29 p.m.
§ Baroness Platt of Writtle
My Lords, I declare my interest—already registered, of course—as a non-executive director of our small family firm, which has been serving its customers to the best of its ability for more than 75 years. I believe that that is the key to the success of any business. Governments cannot run business, as has been said several times tonight. Their experience does not lie in that direction. The less that politicians and civil servants interfere and regulate the better. As Charles Dunstone of Carphone Warehouse has said, fewer than 5 per cent of people are dishonest. It is much better to rely on the principle that 95 per cent are honest. There is too much regulation, which results in senior management—who are a bit thin on the ground in SMEs—having to spend large amounts of their time swotting it up instead of concentrating on serving their customers thoughtfully and efficiently. All strength to the arm of the noble Lord, Lord Haskins. Over-regulation can also result in a litigious society, which can stultify innovation and risk-taking in improving customer service.
In serving their customers, firms always need to keep their eyes on the applications of new technology to increase their efficiency and productivity and keep their prices competitive in a global economy. That means the need to recruit innovative engineers to introduce new ideas. I am a chartered engineer, so of course I am in favour of more graduates entering our profession and joining small firms. However, their greatest need is often at the incorporated and technician level. From all sides, we hear of skill shortages in engineering. Most firms rely on engineering skills somewhere, whether they produce pure engineering products, such as household equipment, or food, drink, pharmaceuticals, textiles or sporting kit. In all those areas, automation is king. If businesses are to be competitive, they need innovative engineers behind them. As Sir Peter Williams, chairman of the new Engineering and Technology Board, quoted recently from Disraeli:Upon the education of the people of this country the fate of this country depends".That is just as true today. As Sir Peter says,not enough young people are choosing careers in science and engineering".He also points out that:Industry needs bright young people, well trained in one of any number of relevant disciplines, with good communication skills, numerate and prepared to act in teams".Careers advisers—now perhaps called Connexions, I understand—need experience in those areas if they are to advise young people in a practical way. However, as the National Institute for Careers Education and Counselling reports in its survey, Choosing Science at 16:The majority of careers advisers were graduates with humanities or social science backgrounds. One in 10 had science degrees, all in biological subjects, and there were two engineers; there were no graduates in maths or physical science".That is not good enough. The balance is wrong. Something needs to be done quickly, or it will become a recipe for industrial disaster in the UK. I am all for 1445 the initiatives that the noble Lord, Lord Harrison, referred to earlier, with young entrepreneurs going into schools. That is good.
Reading the Government's paper on 14 to 19 year-olds, I am horrified by the suggestion that design and technology may become an optional subject. The subject is of value to children of all abilities, but especially to middle-ability children who go on to colleges of further education for technical qualifications and are of considerable importance to the success of small and medium-sized enterprises, who can continue their training to serve the firm and its customers well and efficiently. I hope that proposal is not adopted.
I declare a second unpaid interest as patron of the WISE campaign—Women Into Science and Engineering. The time available for this speech is running out, but I must emphasise the importance of encouraging girls into these fields of work. Only 2 per cent of those taking modern apprenticeships are girls, yet women are 52 per cent of the population. WISE urgently needs government support in its work on outlook courses to encourage 13 to 14 year-old girls to see that these apprenticeships will lead to well paid and interesting careers and to go for them.
I am grateful to the noble Lord, Lord Harrison, for raising this important subject and look forward to the Government's response. I hope that I can stay to the end of the debate, but it started late and I have to catch a train, so I apologise to the House if I am not able to stay.
§ 8.35 p.m.
§ Lord Hodgson of Astley Abbotts
My Lords, I join others in thanking the noble Lord, Lord Harrison, for giving us the chance to discuss this important topic. In particular I thank him for drawing attention to the prospectus directive. I hope that the Minister was listening carefully to what he said about the dangers of that one-size-fits-all idea. I also thank him for dealing with the question of the national insurance increase, which the Government put over as a 1 per cent increase, whereas of course it is a 10 per cent increase—from 10 per cent to 11 per cent.
Despite the persuasive effort of Labour Members to put a positive spin on the Labour Party's attitude towards small and medium-sized business, out in the country a large proportion of small and medium-sized firms are highly disillusioned with what the Government have served up for them. I am not entirely surprised about that, because large sections of the Labour Party still regard business as a zero-sum activity in which for every winner there must be a loser. Nowhere is that suspicion stronger than with small business. For many in the Labour Party, the more that these fundamentally untrustworthy businesses can be 1446 enmeshed in red tape, the better. Even at the higher levels of the Government, there is a continued obsession with command and control. As the noble Lord, Lord Mitchell, pointed out, smaller businesses are harder to command and control than larger ones, so there, too, there is a readiness to allow the tide of regulation to flow on unchecked.
What I find most surprising is how careless—and I use that word advisedly—this Labour Government have been about the preservation of our manufacturing base. I had assumed that with its historic links in the industrial towns of the Midlands and the North, the Labour Party would be more sensitive to the damage done to the manufacturing sector by the burden of regulation and by the Government's general economic policies, in particular the exchange rate that they have pursued, the result of which is that in March 2002 manufacturing output in this country was lower than for any month since 1994. I should have remembered that new Labour is not an industrially rooted party; it is an Islington-based, guacamole-eating, M25-centric party.
I shall deal with the burden of regulation as it is faced by small businesses, which is still increasing. Many of the regulations may be unobjectionable of themselves—they may even be welcome—but taken as a whole they represent a significant diversion of economic activity and effort. As my noble friend Lord MacGregor has pointed out, different Ministers and their civil servants produce regulations for matters affecting their sphere of responsibility. No one ever appears to stand back and look at the overall accumulating burden and consider the overall cost benefit to the country as a whole. An aeon ago, the Prime Minister promised us joined-up government. This is an area that would greatly benefit from such an approach.
I shall give the Minister a few quick examples in which the moves from good practice to statute law have increased the burden of red tape with no commensurate benefit to employer or employee. The first is the Employment Relations Act 1999, with its provisions on time off for dependants. Secondly, the privacy at work regulations, under the ECHR, are a gold-plated UK statute not matched anywhere else in the EU. The third example is the Data Protection Act and the provisions for unregulated employment records. Fourthly, on the mileage to emissions basis for car tax, contradictions still exist between VAT regulations and Inland Revenue rules. Consultants have made a fortune out of firms with only a minimal impact on the environment.
Those are historic examples. I hope that the Minister will be able to give us some views on the upcoming directives, including the physical agents directive, noise and vibration at work—another large red tape opportunity—and the directors' liability for corporate manslaughter.
1447 I shall quote a letter that I have received, which perfectly summarises the position of many small businessmen:My overall point is that this Government has increasingly shifted tasks and responsibilities onto the shoulders of business and I do not know how much more it can take before losing its competitive edge and being seriously damaged.…I am a trustee director of a café and a book and gift shop and the amount of regulatory bumph that comes through would sink the QE II in a month.Tax is not a particular problem as we are a charity but there is an overall problem of constantly having to watch that we ate not infringing Safety at Work, Health and Hygiene, Training requirements, Minimum Wages, Junior Helpers, VAT, Public Liability, Environmental Issues … Staff Advertising and Recruitment, Staff Dismissal, Employment Contracts and a host of other regulations. All these may be laudable in themselves but take up so much time and effort as well as costing money in obtaining legal advice that one wonders sometimes if it is all worth itWhat is the answer? One way may be to use the legal concept of the actions of a reasonable man. Start-up businesses or small businesses below a certain size would have the shelter of a legal umbrella of what a "reasonable man would do in the circumstances". That would enable cowboy employers to be stopped and permit the overwhelming proportion of sensible, serious, small businessmen to get on with their wealth-creation roles without a huge and increasing burden of red tape.
§ 8.41 p.m.
§ Lord Randall of St Budeaux
My Lords, I join the list of Peers who have thanked the noble Lord, Lord Harrison, for establishing this debate. I shall stick to the title of the debate which refers to the conditions necessary for the success of SMEs. The target for SMEs arose during the Portuguese presidency about two-and-a-half years ago, when in Lisbon it was declared that targets would be set for SMEs in terms of performance and in terms of meeting difficult time-scales.
When one considers the needs of SMEs one focuses on reform to the banking sector and access to bigger markets so that SM Es' income increases. There is also the matter of regulation to which the noble Lord, Lord Hodgson of Astley Abbotts, has referred. I do not believe that dealing with the many regulatory concerns on their own will meet the problems of SMEs, nor will it serve as a complete response.
When one considers the progress that has been made over a number of years one sees that there is still much fragmentation in the SME sector. The results from Barcelona, and a comparison with some of the statistics in relation to American progress during its 1990s reform programme, show that our progress should have been better. The solution in this country is to institute agendas as to the requirements of SMEs, but there tends to be no follow-up. Reports from inquiries are given to Ministers in the hope that something will happen.
There are 3.7 million SMEs in this country, and about 3.4 million survive on their own. They feel quite isolated. I believe that we should pursue the UK 1448 model. That puts Britain in an advanced position, which is good news, and it provides performance and competitiveness in a way that is good for this country. That initiative comes from a company called the Genesis Initiative. It is a non-political organisation which is strong in advocacy. I should declare that I am chairman of that company. The progressive people with which it is associated are good. They are well-known people such as Nicholas Goulding of the Forum of Private Business, Stephen Alambritis or the Federation of Small Businesses, David Doyle of the ACCA, on the accountancy side, John May, the policy director of the Small Business Bureau, and many others who undertake progressive thinking for SM Es.
The Genesis Initiative, through its UK model, has come up with a policy of empowerment that helps the 3.4 million isolated small businesses to help themselves. I believe that there will be greater engagement between those 3.4 million companies and the Government. Individually, the Genesis Initiative is establishing SME communities that are matched with MPs in such a way as to help empowerment. That means that SMEs, through their local communities, can access the facilities of MPs or Peers in order to gain access to Ministers. Ministers are involved and pilot schemes are running. Kerry Pollard is the chairman of the APPSBG, the parliamentary SME organisation.
All that is bringing SMEs towards Ministers and putting them in a position where they can ask questions of Ministers, just as we do as parliamentarians. There is also the collective approach. We are holding a spring conference in which delegates of SME organisations advise Ministers of their requirements and Ministers respond. Also website enhancement has helped.
In addition, there is the single market, a market that is relatively untapped by SMEs. It is roughly twice the size of the United States. That must be opened up. In the past we have used harmonisation, but it has done only part of the job. We need to use the UK model and encourage all the other member states to adopt that. We must also encourage our Prime Minister and other senior Ministers to develop a force for SME reform that will enable the Prime Minister of the day to talk to other Prime Ministers in other member states in order to get trade going.
There are huge opportunities. I believe that there is a good story here. There is an opportunity for huge developments in SME economic contributions to get the British approach to the economy going throughout the whole of the European Union. The concept can be pushed towards the WTO countries and Africa with bilateral agreements. I am also proud to say that Prince Michael has made great contributions on behalf of SMEs in this country.
§ 8.48 p.m.
§ Baroness Sharp of Guildford
My Lords, I join other noble Lords in thanking the noble Lord, Lord Harrison, for promoting an extremely interesting short debate on small and medium-sized businesses. Like the noble Lord, Lord Randall, I did some 1449 research and also discovered that there are 3.7 million small and medium-sized businesses in this country. It is a good story. As the noble Lord, Lord MacGregor, said, in 1980 there were only 2 million and in the course of the past 20 years their number has almost doubled; 99 per cent of businesses in Britain are small and medium-sized businesses. Only 25,000 businesses employ over 50 people and only 7,000 businesses employ over 250.
We have a large population of small firms and a small population of large firms. Sixty-eight per cent of small firms comprise self-employed people with no employees—one-man businesses: and 22 per cent employ between one and four employees. So only 10 per cent have more than five employees. That is an interesting statistic.
The largest sector populated by small and medium-sized businesses is the wholesale and retail trade at just over 19 per cent. Manufacturing industry comes slightly below that at 18 per cent. Businesses services are now up to 17 per cent. The construction industry is at about 12 per cent. Over the past 20 years, the fastest growth has been in business services and in hotel and catering. These businesses play, as we have indicated, a significant role within the economy. Over the past 20 years they have contributed in the region of 1.5 million new jobs.
One needs to distinguish between the traditional small and medium-sized business—the master builder, the small construction firm or small building firm on the one hand, with the retail trade on the other—and the considerable growth in new small businesses, indicated by the business services area, which have come partly as a result of globalisation. The noble Baroness, Lady Platt, mentioned that matter.
We have seen new growth for small businesses. Many large businesses are now outsourcing their services. Many of those large businesses are multinationals. Companies such as Toyota or Honda, which have come to the UK, outsource from small companies. It is vitally important that those small companies have the engineering skills and so forth which they need to keep competitive; otherwise—and we have seen this—the Japanese companies will import the components needed, or these large companies—we have also seen this—will set up their own subsidiaries. Of course, that creates good jobs in Britain. Many have also provided excellent training for UK staff. Many new jobs have come from this outsourcing. It is vitally important that such firms have the competitiveness and the skills to enable those new jobs to be developed.
One interesting happening with this unbundling of large firms has been a transfer of risk. Whereas before one's computer expert was employed within the firm, he is now self-employed. The risks of unemployment and the problems of down-turn and the recession are met by the self-employed individual.
Traditionally, one has seen this concept of large firms exploiting small firms. There have always been complaints about the failure of large firms to pay their 1450 bills on time. Because they are so much bigger and often a small firm's sole purchaser, they have much power over them. It is vitally important therefore—I very much endorse what the noble Lord, Lord Borrie, has said—that the OFT and our competition policy ensure that there is no room for exploitation of small firms by large firms. On many occasions, banks have exploited small businesses. Certainly from these Benches, we feel that a strong competition policy is an important part of small firms policy.
We have heard an enormous amount about the burden of regulation. I echo to some extent the feelings of the noble Lord. Lord Mitchell. I was amazed at how officious, how bureaucratic. America is. Sometimes perhaps one hears a little too much about the burden of regulation. Equally, compliance costs, which can be spread across large numbers of employees in large firms, also have to be met by small firms. I confess that I have never run a small firm, but I have had an employee and one has had to fill up the PAYE certificate and so forth. It is a substantial burden. I take on board the point made by the noble Baroness, Lady Byford, in terms of the on-costs. Some noble Lords may know that we are taking the Education Bill through the House. That Bill is putting more regulatory burdens on schools—and that degree of regulation is echoed in a great many current Bills. I very much echo what the noble Lord, Lord MacGregor, said about the amount of bumf that comes around. My desk is chock-a-block full of it. I do not understand why we go on in this way.
One of the problems that has always struck me with this country is that we learn to play cricket. Therefore, when we pass rules, we abide by them. Our civil servants, if I may say so, are usually very efficient. When we have laws, they see that they are enforced. Many noble Lords will know of the problems with the food and hygiene rules, the health and safety rules and so forth. When one travels on the Continent and sees the kitchens in restaurants and so forth, one sometimes wonders whether their people are as efficient as ours, or whether perhaps we are gold-plating our regulations too much. I think that there are occasions when we do that.
Regulation is a big issue. The CBI reckons that since the Labour Party has come to power the cost of regulation is …19 billion. I certainly am surprised that Labour continue regulating as much as it does. We need to look at the situation seriously. We need to think about whether we can get rid of some of this regulation.
What then can government do? We have heard a great deal about taxation—for example, corporation tax and lower capital gains tax. I am delighted that the R & D tax credit has been introduced for small and medium-sized businesses. That echoes again my concern about the competitiveness of small and medium-sized businesses.
From these Benches, one of the issues that we should like to see much more of is a devolving of responsibilities, including financial responsibilities, to local and regional authorities. If one looks at the 1451 Continent and at what is happening, for example, in Germany or in the United States, one realises that it is at the Lander or state level that one sees a great deal of the dynamism in relation to small and medium-sized businesses. They can go out and borrow money on the market in their own right. They can therefore promote infrastructure developments. In this country, however, the Government do not provide quality public services. Businesses abroad can promote infrastructure developments, and team up—and they often do often—in terms of providing a venture capital fund linked to the banks. There is far more enterprise there. I should like to see much more of that dynamism in this country.
The training issue mentioned by the noble Lord, Lord Graham, is absolutely essential. I echo what he said about the problem of cowboy traders. Perhaps we need to think about using our trading standards officers to highlight those with the requisite qualifications. People ask me, "Where do I get a good plumber? Where do I find a good electrician?". It would he good to be able to ring up one's local authority and ask, "Who are the qualified people to whom we can go?" and not have to resort to the cowboys.
Finally, we need as a country—I return to the social and economic conditions that underlie this—to think a little more about the community aspects of small and medium-sized businesses. Are we right to dispense with our village post offices and pubs? Should we not try a little harder to keep these central cores or the community going? Perhaps there is business sense to such decisions—Consignia tells us that it cannot afford to run the post offices any more—but there are two sides to the issue. In France and Italy small shops still exist in the middle of Rome and Paris. Why is that? It is because they pay lower rates. The council tax that they have to pay is considerably lower than that paid here. Can we not be more imaginative about what we do in order to preserve these small firms which play such an important part in our community, and help to keep them as community stalwarts?
§ 9 p.m.
§ Baroness Miller of Hendon
My Lords, I thank the noble Lord, Lord Harrison, for introducing this interesting and important debate on small and medium-sized enterprises. It is a matter close to my own heart, having started my own small business in 1972. I empathise with the noble Lord, Lord Mitchell. I understand exactly what he said about sleepless nights, panic attacks and remortgaging one's own home but having the courage to keep going. Eventually, I found that my business had grown in to a medium-sized enterprise from which I retired in 1988, when I sold it to spend more time with my politics.
It is interesting that the Federation of Small Businesses commented in its recent report on what it called the relatively low levels of business wholly owned by women—9 per cent. That compares with the low number of girls who go into engineering. It also 1452 compares with the proportion of businesses wholly owned by men, which is 44 per cent, and the 42 per cent owned by a mix of men and women.
My own business fell into that latter category. Perhaps that was just as well, considering the difficulty that I had in persuading suppliers to treat me seriously until I had established a track record—which, of course, I quickly did. In fact, one manufacturer refused to sign a contract with my company unless my husband counter-signed, so that he could be sure that I knew what I was doing. I must say that it was some satisfaction to me that my business far outlasted the manufacturer's.
On the same subject of the involvement of women, I notice from the same report that 46 per cent of respondents to the Federation of Small Businesses survey were satisfied "to some degree" with their bank's support. I note what the noble Lord, Lord Borrie, said on that subject. Unfortunately, the report does not state what proportion of the 54 per cent of owners who were not at all satisfied with their bank's support were women. That is important because, as the federation says, most new businesses depend on their bank overdrafts to sustain and grow their businesses. Perhaps that is something that the federation may want to investigate.
The fact is that the vast majority or small businesses have started from scratch compared with the few that begin by buying a going concern, by inheritance or by a management buy-out. Morris Motors, later part of the British Motor Corporation, was founded by a 16 year-old William Morris who started his business with £4 capital making bicycles in his shed. In modern times, the mighty, world-dominant Microsoft Corporation began its life in young Bill Gates' garage.
I do not know if that proves that there is something to be said for starting young and working from a shed, but clearly finding a whole new, hitherto undiscovered market is often the path to success. The Federation of Small Businesses reports that almost 10 per cent of respondents to the survey were under 34 and that the majority under that age came from the North East. A high proportion of the more mature small businesses, which have existed for more than 21 years, are sited in London. That may prove that as job opportunities decreased with the closure of big industries in the North East, the more enterprising residents, especially the younger ones, who saw no prospect of local jobs, decided that they had better start their own businesses.
Referring again to that excellent report from the Federation of Small Businesses, almost half of their respondents reported that sales volume had increased in 2001 and 9 per cent of them said that it had gone up considerably. It is almost a cliché, but I do not mind repeating that small businesses are the engine of industrial and commercial growth. They are most important, as are the entrepreneurs who go with them. The figures that I have just cited prove that.
In fact, the prospect of starting from scratch a new giant industry such as Morris Motors is absolutely remote. It is on small businesses that new employment 1453 opportunities will depend in future. It is unsurprising that it is among newer small businesses that employment increases are most likely.
The Government often boast of the number of new jobs that they have created, but the jobs and business that have been created in the world of commerce have come into existence in spite of the extra taxes, levies and regulation that have become a burden on small business, not because of them. As my honourable friend the member for Runnymede and Weybridge recently pointed out, the fact that they have come into existence at all is a tribute to the resilience of British entrepreneurs, and not a tribute to the Government. My noble friend Lord Brooke made a similar point.
Only last week, the CBI yet again begged the Government to stop strangling business with red tape. It said:It is quite inconsistent to claim to promote an enterprise society on the one hand, and to trammel it with regulations on the other".During Labour's first term, the cost of complying with red tape increased by £15 billion, according to the British Chambers of Commerce․I noted the different figure given by the CBI, but I shall stick with £15 billion. No fewer than 4,642 new regulations were introduced last year. As if that were not enough, the Government have piled new taxes onto business. This year's Budget will result in an increase of yet another £2–5 billion on the cost of doing business in Britain. That is important and a detriment to business. In fact, the Government have increased taxes on business every year since 1997.
The noble Lord, Lord Graham, mentioned the Federation of Master Builders. Something else that it said in the important brief that it sent to me was that when the EC announced in 1999 that renovation of private dwellings, which is a line of work in which many small and medium-sized enterprises are engaged, could be exempt from VAT for an experimental five years, the Government refused to take advantage of that concession. It was taken advantage of in France, where the workload in the industry rose by 7 per cent in that year. We seem to gold plate our directives and do not take exemptions when we ought to. If we were really interested in small business, we would do so. It is no wonder that the CBI, previously most․or let us say quite․sympathetic to the Labour Government referred to its "deep dismay" at the fact that,the Chancellor has given with one hand but taken with the other".The Prime Minister has said that we remain a relatively low-taxed economy. But the truth is that of our top five trade partners, only France has a larger taxation burden than ours. In the past five years, business taxation has risen by £29 billion.
Much of the new and existing employment in this country is generated in what is euphemistically called the service industries, as the noble Baroness, Lady Sharp, mentioned. But we cannot make livings simply 1454 from buying each other's hamburgers or taking in each other's washing. We must look after our manufacturing industry.
The Office for National Statistics reported that there had been zero growth in the economy in the first three months of this year․zero, nil, no growth whatsoever. Manufacturing, exports and investments all fell during that period. As if that were not bad enough, the ONS reports that the economy has failed to grow for the past six months. That is the worst performance in more than a decade and we are right at the bottom of the G7 growth league. We must take note of those facts, consider regulation and taxation and see what has happened.
All of that, of course, impinges heavily on the small corner shop. It is true that the combined weight of all of those burdens affects all businesses․large, medium and small. However, it affects small businesses far more. The effect is proportionally higher. Small niche businesses or businesses providing services in competition with giant supermarkets face the difficulty of deciding whether to pass on the costs to their customers. The noble Baroness, Lady Sharp of Guildford, made that point too.
That is not the end of the story. Only today, I received a copy of a trade journal called Asian Trader, which goes to what we often call the corner shops. It reports the problems experienced as a result of the current system for the wholesale distribution of newspapers, including the case of one newsagent who has been driven out of business by soaring carriage charges. There are two Early-Day Motions about that in the other place, and I am glad to note that the Office of Fair Trading is investigating the problem. I understand that the Select Committee on Trade and Industry will carry out an investigation in November. However, we hope that the DTI will take note. Small businesses are being affected, which is a dangerous thing.
I do not have time to go into all the directives, which also cause difficulties, but I would say that Mr Arculus, the chairman of the task force, reported that he had asked a government department that already gives advice to employers whether it could cover employment regulations. He was surprised when the unnamed department said that it could not possibly know everything that there was to know about employment regulations. Nonetheless, the Government expect small businesses to know all those things. The burden on such businesses is great.
In its report, Employment Regulation: striking a balance, the task force made several recommendations to the Government for alternatives to state regulation. My time is up, so I shall not read them all. One recommendation was that there should be an understanding of how compliance costs were heavier for small businesses. Another was that people who deal with employment law should understand employment. Many noble Lords made that point this evening, as will I. There are too many officials and people pontificating on employment matters. I know that, like me, the noble Lords, Lord McIntosh of 1455 Haringey and Lord Mitchell, have run small businesses. We know what it is about, and we wish that more notice were taken of the people on the ground floor.
§ 9.10 pm.
§ Lord McIntosh of Haringey
My Lords, I hope that, when he reflects on the debate, my noble friend Lord Harrison will congratulate himself on having secured the debate and on the unanimity achieved in support of small businesses. There has, of course, been disagreement about government policies․I shall come to that in due course․but there can be no serious doubt that, as the noble Lord, Lord MacGregor of Pulham Market, said, there is now a common view held in all political parties. I dispute what he said about the situation 20 years ago. When I first came to the House 19 years ago, I talked constantly and incessantly about small businesses. As the noble Baroness, Lady Miller of Hendon, said, I spent my life running small businesses; it was what I knew about and what I was able to contribute. I have no doubt that I bored my colleagues then as I sometimes do now.
There has been a degree of unanimity, and that is healthy Mind you, some of the memories that the debate brought back․particularly those referred to by my noble friend. Lord Mitchell․are not too good. The VAT return was the thing that I hated most about running my own business. I used to spend a Saturday every month․I tried not to do it every quarter․in my office. As my office was above a shop, I used to get locked in at about lunchtime. I used to have to climb out, leap across a well and find my way out of a fire exit late on Saturday evening․always a scary activity. So, I have memories as well.
I also have memories of the difficulties that the firm faced because of the economic instability that characterised the time when I ran a business․from 1965 to 1995. That was the situation under Labour governments in that period too; I am not making a party point. We had constant boom and bust. There were constant panic reductions of expenditure by clients, followed by stocking-up. Interest rates varied enormously․much more than now. Sometimes, one found oneself paying 15 per cent interest, and, sometimes, one had to go abroad to borrow money at a reasonable rate of interest. None of that could be predicted. In my experience, the sense of insecurity about markets and finance was the most serious concern of small businesses. If it is claimed that the regulatory burden has increased, we can argue about it, but I can assure the House that that was a lesser concern for me than having a second mortgage on the house or not knowing where the next payroll would come from.
The objective evidence is that this country is a good place in which to do business․especially for small businesses. The Economist Intelligence Unit has ranked us the fourth best place in the world in which to do business. In 2000 it said that the UK labour market was less heavily regulated than the labour markets in other EU countries. The OECD outlook in 1456 December 1999 said that the UK had the lowest level of product market regulation of any OECD country. It also said that the UK had fewer harriers to entrepreneurial enterprise than any other OECD country.
Those are outside testimonies from international organisations and from well-respected economies. I take them seriously. I understand the concerns of the organisations representing employers who have been briefing your Lordships for this debate, but they are not party free; they have a view to express. Considering the evidence of the external views and the facts, we have a lot to be proud of.
We still, as has been the case for some years, have the largest share of foreign direct investment of any country in the EU. We are still buoyant in terms of our labour market. We have low interest rates and low inflation, which the noble Lord, Lord Brooke, acknowledged, but he seemed to think that somehow that was less important than some of the other issues on which he chose to concentrate. I do not know whether I am supposed to be ashamed of 1.5 million more people being in work. That is of course to the benefit of small and micro businesses. If we can continue to reduce, if not eliminate, income tax barriers to people in work, who have much to contribute to the economy and business, and we can make it worthwhile so that people can earn a decent living, it is worth applying that to our analysis of the position of small businesses.
Let us consider the facts of small businesses. For the benefit of the noble Baroness, Lady Byford, the definitions that I use are I to 49 employees for small businesses and 50 to 249 for medium-sized businesses, with micro businesses having fewer than 10 employees. For the purposes of the small firms loan guarantee, we do it on turnover. For manufacturing it is less than £5 million and for services it is less than £1.5 million.
Small businesses are flourishing. Since 11 th September the growth in world trade, which was 12 per cent the year before, has gone down to zero, but small businesses have excellent survival and start-up rates. They are understandably down from a year or two ago, but there are far fewer business closures than in the past. Small businesses contribute to new technology, introducing technologically new or improved products to markets. Those are largely SMEs.
I cannot say in detail how much I agree with the noble Baroness, Lady Platt, about the importance of dealing with skill shortages, but that is exactly what we are doing. We can only do more if there is an increase in unemployment in total. Before leaving that point, I must say how much I agree with the noble Baroness, Lady Sharp, about the importance of research and development tax credits and 100 per cent capital allowances for particular purposes.
All the facts on the small and medium-sized business economy show that we are successful in this country and we must ask why. First, we have set a fiscal context in which small and medium-sized businesses can flourish. All that we have done on corporation tax is 1457 particularly advantageous for small businesses. There is a nil rate for company profits up to £10,000—that is a rather high level for many of the small businesses that I know. The rate is reduced for those with profits of between £50,000 and £300,000. The nil rate benefits 150,000 small companies and the 1 per cent cut benefits nearly 350,000. The smallest businesses benefit from those rates.
The noble Lord, Lord MacGregor, quoted figures relating to the cost of National insurance contributions. To the average small firm within our definition, the cost of the increase is £835 but the saving on corporation tax alone is £700 without any of the other measures which I have been and will be describing.
I was interested to note that after the noble Lord, Lord Harrison, no one referred to the importance of small businesses in disadvantaged communities. I did not therefore have a chance to refer to the community investment tax credit designed to encourage investment in under-invested communities or the approval we are seeking for state-aid purposes to abolish stamp duty on non-residential properties in deprived areas. Those are worthwhile initiatives.
I was also interested to note that no one referred to the availability of finance for small businesses. It is accepted that much of the finance for small businesses is bank overdrafts. And in that regard this Government, after all, pushed the Competition Commission into making its recommendations, published in March, which were referred to by my noble friends Lord Borrie and Lord Mitchell. For a small business such as mine, it would have been enormously valuable that my bank should have been forced to offer me either interest on my current account, an account free of money transmission charges, or a choice between the two. I believe that the push which the Government have made in that area is important.
Although the matter has not been referred to in the debate, I believe in the activities of our Small Business Service and in our many programmes to encourage the availability of finance for small businesses. I refer, for example, to the programme for early growth funding and our attempt to deal with the equity gap with regional venture capital funds and with the Small Firms Loan Guarantee Scheme. That has been running for approximately 20 years and has made available no less than £3 billion in that period. The noble Lord, Lord MacGregor, as the first Minister for Small Businesses, must take his share of the credit for many of those initiatives.
I turn to the issue of simplification and cutting regulation. Some of the contributions from the Conservative Party confused regulation-making for the sake of government and regulation-making which seeks decent living conditions for workers in small and large businesses. I listened carefully to the noble Lord, Lord Hodgson, but in all his examples the meaning and purpose of the regulation was to achieve decent living conditions. Yes, the minimum wage costs some employers more—and so it should. We should be 1458 proud of having a minimum wage which ensures that in-work poverty, particularly for women, should be illegal. But if that is included in the cost of regulation, it is a false calculation. That is true of all of the noble Lord's examples, including that relating to time off for dependants. All those are hallmarks of a civilised society and I am not ashamed of any of them.
Evidence is available on the cost of labour market regulation. The cost to employers of labour market regulations introduced by the DTI is about £5 billion a year; about £4 for each employee per week. However, most of that gives workers benefits; for instance, paying the minimum wage rather than a lower wage, paying during holiday periods and so forth. The administration costs to business for all of those measures are estimated at just one pence for each worker per week. That is a much more realistic figure.
We should also consider the help that is being given. One has only to look at the Carter review of payroll. Surely it is important for us to encourage all businesses, especially small businesses, to file their end-of-year returns electronically; indeed, it is in their interests to do so. If we have been able to assist them in so doing, we have done so.
There is also the flat-rate scheme for VAT, which I refer to as my biggest bugbear—it is for the smallest firms. There will be an optional flat rate VAT avoiding all the calculation for those with a taxable turnover of up to £100,000. That will affect half a million companies, each of which will be able to cut their compliance costs by up to £1,000. The registration threshold for VAT has also been increased to £50,000. I like the idea of a lower VAT rate for refurbishments or maintenance, as requested by my noble friend Lord Graham. But, realistically, we have to face the restrictions on state aid, as will the French. We shall see what comes out of it at the end of the process.
There have been advances; for example, the construction industry scheme has provided greater flexibility in the way that scheme deductions are set off against tax liabilities. Twenty thousand small and medium-sized enterprises have benefited from that advance.
Again, curiously, there was no talk during the debate of a matter that is enormously important for small business; namely, the treatment of business assets for capital gains tax purposes. That was most important to me because I had to sell my business before I was 60 and I could not take advantage of the business assets regulation. The latter is constantly attacked for being a great complication in our tax system, but small businesses are up in arms—quite rightly—when anyone tries to remove it, because it is through the business assets concept that it is possible for those who control small businesses to take their money out at the end of their working lives. That is to the benefit of all of those in small businesses and, I believe, to the benefit of society. That was a curious gap in today's debate.
My noble friend Lord Harrison referred to late payments. I can assure him that we are adopting European Directive 20035/EC; indeed, Nigel Griffiths, 1459 the Minister with responsibility for small business, made an announcement today about measures to help combat late payment of hills. Such measures, which will come into effect on 7th August of this year, involve simplifying the calculation of interest rates, allowing easier challenges in court, and legislation to extend the late payment legislation.
My noble friend Lord Borrie said that he was looking forward to the proceedings on the Enterprise Bill and to greater strength being given to the competition authorities. That is clearly to the advantage of small and medium-sized enterprises, as is the introduction of a new criminal offence for those engaged in cartels, the attack on those who use bankruptcy and insolvency laws in an irresponsible and dishonest way and the level playing field among public and private creditors.
I believe that I have already said a great deal about regulation and red tape. We need to maintain a sense of proportion in this respect. Some of the speeches that we heard this evening did not seem to maintain that sense of proportion.
Some of the measures that we introduce to help small businesses come under headings that the noble Lord, Lord Brooke, would consider as being "trivial" or "minor" compared with what he believes to be more important. But the work of the Small Business Service and that of the Business Link Operators, while it does not reach everyone, still has an effect. I fear to say that most small businesses go to their banks, accountants or their own advisers when they have problems. However, I can tell noble Lords that those which do use government services for small businesses tend to use them more than once and to be satisfied with them.
It is important that we should try to encourage greater take-up of the services. My noble friend Lord Harrison pointed out that it can be difficult to encourage the very smallest businesses to use the facilities provided by the Government, which are becoming even more widely available. It is still true to say that we have a lower penetration of services to the very smallest firms than is the case with the larger businesses.
I have come to the end of my time. As I am sure is my noble friend Lord Harrison, I am most grateful to all noble Lords who have taken part in the debate. A great deal of personal experience has been in evidence in the contributions. Our debate has been wide-ranging and it has provided an opportunity for me to explain on behalf of the Government the many ways in which not only do we believe in small business but we are active in giving it our support.
§ 9.31 p.m.
§ Lord Harrison
My Lords, I wish to thank the noble Baroness, Lady Miller of Hendon, for reminding us of William Morris, a small business person who went on to create Morris Motors. In my home town of Oxford, we celebrate another William Morris. He managed to combine being a poet, a socialist and a small business person.
1460 The noble Lord, Lord Brooke of Sutton Mandeville, suggested that I was putting out my chin in initiating this debate. I believe that we have had a good chin-wag about small businesses and that our debate has been very profitable. Before I say "chin-chin" tonight, I should like to thank all noble Lords for their contributions, in particular my noble friend on the Front Bench.
And so, with my head held high and my chin out, I beg leave to withdraw my Motion for Papers.
Motion for Papers, by leave, withdrawn.