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Westminster Hall

Wednesday 28 March 2007

[Mr. Martin Caton in the Chair]

Small Business

Motion made, and Question proposed, That the sitting be now adjourned.—[Kevin Brennan .]

9.30 am

Mr. Brian Binley (Northampton, South) (Con): It is good to have your direction, guidance and help, Mr. Caton—I shall certainly need it. I am pleased that this debate was called for this morning because Britain’s future competitiveness and the problems relating to ensuring that we are competitive over the next 40 years are vital to all of us. I want to take a positive approach, because I know that my children and grandchildren will be dependent on how successful we are in the task of remaining competitive over that time.

In a way, this is a continuation of last night’s Budget debate, in which I was fortunate enough to speak. I spoke on the importance of small business and on the harmful effects of the increase to 22 per cent. of corporation tax for small business, which was contained in this year’s Budget. I also discussed the inability of small business to claw back that money through investment and an increased research and development allowance. Those measures will impact on the retained profit of small business, which in most instances—not all, but most—is used to finance growth in the first 10 years of the life of a small business. I feel that anything that inhibits such growth is not in Britain’s interest. However, that debate is over and the Budget is settled for another year. We now need to move on to address Britain’s long-term economic future, the possible impact on that of small business and how it can contribute to well-being.

I have to declare an interest. As I said yesterday, I am a small business man. In fact, one only needs to look at me to know that that is not the truth; however, I have started two small businesses that have grown, and I am most thankful for that. As I mentioned last night, I started my first small business in 1989. It builds databases for business—mostly for the business-to-business publishing industry—and now employs140 people. That is a measure of what small business can do to contribute to the nation’s well-being and to add to the coffers of the Treasury, which is vital. I was then foolish and tried to set up another business in 1993 with a mad South African—everybody has to come across a mad South African in their lives. It was a small publishing company, and by dint of hard work, sizeable risks and sleepless nights we managed to build that company up to the point where it employs more than 80 people. The contribution of those two small businesses is that they now employ more than 220 people, which underlines again the import of the small business sector for providing future job growth.

Although I wish that I were unique, the truth is that I am not. There are thousands and thousands of others like me who have made similar efforts. They did so, of course, first and foremost in their own interests—I do not deny that that is a major motivating factor. However,
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as part of that process they have created jobs and wealth for the nation and taxation for the Exchequer. In the UK, small and medium-sized enterprises now account for more than half of the employment—58.7 per cent.—of the working population. That is pretty much true for each region of the country. There are 4.3 million small businesses, and I recognise that that number has grown, but much of that growth is down to people incorporating as one-man businesses. I recognise the need to ensure that that loophole is closed because, frankly, it does not help anyone, but I am saddened that the Chancellor used such a large, all-encompassing hammer that impacted so much on many small businesses to close that loophole. I appealed to Ministers yesterday evening to review that position—not for this Budget because it has been passed, but perhaps for next year. There is a need to free small business and encourage small business creation, while closing the loophole that the Secretary of State for Trade and Industry said was the main reason for the Chancellor increasing corporation tax.

Some 97 per cent. of firms in this country employ fewer than 20 people. That is quite startling. Indeed, 95 per cent. of firms employ fewer than five people. Small businesses are a major part of the economic fabric of this country.

Mr. Philip Hollobone (Kettering) (Con): I congratulate my hon. Friend on securing this important debate. Does he agree that nowhere in the country is it more important for small business to be successful than in Northamptonshire, because around 100,000 new jobs must be created in that county’s economy over the next 15 years if the hundreds of thousands of people who are coming to Northamptonshire to live are to have gainful employment? The small business sector will be crucial in that respect.

Mr. Binley: I thank my hon. Friend and neighbour in Northamptonshire for that question. I assure hon. Members that the question was not planted—although I wish that I had planted it because my colleague makes a very important point. The sustainable communities project in Northamptonshire will bring 300,000 additional people into the county and add 50 per cent. to our population, so the jobs that he refers to will be required. One of the reasons why I wanted to have a debate on small enterprise is that it is one of the sectors where those numbers of jobs could be created. I thank my hon. Friend for the point that he makes.

The truth is that more than 500,000 people start up their own businesses every year. That is another remarkable fact that smacks people in the face when they see it in print—indeed, it did so to me, as I did not think that the number would be that high. Again, that underlines the import of business creation. Some12 million people work in small firms in this country. Such firms contribute more than 50 per cent. of UK turnover, which is around £1,200 billion—wow! I see my own little contribution to VAT and so on, but it is only when one sees a figure of that size that one recognises the contribution that small business makes.

The final but equally startling fact is that 64 per cent. of commercial innovations come from small firms. That is a massive contribution in total and one that I am proud to be part of. The importance of SMEs is further underlined by the forecast that in a 10-year cycle that began some five years ago, although UK plc
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will shed 1.5 million jobs, SMEs in the UK will add 2 million jobs. I have said before that the sector is rather important to our well-being.

We need to enhance the role of small business if we are to face the challenge of the future. It is worth recording what that challenge is. We know that emerging nations are emerging ever more quickly; it is a trend for globalisation that is impacting massively upon our ability to compete in the world at large. Indeed, the challenge will become increasingly important over the next 40 years. For instance, Office for National Statistics figures show that the United Kingdom’s deficit in trading goods with China grew in 2005 to £10 billion. That shows how the emerging nations are competing. The size of the global economy is set to increase by 40 per cent. by 2015, and India and China together will represent a quarter of the world’s output.

I know from running a business that long-term planning can be a pretty dodgy exercise; it is as much perception, guesswork and hope as it is defying science. However, we have to take the best figures that we can to understand the size of the challenge that faces us. It is expected that India and China alone will be responsible for 60 per cent. of global trade by 2050—to say nothing of Brazil, Mexico or the other emerging nations that are growing and challenging our trading position. To ensure that our businesses remain competitive, we need to assist them to create more jobs, as that will contribute to our well-being and make a better contribution to our trading competitiveness.

I have already spoken about job growth in the sector, and I have already mentioned innovation. The Government need to encourage an entrepreneurial rebirth in the sector. I believe that the Government recognise that. I have no wish to be churlish about it; statements have been made and there is a real desire to encourage and enhance the sector. I welcome that, and I am delighted that the Minister is a part of that process. I have heard her speak to entrepreneurs, and I know that they accepted her message and were encouraged by it. However, we are not doing so well at the moment. I have already said that the Budget is putting an increasing burden on small business. Indeed, I believe that it will restrict growth, as growth is financed from retained profits in that sector—certainly for the first 10 years of the life of a business.

Government support for small business adds up to a staggering £12 billion per annum. Tragically, however, it is not well directed. I am delighted that the Government accepted the National Audit Office report of 2005. It seems to me that the Government have no wish to hide from the fact that we need to do better; indeed, they said so when the report was published. However, the report was scathing. For instance, it said that there were 3,000 different schemes to enhance and help to create small business. Those schemes were falling over one another to get the audience to the marketplace, but they were not very successful. I welcome the Government’s promise—it is work under way—to have a much smaller number. Whether 100 is the right number is irrelevant. We need the most effective number to do the job in hand. I do not hold the Government to such figures, but I do hold them to their promise to improve, so that we become much more effective in our support of small business.

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We all know that regional development agencies are variable in their success rate and in the work that they undertake. It is equally true to say that the Government recognise that. There is much common ground. That excites me and leads me believe that there is hope for the future. However, the overall tenor of the NAO report suggested that the organisation of our support for small business was ineffective, inefficient and wasteful. I am delighted that the Government have seen fit to do something about it.

The NAO claimed that we need to address a number of factors. Small businesses need better regulation and better access to finance, not only when one-man businesses become employing businesses but, equally important, when owner-managed businesses become board-managed businesses. Indeed, at the time of that leap, businesses have a massive problem with equity. Finding capital to finance change between £250,000 and £3 million is massively difficult.

The NAO says that we need more effective business support and less Government bureaucracy, and I agree. We need clear communication and information from the Government. Of course, we need a favourable tax regime, and I shall say more about that later. Above all, we need a skilled work force. Those are the areas that the NAO said needed attention, and it is generally accepted that it is so.

I turn to education and skills. The Leitch report said that one in six adults in the UK does not have the literacy skills expected of an 11-year-old. An Institute of Directors policy paper stated that only 14 per cent. of British employees have intermediate level vocational qualifications, compared with 46 per cent. in Germany. The British Chambers of Commerce says that the UK faces a skills crisis.

The Foster report said that 17 bodies have monitory or regulatory roles in further education, yet less than half the budget allocated by local skills councils goes to further education and 60 per cent. of it is spent on remedial training at level 1, leaving hardly any money to be spent on intermediate skills. We need to change that so badly it almost hurts. It certainly hurts our business success and our ability to compete.

The Ofsted report of 2005 is, I am sure, well known to the Minister, so I shall not go into detail. However, it said that the lack of skilled teachers

that hamper long-term planning. We are not well equipped to support business. We have a problem. We also have a social wage and regulatory burden that needs to be understood, and we need to do something about it.

Mr. Andrew Love (Edmonton) (Lab/Co-op): I agree very much with the thrust of the hon. Gentleman’s argument, and I want to extend the discussion on how to build our skills base. It is a problem for small business in particular, because allowing employees time off to build on their skills can sometimes prove difficult if there are only four, five or six employees. How should small business be working with Government and educational institutions to overcome some of those real difficulties?

Mr. Binley: I thank the hon. Gentleman for raising a genuine—I know that we always use that word in response
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to interventions—and important point. I promise that I will speak later about what we might do collectively, as we are all in this together. Part of our task in this place is to ensure that people can create businesses not only to keep us going but to keep going all those services that live off the wealth-producing sector. I will revert to the subject later if the hon. Gentleman is content for me to do that.

We keep adding to the social wage, and although this is not the right debate in which to go into the areas of employment law, maternity rights and so forth, I want to mark that up as a factor of which we should be aware. The more we impose on small businesses by way of social wage element, the less easy it is for small businesses in particular to compete. That is not to say that we want to return to the 1890s, when workers’ rights were largely not what they should be—we would all be fighting for better workers’ rights in those circumstances. We need a balanced perspective, however, and we need to ensure that the social wage element burden on small business is in keeping with our ability to compete, by recognising global standards and taking them into account when framing regulation.

The burdens barometer of the British Chambers of Commerce shows that the cost of regulation and red tape for British business increased by £55.6 billion in the period from 1998 to 2006. More important, the Association of Chartered Certified Accountants has observed that the cost of complying with red tape can be proportionately 30 times higher for SMEs than for larger firms. That is a massive figure, which we all need to take into account.

Let me mention the national minimum wage, which is indeed a burden on business. Although I do not argue against it, I am against the rate of increase. An increase of 34.7 per cent. in the past five years has created problems—it is at least three times the rate of inflation. So I hope that the Government now feel that they have achieved their objective and can settle on increases that are related to inflation. That would be a great relief, particularly for small businesses. Those businesses want to employ people and to grow, but they dare not always take the risk, because of the responsibilities that are placed on them by employing people.

What else can we do collectively to ensure that our business sector works well and meets the challenges of the future? There are some big issues, and I shall try briefly to address them. The country’s national insurance system is badly in need of wholesale reform, and I believe that we should set about that reform—I was hoping that more would be done in the Budget. The present system costs businesses £760 million per annum—a figure that rises to £2 billion if all Government payroll demands are taken into account. Perversely, that has a considerably greater relative impact on small businesses than on plcs, and we need to consider that fact.

Regulation should be reduced. There was a period when the European Union felt that its only role was to increase regulation on businesses throughout Europe—as though that had no impact on the continent’s ability to compete in a globalised trading system. The cost of regulation to British business should also be reduced, because that too has dramatically increased. I recognise that the increase is not necessarily attributable to the present Government; much of it derives from Europe. However, we need to get a grip on it. I hate to say it, but if that means throwing some regulation back to Europe,
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let us have the courage to stand up and do that. Somebody needs to do it; somebody needs to stand up to the regulatory burden and say, “We as Europeans can’t accept it. Our future as Europeans is bound up with the size, rate and burden of inflation emanating from the EU.”

There is one area for which this country is responsible, however: gold-plating. The Foreign Policy Centre found, I believe, that 62.5 per cent. of the EU regulations that they reviewed had been gold-plated. Do we really need to add to the burden on business by imposing yet more regulation at our end? My belief is that we do not.

To get rid of the burden of regulation, or at least to increase awareness of its dangers, we should create a network of enterprise champions throughout the civil service. That is not a new concept; champions exist in many different areas of Government. There should be enterprise champions who are committed to the mantra that regulation costs money and reduces our ability to compete in the world.

The Public Accounts Committee has observed that there are no official statistics on the national cost of regulation on small businesses, although it acknowledged, as do I, that the Government have recently embarked on a costing exercise in that respect. That is a move forward and I welcome it.

I have already said that red tape has a heavier relative impact on small businesses, and I have referred to the need for better skills. I have a whole list of such skills. We need to ensure that skills packages derive from the shop floor and are not imposed downwards by the educational establishment. We need to reach out to businesses with skills and involve them in creating skills packages, and we need to take skills packages to the workplace. The hon. Member for Edmonton (Mr. Love) is right that a sizeable number of small businesses are not being reached because they are expected to seek assistance at a higher level than often is known to them. There should be much more involvement in reaching out to them with training packages that are created by business, as well as by educationists.

My own local learning and skills council has17 members, of whom only four are businessmen. I am not saying that that is the Government’s fault; business has a responsibility to help to work in partnership with the Government at all levels to ensure that skills training is much more effective. However, I want to see a change from control by educationists to a situation in which there is much more business input, and I want that to work on the shop floor, in factory sites, in offices and on the ground in business generally. Will that be expensive? Yes, it might be more expensive than at present, but an awful lot of waste in supporting business has been observed. That could be directed to the training activities that I want to happen, and I hope that that gives one possible answer to the point raised by the hon. Member for Edmonton.

I have already commented on how poorly equipped this country is in skills and vocational training, and we need better.

Mr. Charles Walker (Broxbourne) (Con): On vocational training, does my hon. Friend think that it might be a good idea for the Government, or any incoming Government, to consider how young people of 14 are streamed?
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Many such young people do not necessarily want to be learning French or academic subjects. They are turned off by school, but they would appreciate the chance of a vocational education that would begin to train them for work. That is done in Germany, where there are academic and vocational routes at 14.

Mr. Martin Caton (in the Chair): Order. The hon. Gentleman is taking rather a long time for an intervention. I think that the hon. Member for Northampton, South (Mr. Binley) probably has the idea.

Mr. Binley: Thank you, Mr. Caton. I accept the point that my hon. Friend was making—it is an important one. The national target for 50 per cent. of the school population to go to university is not the most helpful target—I am sure of that. I would rather not have a specific target; I would rather enhance vocational skills, apprenticeships and school training for the world of work in a way that might obviate the need for such a 50 per cent. target. That is possible, provided that vocational attainments are worth while, important to the student and important to the world of work.

Mr. Love: May I say how much I agree with the hon. Gentleman’s view that education or skills training should be a bottom-up process, rather than a top-down one, but is not the problem with comparing us with Germany that there is no parity of esteem in this country between the academic and the vocational? Until we create such a culture, separating people out will not work.

Mr. Binley: I thank the hon. Gentleman. He always speaks words of wisdom. I said yesterday that I had once had the privilege of going to Sri Lanka with him, and I had a very enjoyable week. I recognise what a wise and credible man he is and I am delighted to pay him that tribute. Of course, I agree with him. We must make the world of work a heroic place to be. We make heroes of pop stars and football players, but we look down on entrepreneurs in some respects. They are viewed with distaste, either as anoraks or as petty crooks trying to screw the whole world for their own ends, and of course, we know that neither view is accurate.

We must build up the esteem in which we hold entrepreneurs, who go out and create business. We must build up a view that good management is a good profession to be part of, and we must create the view that profit is an honourable thing to attain, because it is about growing jobs and businesses. I therefore accept totally what the hon. Member for Edmonton says and thank him for making the point.

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