Examination of Witnesses (Questions 20-39)
MR DAVID
FROST, MR
ANDREW CAVE
AND MR
MICHAEL IZZA
16 DECEMBER 2008
Q20 Mr Weir: What is the way out
of this circularity then?
Mr Izza: We have been seeking
to raise the profile of this issue so it does not become a train
crash, so that people actually understand what these statements
mean. There have been a number of articles positioned in the media.
We have been speaking to the Secretary of State at BERR to make
sure that the Government understand this problem and are able
to take whatever actions they see fit. It is principally one of
education.
Q21 Mr Weir: Presumably the landlord,
investor, whatever, would be seeking the advice of his or her
accountant on this company before putting an investment into it.
Is the first line of defence not with the profession itself, to
be able to explain these qualifications to any potential investor?
Mr Izza: I would very much hope
so, but we do not want to leave any stone unturned.
Q22 Mr Weir: Is this a real problem?
Do you think that sound companies may be undermined if there is
a misunderstanding of these modified audit certificates in their
accounts?
Mr Izza: I think there is a real
problem. We have seen it in recent weeks, that as soon as a concern,
for example, was raised about Woolworth's all sorts of suppliers
to Woolworth's turned off the credit and started asking for cash
on delivery. All through the supply chain this could percolate
down and have a significant effect from large, to medium, to small,
to micro.
Q23 Chairman: On this matter we talked
about this privately a couple of weeks ago and it caused me great
concern. I would just like to know from the representatives of
the small business sector here whether they share the concerns
expressed by the accountants on this matter.
Mr Frost: Yes, we do have some
concerns.
Mr Cave: We are certainly very
concerned by the figures that have been announced, yes. This goes
back very much to what we were saying earlier that we are concerned
our members need to make sure that they are getting everything
sorted now, talking to their accountants and getting things resolved.
Yes, it is a matter of concern.
Q24 Chairman: The only action we
are able to do in this Committee is talk about it and highlight
the issue, but I think the CBI has called on the Financial Reporting
Council to produce new guidance on this matter. Is there something
the Council could do?
Mr Izza: There are a couple of
things. First of all, the Financial Reporting Council produced
this guidance in November, which is very good guidance
for any director of any company. That explains the issue for them.
They are also at the moment looking at issuing further guidance
before the year end for auditors. I would say that they understand
the issue, but it is about making sure that the £4.7 million
small and medium size enterprises in this country have an awareness
of it.
Q25 Chairman: Is there any other
regulatory action which could be taken to help draw attention
to this issue or deal with it?
Mr Izza: In our view, no.
Q26 Mr Bailey: I want to explore
the impact of the pre-Budget Report and the measures in them.
First of all, do you think the measures will help quickly enough?
Andrew, earlier you mentioned the £1 billion fund and that
this was likely to be used within two months—presumably
that at least is being utilised?
Mr Cave: It is not being utilised
at the moment because they are still working up the details. We
need this to happen now. It needs to have happened a month ago.
We would like to see it in place and available through the banks
for the 1st January. I suspect is going to be more like the middle
of January. That is something clearly we are very keen to welcome.
In addition, there is also the £25 million that is going
to be made available through RDA funds. Again, that is a very
small sum of money when you consider the issues, but it is clearly
welcome. In terms of the impact it is too early to tell—we
will have to see. The spreading of payments and the situation
with HMRC is something we very much welcome and will give some
breathing space to members; and also the changes to offsetting
are particularly welcome.
Mr Frost: The question was broadly
about the measures in the PBR. I think there were a number of
good measures in there, including the small business package which
is clearly a bit hazy at the moment, let alone whether the guarantee
scheme is going to work, but we think that has the potential to
really help business. I think the HMRC clearly shows an understanding
of the need to work with business. I think they first showed that
during the floods of last year, and we place great store on that.
A deferral of the increase of small firms' rate of corporation
tax was a good move. The negatives from our point of view were
the proposals to introduce NIC contributions, which is a very
retrograde step because it will harm the ability of firms who
desire to increase employment, which is exactly what we do need
to do. We thought the rate relief on empty property could have
gone far, far further than it did. Broadly, there were some good
measures to help small business.
Mr Izza: Chairman, could I just
add, the temporary reduction in the VAT rate, while welcome, we
think is going to have a relatively modest impact. At a macro
level I do not think a 2.5% change in purchase price, when there
are so many other discounts going on in the high street, is going
to modify behaviour. I think the burden on small and medium size
businesses of implementing it was not particularly well understood.
I do not know whether all the Committee are aware of this but
HMRC issued 70 pages of guidance to advise on the rate changes
and how to deal with them. If you own a small company and there
might be two, three, four or five of you this is a major administrative
burden. I think potentially that was problematic. We very much
welcome the introduction of flexible payment schemes for tax by
HMRC; and when that was introduced in the foot and mouth crisis
that actually kept some farmers alive. So we should not forget
that, and that could be very valuable. It was also announced that
there was a proposal to carry back loss relief for any losses
incurred in this year. Again, I think that is very welcome but
there are some details of that scheme that we would still like
to see; and we would like to see that as widely available as it
could possibly be. One thing that we have been lobbying on for
well over a year now is the income shifting rules, which affects
many, many small and medium-sized businesses. We were glad to
see that that was deferred in the PBR as well.
Mr Bailey: There does seem to me to be
a certain contradiction in approach here. I certainly could see,
with an individual purchasing decision where you have discounted
goods, 2.5% is neither here nor there. However, in macroeconomic
terms it does release £12.5 billion of purchasing power.
It does not just relate to one purchase; it relates to a huge
range of purchases that people make every day. My instinct would
say that would make a difference, although it is probably too
early to say. What is your assessment so far?
Chairman: We are actually looking at
the impact on liquidity of small and medium size businesses.
Q27 Mr Bailey: Actually we are talking
about the pre-Budget Report and its impact on small businesses.
I would like to have some assessment. Have you got any early indications?
Mr Cave: Our early indications
are that it costs our members on average £2,500 to implement
because they have had to change a lot of price lists. We were
inundated with emails and phone calls from members who said, "This
is absolutely absurd. Why are they doing this?" You do have
to reduce it. I am here to speak on behalf of members and they
take these things on a case by case basis, and they do not see
the benefits compared to the costs. They have endured more of
a cost with this measure than they will see in benefit. Maybe
in the long-term, but we are talking about short-term issues here.
Cash flow is the issue at the moment.
Q28 Mr Bailey: Different companies
seem to have implemented it in different ways, some with more
burdens than others.
Mr Izza: Chairman, I accept your
macro point entirely, and I do think there is validity to it.
Let us not lose sight again of this administrative burden and
the potential for problems when people do VAT returns et cetera,
because VAT is a very complicated tax. HMRC now need to approach
all the changes that have been made with a light touch, because
otherwise that will be the next problem that occurs in this area.
Mr Frost: Finally, one of our
constituent chambers carried out a survey of its members immediately
after the announcement and 80% of businesses that replied said
that the cost of implementing the changes would outweigh any benefits.
Q29 Roger Berry: I recognise there
are costs with people changing their price tariffs, but £12.5
billion in an indirect tax cut benefits consumers and businesses.
Let us be quite clear about this. £12.5 billion goes into
the system, it is not simply that consumers get the benefit; in
normal market conditions part of that would immediately improve
the cash position of businesses, would it not? Or would you prefer
that tax to be stopped now and for the £12.5 billion to be
taken back? Would that be good for small business—to reverse
the policy?
Mr Izza: I entirely accept the
point you are making. At a macro level it has an impact. If you
were to try and segment where that has an impact on the economy,
it may well be that this has a disproportionate impact in favour
of large enterprises rather than medium and small; because large
enterprises have the resource to change prices and deal with it
quickly. If you are in a small company with two or three people
it is a major task.
Roger Berry: I accept that.
Mr Hoyle: I think we are in great danger
of losing sight. Everybody accepts that £12.5 billion being
put into the economy is so important. It is the quickest
way to get money into the market and moving around, there is no
quicker way. If you changed the tax codes it would take so much
longer, and the fact is that would be a burden on business as
well. Whatever you do is still a burden on business, so let us
face up to that fact as well. The other thing to remember is that
it does make a difference, whether somebody is buying a CD and
it knocks 20p off, I agree with you, it does not make that much;
but, on the one hand, you are saying, "There are already
discounts taking place on the high street" so therefore people
are already altering the price of goods to begin with, but this
is an extra 2.5% that is not being given by the company but is
being given by the Government. I think we have to remember that.
On the one hand, they are already discounted; this is a further
discount that can help. Let us look at it the other way. Mr Cave,
you represent small businesses: builders—builders who are
building extensions to houses—three-man bands really do
benefit if they can knock 12.5% off a £75,000 house extension,
so it really does make a difference. Let us get away from the
CD mentality and chocolate bars—small businesses can benefit
that way. Also, what we need to stimulate is the other part of
businesses, and that is the car market. If you take 2.5% off a
car it really does make a difference. What we have to do is be
careful we do not just condemn but we actually see the benefits
as well. The fact is that we have £12.5 billion immediately
into the market that does help everybody.
Chairman: We are not the Treasury Committee
and we are not looking at the macro impacts of £12.5 billion.
We are looking at the impact on the small and medium-sized businesses,
so I want to focus any questions that are asked very much on that.
Mr Hoyle: Finally, the £12.5 billion
that is into the market helps small businesses because that is
money that was not there previously.
Q30 Mr Clapham: I want a word on
the RDAs, because the RDAs have had an input into the PBR and
are also making a £110 million package available. How important
do you see the RDAs in actually facilitating a revival of the
SMEs?
Mr Cave: Potentially very important.
We were very encouraged by One NorthEast and the measures they
brought forward before the PRB, and they have also stepped up
to the plate and said that they will go to the European Investment
Bank and buy money themselves. That is something that is practised
in mainland Europe and we, as the FSB, have been encouraging RDAs
around the country to do that here. We would like to see that
happen more. We do have some serious question marks over the actual
delivery of it though; because the RDA network differs around
the country—some are exceptionally good and quick off the
mark, as I have just mentioned, and others less so. This is an
opportunity actually for them all to raise their game, and we
would like to see that. We want to see their delivery mechanisms
and their contact with small businesses improving.
Mr Frost: Can I turn that on its
head. I think the response to this is that for the first time
the RDAs and the whole business support structure has got the
opportunity to prove itself. If it cannot show added value over
the next two years then essentially why do they exist?
Q31 Mr Binley: It is interesting
to see supporters of the Government party telling you what you
have to believe. Quite frankly, I thought that was quite interesting!
The VAT fitting has a cost to it, and the cost to it comes just
as we are emerging out of recession and just at a time when SMEs
are going to need all the help they can get to achieve that growth
we all want to see—be it in two years' time or whenever.
Are you fearful of that at this stage, or are you just focussing
on the short-term cash flow problems?
Mr Cave: I will be perfectly honest
with you, we are focussing on the short-term at the moment because
that is what we have got to solve. There is built into this concern
for the future. I come here because we were asked to give evidence,
and I can only give evidence on what our members are feeling now.
The problem with that VAT change is that it is a cost at a time
when markets are contracting. Therefore it is impossible and too
early to measure the possible benefits of that; but, I agree with
you, there is a cost associated further down the line and that
is something to be worried about.
Q32 Miss Kirkbride: It is interesting
to see, Chairman, how the Government party squawked when you had
the temerity to suggest that this was not a wholly good idea.
If you had £12.5 billion to spend what would have liked to
have spent it on, or would you have liked to have seen it saved?
Mr Frost: There is a wider issue
here. I think if there is going to be a substantial increase in
public expenditure then it is absolutely vital that that money
gets through to stimulate business. Therefore, we see programmes
of road building, we see programmes of house building, we see
programmes of school building and hospital building that are really
going to boost the construction centre—that is one sector
of the economy that is being hit very hard indeed. Our concern
is that we will see an increase in the number of public sector
employees at the expense of capital expenditure.
Chairman: I observe a lot of small businesses
saying they are getting a substantial reduction in orders from
the pubic sector at present, particularly from local authorities.
Q33 Mr Bailey: Coming back to the
question I was going to ask 15 minutes ago and to a certain extent
Andrew anticipated that: how far do you think the views of SMEs
were taken into consideration in the measures in the pre-Budget
Report?
Mr Cave: I think to a large extent
they were taken into account. One thing that we have welcomed
and we have been pleasantly surprised about is the willingness
of Government and the opposition parties and government ministries
to actually listen to the concerns of small businesses and what
is happening on the ground; and we have been inundated with requests
for information and data on that. That was fed into the PBR and
as a consequences that is why we welcome a lot of the measures
that have been adopted. The other thing I would say—and
this relates back to a conversation Mr Hoyle and I had last time
we were here relating to procurement and the Glover Review—we
very much welcome a lot of what is in that Glover Review. It is
measures like that—linking what David has just been saying
about infrastructure spending—which make it possible to
connect infrastructure spending and the money there with the small
business community, so that we can benefit from procurement contracts.
Mr Frost: I have been highly encouraged
by the dialogue that has taken place between the Government and
ourselves on behalf of businesses; a real feeling that the Government
does want to listen to what the issues are affecting business
and how they can find solutions; whether that be a small business,
a finance forum which I think is in its early stages clearly seeking
to look at the data it should be monitoring about bringing the
banks and business together; and I think it is even things like
the launch of the Better Payment Practice code last week. I do
sense a desire to get through and get the understanding of business.
Mr Izza: Chairman, I would agree.
I think there is a much better dialogue going on with business
today than there certainly was 12 months ago.
Q34 Mr Bailey: Could I just refocus
slightly. The measure available, the £1 billion for export
credit, in theory at least that, combined with the depreciation
of the pound, you would expect to help a lot of businesses that
are export-focussed. Is it too early to assess any positive benefits
that have come from that? How do you feel about it—either
working or going to work?
Mr Frost: In essence it is a good
move; I think it is too early yet to monitor its effectiveness.
What is absolutely clear is that this credit crunch, credit crisis,
is not purely a UK issue. I have been speaking to many businesses
who have products and goods they want to sell abroad and, in essence,
the customers want to buy but there is no money there. By feeding
money through ECGD and keeping that up should help but we will
monitor it in 2009.
Mr Cave: I would agree.
Mr Izza: That is export credit
guarantee. There is a major problem in the UK with credit cover.
Chairman: We will do that in a moment.
That is our last serious of questions on credit insurance.
Q35 Mr Hoyle: I am pleased that Mr
Cave has touched on procurement, one of the big issues where I
think Government can make a real difference having that money
for small, medium and large businesses. Does he share my concern
that we have local authorities up and down this country that sat
on huge balances, which is one thing, as we found out with all
the money that was invested in Iceland and elsewhere that could
be spent on schemes; but, more importantly, they actually sat
on 106 monies which does not belong to them but was given by developers
that is meant to be for social housing, community centres and
recreation grounds. Could that make a difference? Does he not
agree with me that local authorities have got their part to play
as well?
Mr Cave: Yes.
Q36 Mr Bailey: Again, this has been
touched on—the European Investment Fund. One of the panel
mentioned RDAs and in effect trying to access it. What differences
do you think it is going to make, and what steps are being taken
to utilise it?
Mr Cave: In theory it should make
a big difference. There is a lot of money there that can be channelled
primarily through the banks. Whilst we of the FSB have explored
other ways of accessing that money, it should primarily come through
banks; that is the fastest route. We are concerned that the behavioural
inconsistencies that I keep referring back to, which are so important
at the moment, are having an impact here as well. I was talking
to a member yesterday who had been to his bank and sought funding,
particularly looking EIB funding which his bank deals in and he
was told, "Actually, we couldn't offer it at a rate that
would be any different from a standard loan you'd get from your
existing bank". There is something not quite right there,
because the whole point of EIB money is that it should be offered
at preferential rates. There are problems in the system. We want
to see EIB money flowing as far as possible. We are encouraged
that banks and more banks are looking to sign up to it but they
need to explain how it works to their own members of staff for
it to actually get to our members.
Mr Izza: Chairman, if I could
just add, speed is of the essence here because at the moment there
are only three banks in the UK that offer EIB funding. Although
there are many more interested they need to act quickly because
they have to train their staff and become familiar with the scheme.
If that takes six months then they will have lost the moment.
Chairman: To be fair, the Department
have told us in their written evidence that they are looking for
clarification on some aspects of the way this would work. There
is a board meeting of the EIB today to provide some clarification
on the use of the monies and how they can be deployed.
Q37 Mr Bailey: Would it be a fair
summary of your comments to say that the Government needs to talk
to the banks to ensure that they are stepping up to the plate
on this? The money is there, they need to have the schemes for
training and the facilities, and to understand it themselves for
it to benefit.
Mr Cave: From what I see and hear,
it has been laid out. The banks have shown that they want to take
part in this; it is additional money to the system. I think the
point has been made, and we just need to get that out into the
market ASAP.
Chairman: I think we will hear what the
banks say about the way the EIB money works. It is not as straightforward
as we may assume, but we will find out in our next evidence session.
We will turn to credit insurance.
Q38 Roger Berry: There are countless
reports of the companies finding it increasingly difficult to
get their insurance. How serious is the problem?
Mr Izza: I think this is a serious
problem and it is growing in severity. We understand that credit
insurance is being withdrawn for whole sectors of the market.
Insurers are deciding that a sector is one for which they no longer
wish to carry the risk, and that is very problematic because it
is being done with very little notice. For a medium-sized business
which is suddenly faced with the prospect of always having had
this cover and it now being withdrawn, it completely changes the
relationship then that you have with your customers, so it is
a serious issue. If you are looking for solutions, perhaps the
solution is that the insurer should be guaranteeing to keep them
in place for six months, because businesses just cannot respond
to things being withdrawn at 24-hours' notice.
Q39 Roger Berry: So you would make
it a legal requirement that insurance companies would, against
their wishes, be required to maintain insurance cover for six
months.
Mr Izza: Whether it is a legal
requirement or whether it is part of a code of conduct I do not
really care, but getting the cover to the businesses that need
it I think is the important thing.
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