Financial support for small and medium-sized enterprises - Business and Enterprise Committee Contents

Examination of Witnesses (Questions 20-39)


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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