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Mr. Ian Taylor (Esher) : I recall with some guilt that before the debate began I posted two envelopes from my small company--one to the PAYE office and the other to the VAT office. Although they have been signed, I did not post the cheques to the various creditors of that company.
Column 609In a sense, that is one strong argument in favour of the Bill before us this evening. [Interruption.] Sorry this afternoon ; having sat here since 9.30 am, I have lost all sense of time. I wonder whether we do not fall into confusion about the relationship between the individual--whether it be a corporate individual or a person-- and the state and the much less regulated and complex relationship between one company and another in the commercial world. I do not necessarily think that the Government providing penalties and charging interest on VAT and PAYE is a good guide for what should be done within business.
Earlier, my hon. Friend the Member for Chichester (Mr. Nelson) forcefully said that if this Bill does not succeed it will severely damage the interests of the Conservative party because it will give the impression that it is not looking after small businesses. I take issue with my hon. Friend on that. Over the past 10 years, the Government have offered remarkable assistance to self-employed people and small businesses. This background to the debate is important, and we must consider those developments before considering the specific problem of debt.
There are now 2.5 million businesses in the United Kingdom, 96 per cent. of which employ 20 or fewer people. They account for 36 per cent. of non- Government employment, compared with 27 per cent. in 1979. That underlines not only the Government's contribution in encouraging small businesses but the importance of the contribution that small businesses make to the economy.
The growth in enterprise spirit has been remarkable, and much of it has been created by deregulating and removing shackles on business, thereby allowing it to devise its own trading rules.
I have long experience as a corporate finance adviser, principally to small and medium-sized companies. For three years I lived in France, where in the 1970s an active group, Petites et Moyennes Entreprises, better represented small and medium-sized businesses than any comparable group in this country. Indeed, it developed many techniques to ensure that its members were not subject to the greater power of large companies. I earlier mentioned the use of factoring. The discount banks in France regularly discounted notes between companies so that there was regularity of cash flow. Of course it was costly, but many companies wanted certainty above all and were prepared to make an estimate of what that certainty was worth in terms of a possibly reduced profit margin.
In this country, because of the recent growth in entrepreneurial spirit, the small and medium-sized sector is much bigger, and there is therefore a greater diversity of problems.
We should welcome that growth in entrepreneurial spirit ; the Soviet Union would welcome even a small part of it. I cannot resist telling the House one of my favourite stories, which I once told at a meeting attended by a Russian professor. It is about the difference between a Hungarian peasant and a Soviet peasant. If a Hungarian peasant sees his neighbouring farmer with two cows, he works day and night until he gets a second cow. If the Soviet peasant sees his neighbour with two cows, he goes next door and shoots the second cow. At the end of the
Column 610meeting, the Russian professor said to me, "You have got your story wrong. In the Soviet Union, the peasant would go next door and shoot both cows and the farmer."
Fortunately, that is not the entrepreneurial spirit that exists in this country. This country has benefited massively during the past 10 years because of the contributions by the small and medium-sized business man, helped by the sometimes maligned people in the City. The growth of the venture capital market over the past 10 years have been amazing. Let us remember that the unlisted securities market did not exist in 1979-80. Many people thought that it was crazy to have a market for companies that had short-term trading records and were small in terms of market capitalisation. Some of the larger City investment houses would perhaps blush at the memory that they were anxious that that market did not come into existence.
The Government have assisted specifically, as many of my colleagues have said, by simplifying the tax system, by reducing tax levels and particularly by giving benefits to smaller companies through lower corporation tax levels. They have increased the VAT threshold, which has removed many bureaucratic obstacles. They have encouraged schemes such as the business enterprise scheme, which has benefited more than 3,000 companies and resulted in 80,000 investors coming forward. The loan guarantee scheme, which is not often talked about, has led to about £750 million being made available to nearly 23,000 businesses. That scheme means that the Government guarantee up to 70 per cent. of loans up to a maximum of £100,000. The Government have given advice to companies through the small firms service and various training schemes. I note the recent announcement by my hon. Friend the Minister on the targets that he has set his Department this year to improve progress.
Why do I stress the importance of such Government help over the past 10 years? It is because the difficulties of small firms often stem from a variety of problems, not just late payment of debt. Although my hon. Friend the Member for Hampshire, East (Mr. Mates) has done a great service in introducing the Bill so that the House can debate the issue, the Bill is in a sense misleading. In my experience as a corporate finance adviser, I have often found that the late payment of debt was not among the most important problems faced by my client companies. Inefficient management systems in small and medium-sized companies are at the heart of many of their problems, as is slow invoicing, which would not be helped by the Bill. If a company cannot get its work in progress under control and invoice it at the right time, it will be critically injured as a company in a cash-flow sense, regardless of whether the legislation exists. Sales costing is another major problem in small companies. Some of them do not understand what they should take into account when pricing their final invoices, especially in certain manufacturing areas.
Mr. Arbuthnot : Does my hon. Friend recall, because he, too, has been here throughout the debate, that my hon. Friend the Minister referred to improved and cheaper computer systems for improving debt control? Does my hon. Friend therefore think that the problem of bad debts and slow payments should be lessened as the improvements in computers increase?
Column 611afraid that I have not quite caught up with modern technology. My 12-year-old son also tries to give me lessons. I know that computers can assist to a great extent, although I still have slight doubts about the impact, because I know that computers can provide excuses for non-payment. Nevertheless, let us face the fact that modern technology can help processing. Often, because it is not labour-intensive, it is of great assistance in increasing the efficiency of small companies. I am therefore glad that that point has been raised.
A small company can get itself into difficulties because of insufficient rapport with the client. It may not know how the client works, yet may hope to get further contracts. It may not be sure of its status with the client, so sometimes it holds back from interim invoicing and so on in the hope of pleasing the client. It may have a weak market position and we should never fail to take that into account. Many small companies come into the market with no degree of dominance, which can weaken their position and cause them serious problems, whether they are paid on time or not.
Inadequate cash flow facilities from banks are a major problem. It is not that the banks will not lend money and it is not a result of interest costs. The companies themselves have often never prepared a spreadsheet in sufficient detail to know what they require, so at the moment when they are most in need, they are caught out. I see the hon. Member for Southport (Mr. Fearn), who is a former banker, nodding in agreement. Many times, on behalf of clients, I have gone to the bank. The bank manager has asked why the client has approached the bank in a crisis ; the bank cannot help easily now, but could have done if there had been more time. That is not a question of late payment, but of inadequate preparation to judge what the cash flow is likely to require.
One of the major problems, which would be a problem whether the Bill came into force or not, and one of the reasons why I have major doubts about the Bill is that, by and large, British companies are undercapitalised. If a company is attempting to move into a highly competitive industry and faces other companies that are far better capitalised, it will constantly face the problem of cash flow difficulties and will be at the mercy of setbacks that may involve the late payment of bills. The undercapitalisation of British companies is a problem and until it is resolved, it will continue to hold back the small and medium-sized business sector. It is not as grave a problem as it was 10 years ago because, as I mentioned earlier, there has been the development of the business expansion scheme and the venture capital industry, but it is still a major problem and the Bill would not contribute to tackling it. Another frequent problem for small companies is inadequate stock control and problems with stock turnover, which, in my experience, soak up far more business money than the problems of late payment.
No hon. Member has suggested today that late payment is not a problem ; of course it is. I have taken the opportunity to talk to some of my constituents about it. There is no doubt that for certain companies, there are major difficulties as a result of some of the larger companies not paying them. One firm has been waiting no fewer than 120 days for a major foreign car manufacturer to settle an account of £1,700. It finds that problem not atypical. Another problem relates to the discount offered for prompt payment. That point has not been raised today, but interestingly, an electrical engineering firm in my
Column 612constituency that works exclusively as a sub -contractor for large building companies is obliged, under the guidelines laid down by the industry's professional body, to offer contractually a 2.5 per cent. discount for prompt payment--that is, payment within 14 days. Unfortunately, it has yet to be paid within the 14 days and the average time is 60 days. The companies with which it deals still take advantage of the discount which is written into the price. That small firm has the option to pursue the matter through the courts to claim back the money that is owed, but estimates that the legal costs involved would not make it worth while to do so. Consequently, it is resigned to forgoing 2.5 per cent. of its rightful income. I have listened carefully to the debate today. I am not certain that that problem would be solved because the main contractors would find some other way of taking advantage of others in the industry.
The key phrase that is applicable to many of my constituency companies was used by one of them. The chairman said :
"Better to be paid later than never at all."
He said that he understood the motive of the Bill and appreciated that this was an issue on which, superficially, it seemed that some form of legal action would be an improvement. However, he said that his firm was in the market place and wanted the market place to resolve the problem. I do not think that any form of legislation will remove that aspect of the complexity of the commercial world. No form of legal intervention will help.
I understand the problem ; I understand the difficulty for small companies, which is precisely that a large company can go to a bank and get a loan at a cheaper rate--at a smaller margin over the inter-bank rate--than a smaller company. In that sense, small companies are penalised twice. That may be true, but it seems to me that the Bill does not provide the answer.
If small companies want certainty, there are other means available to them. The Minister has pointed out that, even under the Bill, a large company could force a smaller company to extend the agreed period of credit in the contract and thus postpone the date at which the statutory requirements would come into effect. That is a crucial weakness. The worry that has prompted the Bill is that small companies are in a weak negotiating position. But the Bill does not help that position, it does not strengthen the hand of small suppliers that may be in difficulty because it still enables large companies to dictate the period. The Bill says that the period, if not specified, is 28 days and is otherwise as specified in the agreement. The Bill does not, therefore, specify what the period should be. It does not specify the maximum. Unfortunately for small companies, large companies may well realise that very quickly. A friend of mine who is a director of a large company made a pertinent remark when he said that he thought that the Bill was a "short and curlies" proposal. I shall not go into that in detail, except to say that I think that my friend meant that the Bill would give him much more power to dictate his terms to smaller companies and that it might prompt him to do so. The Bill would therefore cause smaller companies more difficulties than had previously been imagined.
I shall draw my remarks to a close. For many in my constituency and many of the businesses that I have advised over the years, late payment of debt is not the principal problem. If I could wave a wand and give
Column 613businesses in my constituency a choice, they would ask for skilled labour, the shortage and price of which they regard as one of their biggest problems--a much more damaging general problem than late payment.
Even if one accepted that the Bill has merit, one would still want to ask why it does not apply to everyone. If one asks a small company whence its difficulties come, it says that it is not just from large companies, although for obvious and logical reasons, it may be with larger companies that the bigger percentage of its debt is at any given time. Difficulties also come from other small companies because those are the companies that they cannot rely on to pay. They are most at risk from other small companies getting into difficulties and going into liquidation because those are the companies that find it most difficult to get bank assistance when they are in trouble. I admire my hon. Friend the Member for Hampshire, East. He has pursued this case with great conviction. He has put his arguments before the House clearly. He has failed, I am afraid, to convince me, but I should certainly not wish to stand in the way of his conducting the argument further. I merely urge him to improve his case because at the moment his proposal is flawed.
Mr. Jeremy Hanley (Richmond and Barnes) : A few minutes remain for us to discuss this important issue. Some of the speeches againt the Bill have been examples of the exercise of a power somewhat similar to that which big businesses have over small businesses. Some hon. Members should have been charged interest on the length of their speeches over and above 10 minutes.
As my hon. Friend the Member for Esher (Mr. Taylor) said, we all recognise that late payment of debt is a real problem for companies, both large and small. Although it may not be the most crucial problem affecting companies, it usually affects those on the margins of survival. Therefore, to say that skilled labour is the most important problem--I accept that it might be for industry as a whole--is not to understand the point, for a small business that has been waiting for a good many months for payment from a large customer, because whether that one payment comes in or not is often a matter of survival for the small company.
Many of my hon. Friends would say, "Let them sue." That is obviously the advice of a House that contains nearly 140 lawyers. However, suing is not a real possibility for the smaller company. For a start, it may mean the High Court. At least if the Bill is enacted, interest can be severed from the principal of the debt and a simple action through the country court could then ensue. Lawyers might not become involved in the transaction at all--an attractive possibility, indeed.
It is because of the Government's campaign on prompt payment that the whole House knows that late payment of debt is a problem. The booklet that they have produced and updated is excellent in itself, but it is a voluntary code. I remind the House, as I reminded my hon. Friend the Minister of State earlier, that in the debate on 24 July 1986, it was said that if the voluntary code did not work, legislation would be considered. While the voluntary code may be having an effect--but who knows what effect?--it
Column 614is certainly not working or we would not be having this debate and the Bill would not have been presented so excellently by my hon. Friend the Member for Hampshire, East (Mr. Mates).
The Government's booklet "Prompt Payment Please!" is sponsored not only by the Department of Employment, but by four leading bodies--the Association of British Chambers of Commerce, the Institute of Directors, the Institute of Purchasing and Supply and the Confederation of British Industry. I remind the House that when the booklet was issued, the Institute of Directors was in favour of the voluntary code and against compulsion. However, as my hon. Friend the Member for Hampshire, East has said, the institute has changed its mind. In other words, the problem is getting worse, not better, as a result of the voluntary procedures.
I repeat the extract from the letter from the Institute of Directors that was sent to my hon. Friend the Member for Hampshire, East earlier today. It states :
"Thanks to these changes your proposal is better targeted, more likely to be effective and more compatible with freedom of contract".
That is a pretty tough statement from the Institute of Directors and shows its change of mind. The letter then states :
"On balance, therefore, we feel it may now be better than not to have your proposal on interest on late paid debts on the statute-book. Your approach is certainly a more sensible and appropriate response to the problem of late payment than previous proposals."
In other words, the Institute of Directors now believes that the Bill is the right way forward.
Other hon. Members have said that the Government should take a lead, and the Government have said that they should lead by voluntary procedures. The 1988 changes on VAT and interest have been mentioned, but I remind the House that it is not only in that respect that the Government have hit late payers. They do so on taxation, with high rates of tax penalties, and in almost every other area. The whole country is used to interest on debts, such as those on credit cards, and on mortgages. It seems that it is only in the business community that interest is taboo. Even in executorship, if an executor does not pay out to an estate within 12 months, which is regarded as a reasonable period within which he or she can carry out the work, that is regarded as unreasonable. In other words, the principle of late payment beyond a reasonable time is already accepted in many branches of the law.
The actions recommended in the Bill are wholly sensible. My hon. Friend the Member for Gillingham (Mr. Couchman) has said that a private Member's Bill is not appropriate to this subject and that Members should introduce matters merely of their own interest. I cannot think of anything more important at the moment for the survival of small businesses than giving this strong message to companies that do not pay. It is right for Members to introduce legislation to redress a wrong and there is a wrong here. Of course, the Bill is not a palliative for all evil. It cannot be said that it is the only measure that will help small businesses to survive, but it would offer them compensation against the money and the interest that they lose because of the late payments of their customers.
Will the Bill introduce a change of attitudes? I believe that it will give a kick to those who do not pay. It will show
Column 615that the House approves of early payment, in a way in which the voluntary code has so far been unsuccessful in doing. Therefore, I welcome the Bill wholeheartedly.
Mr. Mates rose in his place and claimed to move, That the Question be now put.
Question put, That the Question be now put :--
The House divided : Ayes 52, Noes 0.
Division No. 65] [2.24 pm
Ashdown, Rt Hon Paddy
Barnes, Harry (Derbyshire NE)
Body, Sir Richard
Bowden, Gerald (Dulwich)
Buck, Sir Antony
Field, Frank (Birkenhead)
Garrett, Ted (Wallsend)
Greenway, Harry (Ealing N)
Hamilton, Neil (Tatton)
Hayhoe, Rt Hon Sir Barney
Hughes, Simon (Southwark)
Jones, Robert B (Herts W)
Leigh, Edward (Gainsbor'gh)
Martin, David (Portsmouth S)
Meyer, Sir Anthony
Powell, Ray (Ogmore)
Rossi, Sir Hugh
Sheldon, Rt Hon Robert
Smith, C. (Isl'ton & F'bury)
Stewart, Allan (Eastwood)
Thompson, Patrick (Norwich N)
Winterton, Mrs Ann
Young, Sir George (Acton)
Tellers for the Ayes :
Mr. Martin Brandon-Bravo
Mr. Jacques Arnold.
Nil Tellers for the Noes
Nil Tellers for the Noes :
Mr. James Arbuthnot and
Mr. John Marshall.
Whereupon, Madam Deputy Speaker-- declared that the Question was not decided in the affirmative, because it was not supported by the majority prescribed by Standing Order No. 36 (Majority for Closure). It being after half-past Two o'clock, the debate stood adjourned. Debate to be resumed on Friday 9 February.