Supplementary Memorandum
from the Federation of Small Businesses Wales
BUSINESS RATES
There are 1.6 million rateable properties in
England and the gross rates yield in 1997/98 is forecast to be
£15 billion. By contrast, the council tax collected from
20 million domestic properties will raise around £7.4 billion.
Nearly half of all business ratepayers have
a rateable value of less than £5,000.
The impact of business rates on small and large
businesses is shown in the table below:
| | |
|
Turnover
£s | Rates as percentage
of turnover
| Rates as percentage
of overheads |
Rates as percentage
of profits |
| | |
|
| Less than 50,000 | 7.7 |
13.7 | 35.9 |
| 50,000-99,999 | 5.5 | 10.3
| 31.8 |
| 100,000-499,999 | 2.5 | 5.2
| 17.2 |
| 500,000-1.99 million | 1.4 |
3.7 | 15.2 |
| 1 billion and over | 0.7 |
3.0 | 3.3 |
The current UBR system from the small business perspective
— In terms of numbers, SMEs occupy the majority
of business premises—numerically the largest business group
representing 13 per cent of the electorate.
— The previous Government's refusal to tackle the
UBR burden on small businesses is seen as a key aspect for their
1997 election defeat.
— Small outlets pay disproportionately higher rates
per sq. ft. than large businesses and more than a domestic property
of comparable freehold value.
— It is unfair that save for a few exceptions, SMEs
cannot claim hardship relief like domestic council tax payers.
— Pending a lengthy appeals process, SMEs have to
pay the higher disputed rate.
Why the Government should give special consideration to small
businesses
— For SMEs that turnover up to £100,000, UBR
accounts for 36 per cent of profit.
— SMEs contribute to Government turnover by paying
and collecting other taxes—income tax; corporation tax;
NICs; VAT and Customs and Excise duties and when an SME goes to
the wall (one-third of all SMEs fail in the first 3 years) this
Government revenue is taken away.
— Therefore any new tax—such as a local supplementary
levy—could be the straw that breaks the camel's back.
A summary of the FSB's views and proposals
— The FSB is against allowing local authorities
discretion over UBR and the current amount of UBR liability incurred
by SMEs.
— The FSB supports maintaining the central
pooling system; simplifying transitional relief; speeding up the
appeals system; overhauling the exemptions system; extending hardship
relief; reducing the poundage figure for small businesses while
increasing it for large businesses; and introduction of a banding
system.
CONCLUSION
— It is no longer in dispute that SMEs are losers
under the present system, and that it currently advantages big
business and council taxpayers.
— The FSB maintains that the Government must accept
the principle that the present system needs reform.
— The FSB rejects outright the proposal that local
authorities could levy an additional supplement.
The following table outlines the FSB's recommendation for
banding. The proposed reductions would be funded by a one-off
increase in the poundage to £0.51. Thereafter all increases
would be indexed to no more than the rate of inflation. This recommendation
would reduce the rate bill for 1,496,000 of the 1,723,000 businesses
that pay UBR and completely remove 154,000 businesses from their
rates liability.
Rateable Value Band
£ (lower limit)
| Proposed Reduction
(Per cent) |
|
| |
| 0 | 100 |
| 500 | 100 |
| 1,000 | 80 |
| 2,500 | 70 |
| 5,000 | 60 |
| 10,000 | 50 |
| 15,000 | 30 |
| 25,000 | 10 |
| 50,000 | 0 |
| 100,000 | 0 |
| 250,000 | 0 |
| 500,000 | 0 |
| 1,000,000 | 0 |
To secure the prosperity of the small and micro business
sectors, it is necessary to change the present system so that
the rates burden is spread in an equitable way.
THE FUNDING
GAP
Small businesses looking for cash risk falling into a funding
gap. According to academics, whose ideas are backed by experts
dealing with corporate finance, companies looking for up to £3m
could struggle.
For venture capitalists the risk does not warrant interest
and it is a serious problem, both for small businesses with excellent
growth potential, and for those who have a sound idea, but need
financial support.
And banks are unlikely to prove an alternative because small
businesses do not have the security necessary to back a six-figure
loan. Paradoxically, businesses have more chance of getting venture
capital backing if they are looking for in excess of £5 million.
The bigger the investment, the lower the risk of business
failure. And for the venture capitalists the cost of doing a deal
is roughly the same whatever the amount advanced, in items such
as management time, market research and marketing.
This again militates in favour of larger deals. Venture capitalists
also want to see a growth that will enable them to get their money
out in a few years. Small companies, even successful one, can
rarely achieve the growth rates needed to guarantee such returns.
ENTREPRENEURSHIP
The problems discussed in Oral Evidence to the committee
concerning students and entrepreneurship can best be summed up
by the opening paragraphs of an article in The Guardian
(Tuesday, 16 June 1998) "Bright Sparks Turned Off":
"You're 21 and straight out of university. You've got
brains. You've got enthusiasm. Most important of all, you've got
a staggeringly good idea for a new business. All you need is some
seed-corn funding.
According to one of the participants at one of the joint
Treasury-DTI productivity conferences last week, this is where
the problems begin. The bank manager want to see three years of
non-existent accounts and run the rule over a non-existent finance
director. The result? Lots of budding entrepreneurs decide that
there are better ways of becoming seriously rich and go off to
work for Goldman Sachs instead."
Britain as a whole has a worrying enterprise deficit. In
America, as we have seen with the Californian model, there is
an entirely different culture, where a `get-up-and-go' approach
leads to a much higher rate of small-firm creation. Every year
in the United States, 1.4 million businesses are started, and
five per cent of them enjoy high growth.
A recent survey by Babson College in the United States found
that only 21 per cent of adults in the UK thought that good new
business opportunities existed in Britain. Sixty-eight per cent
of adults said they would approve if their child started a new
business here, but the comparable figure for the US is 85 per
cent.
It could therefore be argued that Britain has a more cautious
attitude to entrepreneurship. Despite the recent robust period
of growth, there is still plenty of doubt about the UK economy
from the two grinding recessions of the early 1980s and early
1990s. America, too, has suffered from economic downturns, but
they have been shorter and shallower than those in Britain. People
tend to think twice about starting a business if they think there
is a chance they will lose not just their money but their home
as well.
The problem in Britain would appear to go deeper, with our
risk-averse, conservative attitude to the economy to be inappropriate
at a time when the world economy is on the brink of a digital
revolution that will match in significance the industrial revolution
of two centuries ago.
Government should be about nurturing dynamic sectors of the
economy. The Irish government, for example, has adopted a hands-on
role in developing a software industry, while the Danes have done
the same in northern Denmark for digital communications.
We also need to address the education system and its relationship
with the enterprise gap. The Government should build confidence
in the young, remove the specialisation at A-level, insist on
mandatory business modules at secondary level, and end the narrow
specialisation of British degrees.
LATE PAYMENT
OF BILLS
The issue of late payment of commercial debt remains a significant
problem for many small businesses. Due to their poor bargaining
position small businesses are particularly subject to delayed
payment, particularly from larger clients. During times of economic
recession and high interest rates, small business cash-flow is
even more vulnerable to late payment. However, the imposition
of a statutory right to interest is not the answer. A Bank of
England report has stated that countries which have this right
have found it provides no solution. Such a move would result in
small firms, eager for business, finding themselves forced to
accept extended credit terms from larger companies in a stronger
bargaining position while at the same time being squeezed by their
creditors who are able to enforce rigid payment periods under
the threat of interest.
The FSB remains opposed to legislation providing statutory
interest on late payment of debts as such legislation would remain
prohibitively expensive for small businesses to enforce. Furthermore,
it is more likely to be used by big businesses against smaller
businesses rather than vice versa, while small businesses would
still have to go to court with no guarantee that in the end any
judgment would be satisfied.
A more effective solution would be to make access to the
courts both cheaper and simpler and the enforcement of a judgment
easier.
The FSB advocates a fundamental reform of the Small Claims
Court procedure, which is both time consuming and ineffective.
The FSB recommends:
— Making it easier and cheaper to get into court.
— The setting up of a national enforcement department
by the Lord Chancellor.
— That any judgment or instalment payment outstanding
for 28 days should automatically trigger an enforcement hearing.
— That the upper limit for small claims in the County
Court be increased to at least £5,000.
— The public listing of bad debtors.
— Ensuring that the supplier's normal terms of trading
goods and services take preference over those of the purchaser.
— Making 30 days the "normal" period of
settlement when unspecified in a contract.
— Making the goods, where practical, remain the
property of the supplier until fully paid for.
— Allowing the credit agencies, as of right, to
notify bad payers that they will be (or are) listed.
— Forcing large companies to include a note in their
annual report about their payment record over the previous year.
— When a company has gone into liquidation the liquidator
should be empowered to levy a fixed surcharge to be paid to unsecured
creditors. This would be in addition to the capital sum levied
against companies owing money outside their contracted terms at
that time.
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