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Micro-Businesses

Volume 539: debated on Wednesday 25 January 2012

We cannot mention the word micro-business in this House without thinking of the hon. Member for Newton Abbot (Anne Marie Morris). We now have a very important micro-debate on micro-businesses.

I look forward to serving under your chairmanship, Mr Hollobone, and I am delighted to see the Minister in his place. As you rightly say, micro-business is absolutely at the heart of what I have been doing in my time here in the House. Perhaps I should start by saying that there is no division or debate about the importance of micro-businesses. I am absolutely clear that the EU and the UK recognise their importance and the role that these very small businesses play in growth and community stability. The challenge for us today is this: what can we do to ensure that Government policy is best shaped to help that growth? I will consider that in relation to four different areas.

First, we need to consider how we might clarify what we mean by a micro-business. Secondly, we need to examine regulation. We need to consider what the Government could do to reduce the burden of regulation and to reduce not just the amount of taxation—that is a difficult issue—but the bureaucracy that goes with it. Thirdly, I should like to consider how we might help micro-businesses to get access to finance and to consider alternative sources. Finally, I should like to consider the culture change that we need to make to help this country to grow micro-businesses and to help young people to see them as a career route to which they might want to aspire.

In the UK, we do not have a definition of a micro-business. The EU has definitions; they are not compulsory but voluntary ones. It defines small and medium-sized enterprises, micro-enterprises and micro-entities. Perhaps when the Minister is considering any changes at EU level, he will suggest that the last two names are too similar. Let me explain the difference between a micro-enterprise and a micro-entity. A micro-enterprise is a business with fewer than 10 employees and a turnover of less than €2 million. By contrast, a micro-entity still has a cut-off of 10 employees, but the turnover cut-off is €700,000. There is an additional option test of assets worth up to €350,000. Those are ceilings to the definition, and the criteria—whether we consider the number of employees, turnover or assets—are optional, so it is a very flexible definition.

As a matter of practice, the UK Government and particularly the Department for Business, Innovation and Skills have accepted the ceiling in most cases, but it is interesting to note that the Department for Work and Pensions has recognised that there is a significant difference between those businesses with fewer than five employees and those with more than five employees. It has recognised that a business with fewer than five employees does not have the same managerial support and expertise. Therefore, the burden of regulation is that much greater. In secondary legislation under the workplace pensions reform, the DWP said that micro-businesses should mean businesses with fewer than five employees. That is particularly relevant now, because the EU is considering reviewing the definitions again, while it reviews the Small Business Act.

The Minister will know that I have argued for some time that the definition of fewer than 10 employees encompasses too large a group of businesses to enable the Government to focus their policy, not that I would choose a smaller definition to exclude businesses from relief. On the contrary, unless the definition is realistic and properly applies to a recognisable group, there will be fewer exemptions from which small businesses will benefit.

My real concern, however, is that when the European Union looks again at the definition, it may choose to remove the flexibility and instead have a fixed definition, with a fixed number of employees and turnover. That will significantly reduce the UK’s ability when it wishes to use those definitions, as indeed it may be required to under EU legislation. So I think that it is for the Minister and the Government to decide now what they think the right definition is, not only so that they can lobby the Small Business Act review group, but for their own purposes, so that should they want to use a small definition for a tax scheme or in relation to pensions, they still have the flexibility to do so.

Both the EU and the UK are committed to reducing the burden of regulation on these very smallest of businesses. Indeed, for new legislation, the EU has a lovely mantra: “Think Small First”. That is spot on. Going forward, it has concluded that any new legislation should, de facto, exclude micro-entities—that is the smallest size that it has come up with—unless there is a good reason for including them. That sounds like a good starting point. It also says that for the next size up—micro-enterprises—any new legislation should have a light-touch approach.

My hon. Friend has done extraordinarily well to obtain this debate. Micro-businesses are such an important part of our economic growth going forward. Does she agree that as more than 90% of very small businesses are UK-only, it is astonishing that the EU is telling them what to do at all?

My hon. Friend makes a very good point. Such businesses need the freedom and flexibility to do what entrepreneurs do extremely well. Her intervention is absolutely en pointe.

Turning to the UK, I am pleased that the Government have introduced a three-year exemption on new regulation, and they are to be commended for that. The real challenge for the EU and the Government is what do we do about the pages and pages of existing regulation. The Government have introduced the red tape challenge, and I commend them for that. They have already looked at 12 sectors, and there are five more to come. I believe that they will report in three months or so, which will be valuable. Will the Minister adopt the EU mantra, “Think Small First” when he considers what can be got rid of? The EU has also gone through a simplification procedure on a number of occasions, but at the end of the day, we need to move faster and further.

The Minister has already looked at one area that needs further review from the perspective of micro-businesses: employment law. The British Chambers of Commerce has raised the issue with Ministers and in its various reports, but recruitment and dismissal procedures are onerous for very small businesses. No one wants to take away an employee’s rights, but the overall protocols and processes are complex. The second issue that small businesses have raised with me is health and safety. Lord Young has done some valuable work, and I look forward to it being implemented so that low-risk businesses can be excluded from much of the burdensome regulation and a more pragmatic approach is taken to those in higher-risk categories.

Still under the heading of regulation, I want to raise some issues about taxation. Paying less tax is clearly something that we would all be happy about, but it is the burden of the process that causes real pain for very small businesses. First up is fuel duty. I would, wouldn’t I?—I have been approached by a number of small businesses—plead with the Minister not to implement the fuel duty rise in August and to look again at a price stabilisation mechanism, because that would make the cost of petrol affordable and predictable for the smallest businesses. Both things are equally important.

Turning to national insurance, the Government have a good record on the rate and the holiday that they introduced for new businesses, so that they would have relief from employer national insurance for their first 10 employees. I suggest that we could allow mini-micro businesses—we have so many definitions on the table at the moment, but those with fewer than five employees—who take on up to four employees, so those with a total work force of four, not to pay employer’s national insurance for the first year, although employee contributions would stay in place. That would enable them to assist with the cost of the training and general upskilling of those new employees.

The group employing one to four employees represents 7% by turnover of the private sector, so it is not a small group for which I want to the Government to provide support. They are already considering the challenge of aligning PAYE with the national insurance regime, and I look forward to the results. May I encourage the Minister and his Cabinet colleagues in the Treasury to look at simplifying the classes, because there are so many that the average bookkeeper is totally confused?

I turn now to business rates. Again to the Government’s credit, they extended the small business rate relief and said that the scheme they were introducing would apply for a further year. I suggest to the Minister that that becomes a permanent feature, or lasts at least until the end of this Parliament. It is valued by small businesses, and that really would make a huge difference. However, business rates give rise to process issues, the first of which concerns valuation. Why do so many of the large business players, such as Tesco and Sainsbury’s, seem to be paying less than the smaller players? There is something wrong with the way in which the valuation criteria work, and they might sensibly be reviewed. I am often approached by small businesses that believe that they are suffering hardship and are frustrated by the appeals procedure. It is so bureaucratic and takes so long from start to finish that generally they are out of business by the time that they have finished the process, which simply cannot be what the Government intend.

My final point on business rates concerns empty properties. I accept that an incentive is needed to bring such properties back into use, but allowing six months, or three months for retail, to do so is not long enough, and the penalty for leaving them empty longer than that is disproportionate.

I turn now to VAT—a tax that is necessary and without which we would not be able to take this country back into the black. None the less, it has some wrinkles that the Minister and his Treasury colleagues might helpfully look at. We have on a number of occasions talked about the possibility of reducing rates for restoration and repair of houses, bringing the rate down to 5% rather than the full 20%. It seems to me that, given the pressure on the Government to increase the available housing stock, now is the time to look at that again.

Colleagues have considered a reduced rate of 5% for the accommodation charge for bed and breakfast and in hotels. Given that this is our Olympic year, why do we not set the rate at 5%, just for this one-off tax year, and let it be part of our marketing campaign to get people to visit the UK and enjoy the Olympics?

Perhaps one of the biggest challenges is the VAT cliff: once a business is earning £73,000, it has to register for VAT, and if it provides services to individual customers who are not VAT registered, the increase in profitability that it has suddenly to achieve is significant. I suggest that we look at introducing a ratchet mechanism or a VAT rebate, which will ease the situation so that the full force of VAT does not affect the business in the first year.

Does my hon. Friend accept that in some cases the VAT threshold—the cliff edge—acts as a disincentive to growth?

My hon. Friend makes my point extraordinarily well. It prevents growth, and if we can find a way of easing the burden, that would be well worth while.

My final point on VAT concerns the enforcement challenge. Only last night a small business came to me saying that it was one week late with its VAT and had been asked to pay £955 as a penalty on an original bill of £6,370. Clearly, we want people to pay, but that business was only a week late and the penalty seems disproportionate.

The third issue is access to finance. The challenge is how to make better use of what we have and how to find new sources and new organisations to provide money to very small businesses. Under the existing arrangements, the problem for the banks is that they are in a cleft stick. Given the capital adequacy requirements, if they offer a loan to what is inevitably a risky start-up business, they have to do so at very high rates, so the loan might not be accepted. Can we consider capital adequacy adjustment for the banks—just for loans to micro-businesses, not for the rest? The Government schemes to provide equity, debt and so on are aimed at the whole SME community, ranging from those with no employees to those with 250. Banks are in business to make money and are targeting most of their help at the larger businesses with good, clear business plans and a track record. We need some ring-fenced schemes specifically for micros. The Minister might like to consider that with his Treasury colleagues when we get to credit easing.

The Government are consulting on new sources of finance until the end of this week. The Federation of Small Businesses has looked at other sources of funding and will share its findings with the Government. I recommend that the Government look at what is going on in central and eastern Europe, in Asia and in south America—countries that have more experience than we do of different funding mechanisms.

I have an additional suggestion. One of the challenges faced by most small businesses is that, when they start up, they cannot separate the risk and the liability of the business from personal assets and find themselves having to mortgage their house and give personal guarantees. Can we not consider extending the limited liability partnership?

Sitting suspended for a Division in the House.

On resuming

It is likely that we will be called to another vote imminently, but I shall call the hon. Member for Newton Abbot (Anne Marie Morris), who might want to use these next two or three minutes to wind up her remarks.

I shall repeat my last point, because it might have been lost. I should like the Minister to consider using the limited liability partnerships legislation to create a new limited liability sole trader equivalent, which would enable the enterprises to have the limited liability benefit without the corporate registration requirement.

In conclusion, I believe that the Minister has enough to think about, and I should like him to go away and indeed think about the matter, and then come back and tell me what might and might not be possible. I recognise that not only does the detail need to be addressed, but that we have the bigger challenge of changing the culture through our education system—primary, secondary and tertiary—our local businesses, which might support these little baby businesses, local government, which can provide incubators and start-up units, and our local enterprise partnerships, which can also provide support and guidance. I therefore look forward, with pleasure, to the Minister’s response.

You are very kind, Mr Hollobone. Within the 10 minutes that I gather I have, I should like to try to respond to the smorgasbord of ideas suggested by my hon. Friend the Member for Newton Abbot (Anne Marie Morris). Although this is indeed a debate about micro-businesses, it is nevertheless significant—colleagues are still streaming back from the vote in the main Chamber.

This country has a strong tradition of entrepreneurship, and we as a Government really do have an ambition to ensure that we retain, and indeed strengthen, our position as one of the best places in which to start and grow businesses, throughout their life cycle—start-ups, micro-businesses, small and medium-sized enterprises, and so on. About 4.3 million micro-businesses exist in the UK, and yes, they represent about 95% of all enterprises in the country. In that cohort lies a huge variety of enterprise, everything from the university high-tech business—the spin-off—right the way through to the traditional family concern. Therefore, the Government need to be clear and effective in focusing on the right long-term framework for all types of enterprise, regardless of size and throughout their development. That will relate, in a moment, to the question of definition.

My hon. Friend has rightly set out her thoughts about how we can best help micro-enterprises, and I want to put very firmly on the record, as you have done Mr Hollobone, that with her enthusiasm and knowledge she is one of the best champions in this field. We could do with more champions like her.

I shall address the question of definition, and then come on to some of the other issues, at reasonable speed I am afraid, given the time before me. The issue that has been highlighted is: how do we define micro-enterprises? In some cases, people have argued that we might look at that group of up to and no more than four employees—

Order. I am sorry to interrupt the Minister, but what we feared would happen has happened: there is another Division in the House. I encourage Members to come back as quickly as possible. I should like to restart the debate at 16 minutes past 5, at the latest.

Sitting suspended for a Division in the House.

On resuming

I shall recap, although Hansard will seamlessly slide through the process, unlike the rest of us.

I was trying to respond to my hon. Friend’s suggestion that we need to revisit the definition of a micro-business, not least to make the policy more effective. This has largely revolved—in our previous discussions, including with other hon. Members—around whether we need to narrow that definition from 10 employees to fewer than five to target better the policies, as my hon. Friend highlighted.

I understand the point. I share the view that when we set policy, we need to ensure that it really addresses those people we are trying to help. It is also true that the Treasury will rightly want to ensure that when we are using taxpayers’ money, we direct financial support accurately at what they like to call leakage, which is a strange phrase but one that is understood in terms of the money being spent not necessarily reaching the people one is trying to support.

The definitions that we use are quite well established across Government and within the Office for National Statistics. As my hon. Friend also rightly said, those are clearly understood and are adopted on the basis of policy development in the EU as well. Without securing a change in definition across Whitehall and with the ONS and the EU, there is danger of confusion between different definitions when we develop policy.

Let me give some practical examples. At the moment, we are in the middle of discussions with EU partners about exemptions for micro-businesses from future regulations, to which my hon. Friend alluded. These are important. If we were to engage in a process, which would probably take a year or so to establish, according to which we might wish to define micro-businesses in a way that is different from the EU as a whole, clearly there would be a problem. It would be similar, in a sense, to our discussions with our EU partners over the next round of structural funds, which would start in 2014.

It is also true that we need to be careful about domestic policy and how that is applied. For example, my hon. Friend mentioned the micro-business moratorium, the moratorium from regulation, giving micro-businesses relief from the burden of additional changes in rules and red tape. We have secured significant reductions: the two that immediately leap to mind are, first, the postponement of the change in rules banning the display of tobacco products in shops, which is now only applicable to supermarkets, giving small businesses three years to consider how their business might be developed and, secondly, giving them the opportunity not to face those costs up front.

A similar case with a greater financial benefit to the smaller firms is the exemption that we secured, mentioned in part by my hon. Friend, on auto-enrolment for pensions. Again, that is a big saving for small businesses. Were we now to change the definition, there is a danger that there would be an immediate impact on firms employing between five and nine employees that are currently enjoying micro-business status.

I should like to highlight that, although there are benefits from considering whether the definition is accurate, our concern would be that there are obviously adverse consequences as well.

Does the Minister agree that it is crucial that we engage with the debate at European level about what those definitions should be, so that they work not just for other European member states, but for ourselves? Although I accept what he says, it is perfectly possible, without conflict, to have a UK definition that works within this ceiling umbrella, which the EU has created.

I think that that is true. My only concern would be that, as the policy is applied, if a business found itself defined as a micro-business in terms of one set of policies but not another, there is a danger of confusion in the very group that we are trying to help. I understand my hon. Friend’s point. We are not oblivious to the fact that, often, government of all forms probably thinks of small businesses as businesses employing 100 people, let alone ones employing three, four or five people, as we are discussing.

I shall deal with the definition, then I will get on to the practicalities in respect of what we are doing to help this important group. I am not seeking to dismiss the issue; I am trying to explain why the Government would be cautious about embarking on this path. I am happy—I have said it to my hon. Friend before, but am happy to put it on the record—to engage with her and the all-party parliamentary group to look precisely at how the definitions work, where the pinch points lie and how Government policy can best help this group.

My hon. Friend mentioned numerous important issues, and I will canter through them briefly in the few minutes that I have. The first is tax. I am grateful for her support for the changes that we have made, for example to small business rate relief. We have extended that holiday for smaller businesses for a further six months from October this year.

I understand the point about appeals. It is always a little challenging for a sole trader to take on the process. I trust and will ensure that my ministerial colleagues in the Department for Communities and Local Government consider that, and it is certainly high on our agenda.

Tax enforcement is always a sensitive issue. Clearly, it is principally a matter for my colleagues in the Treasury, but as the Minister with the privilege of responsibility for small businesses, I can say that we occasionally have a direct dialogue—he said carefully—with my Treasury colleagues and the tax and revenue authorities. They need to understand that ultimately, all of us, as public servants, are paid for by those same businesses, so the manner of enforcement is important. A careful distinction must be made between the real rogue and the person who has made the odd mistake on their VAT return late on a Sunday afternoon at the end of a working week. It is an important one.

I am also grateful to my hon. Friend for supporting what we have achieved on national insurance. She raised numerous other issues about tax, including fuel duty and the VAT threshold. Ironically, the VAT threshold—the cliff edge, as I think our hon. Friend the Member for Stafford (Jeremy Lefroy) called it—is, in a way, a cutback to the argument about how to define micros. We must be careful, but I welcome the points raised by my hon. Friend the Member for Newton Abbot. As I would like to remain the Minister with responsibility for business and enterprise, I will not pre-empt what the Chancellor might or might not say in his Budget in a few weeks’ time. However, those are good representations, and I am sure that the Treasury is listening.

Access to finance is an important issue. We have tried to think about micros. The enterprise finance guarantee was put in place specifically for those businesses without security to offer when seeking a loan, and it is very important for a micro-firm. Under the Merlin agreement, lending to small businesses increased in the past year over the previous year. Perhaps it might not achieve the full 15%, but we have yet to see the final figures.

Has my hon. Friend’s Department asked the banks to break down what sizes of business are benefiting from the schemes, so that he can see how many sole traders and mini-micros with fewer than five employees have benefited? That would be informative.

The Small Business Economic Forum regularly meets the small business organisations and the banks. We will ask it for that kind of breakdown, so that we can get a better understanding of the scale of micro, small and medium. It is important.

I agree with my hon. Friend that some of those proposals do not necessarily reach the smallest businesses. That is why we have supported the community development finance institutions. Working through the regional growth fund, we have put together a package in response to an application, so that some £30 million of taxpayers’ money can unlock something like £60 million of lending. The money involved is very often the several thousands of pounds that a micro-business needs to make the difference between a good idea that becomes a profitable venture, and a good idea that remains just a good idea. It is an important area and very often it is an area where, frankly, retail banking struggles to justify the work involved to deal with such loans, and CDFIs are well placed to fill that gap.

In finance terms, the business angels are a crucial part of this equation. When we think of micros, we tend to focus simply on the type of lending—whether that is loans, credit cards or whatever—that the smallest of enterprises engage in. But I am a strong believer that, alongside the larger venture capital funds, we need to ensure that business angels are encouraged. That is why we have put together a co-investment fund of £50 million, to start to grow that market substantially.

That is a great idea, Minister; my challenge is to get that communicated. Can we ensure that the local enterprise partnerships have a role in that communication, because the money is there but nobody knows about it? The new website—the “Business In You” website—has 851 of these schemes listed, and it is fantastic, but it is not something that is easy for someone to work their way around.

Indeed. It is not too difficult, on the basis that I can work my way around it, so it is fair to say that it is not too challenging. Nevertheless, I understand the point that my hon. Friend is making and, yes, communication is important. That is the purpose of the campaign that has been announced by the Prime Minister.

To conclude, we very much welcome this debate. It has been a useful opportunity—albeit one that has been slightly interrupted—to address the questions of what we mean by micros and how can we best help them. As a Government, we are determined to provide the support that micros need and I am confident that in the years ahead the UK will remain one of the best places in which to start, invest and grow a business.

Question put and agreed to.

Sitting adjourned.