Small and Medium-sized Enterprises

The Committee consisted of the following Members:

Chair: Miss Anne McIntosh 

Birtwistle, Gordon (Burnley) (LD) 

Coffey, Dr Thérèse (Suffolk Coastal) (Con) 

Crabb, Stephen (Lord Commissioner of Her Majesty's Treasury)  

Dakin, Nic (Scunthorpe) (Lab) 

Dinenage, Caroline (Gosport) (Con) 

Fallon, Michael (Minister of State, Department for Business, Innovation and Skills)  

Hopkins, Kelvin (Luton North) (Lab) 

Kirby, Simon (Brighton, Kemptown) (Con) 

Lefroy, Jeremy (Stafford) (Con) 

McKechin, Ann (Glasgow North) (Lab) 

Perkins, Toby (Chesterfield) (Lab) 

Sheerman, Mr Barry (Huddersfield) (Lab/Co-op) 

Simpson, David (Upper Bann) (DUP) 

Lloyd Owen, Committee Clerk

† attended the Committee

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European Committee C 

Monday 22 April 2013  

[Miss Anne McI ntosh in the Chair] 

Small and Medium-sized Enterprises

4.30 pm 

The Chair:  Does a member of the European Scrutiny Committee wish to make a brief explanatory statement about the decision to refer the relevant documents to the Committee? 

Kelvin Hopkins (Luton North) (Lab):  It is a pleasure to serve under your chairmanship, Miss McIntosh. 

I shall briefly describe the background to European Union document No. 7268/13 and explain why the European Scrutiny Committee recommended today’s debate. The Commission has often noted the contribution of small and medium-sized enterprises to the European economy and the importance of a regulatory environment that meets their specific needs. In particular, following the “think small first” principle set out in the Small Business Act, it has sought to enable micro-enterprises to be exempted from regulation, to identify the top 10 most burdensome regulations for SMEs and to improve consultation with them. 

The document reviews progress in applying the micro-enterprise exemption and, in introducing lighter regulatory regimes for SMEs, introduces an SME scoreboard and shows how to ensure regulatory fitness. It notes that Commission impact assessments consider the consequences of proposals for SMEs and cites a number of instances in which they have been granted exemptions, while also pointing out that that has not always been possible. It goes on to note that, in those cases, efforts are made to tailor regulatory proposals to SMEs and that some EU legislation leaves member states free to decide whether to introduce lighter regimes. The document also provides the first results of a consultation to identify the top 10 most burdensome pieces of EU legislation for SMEs. 

The Commission reiterates that it remains committed to ensuring that regulation is adapted to meet the needs of SMEs and that it will continue to pay close attention to these in its policy development and review. The Government say that they have engaged extensively with the Commission in this area and note that most of the adaptations made to proposals are expected to benefit SMEs in the UK. They also confirm that the number of legislative proposals being adapted to help SMEs has increased, but say that there is still scope to propose such adaptations more frequently. 

Although the communication is essentially a report on the progress made on lightening the regulatory burden on small businesses and does not break fresh ground, the need to encourage such businesses is an important priority for the UK, and indeed the EU. Consequently, the European Scrutiny Committee felt that this was an opportune moment for the House to take stock of what has been achieved so far and what still needs to be done. 

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The Chair:  I call the Minister to make an opening statement. 

4.32 pm 

The Minister of State, Department for Business, Innovation and Skills (Michael Fallon):  I, too, welcome you to the Chair, Miss McIntosh. I look forward to the Committee’s proceedings today. I thank the hon. Member for Luton North for setting out the reasons why we are here so concisely. 

The interest in our work to reduce burdens on small business at the European level is extremely welcome. Reducing regulatory burdens, especially on SMEs, is a Government priority, and we have been pressing the European Union to be more ambitious in its efforts to cut red tape for a number of years. In November 2011, we secured a number of commitments from the Commission to “think small first” when designing legislation. That included commitments to exempt micro-enterprises from new EU legislation where possible, to look to lighter regimes for SMEs, and to screen the stock of EU legislation to identify areas in which regulatory burdens could be lightened. 

The Commission’s March SME communication, which we are considering today, details how it is meeting those commitments and sets out the progress it has made so far, including by suggesting adaptations to benefit SMEs and micro-businesses in about a third of its relevant legislative proposals in 2012. Those included two partial exemptions specifically for micro-enterprises on intellectual property and drug licensing charges. We have long been calling on the Commission to focus its burden reduction efforts in the areas that will bring tangible benefits for businesses on the ground in our constituencies. Burden reduction should not just be a numbers exercise, but should result in a real change in business perceptions. 

To that end, we welcomed the Commission’s consultation to ask SMEs across the EU to identify the top 10 areas of EU law that they find most burdensome, which was another of its November 2011 commitments. That consultation closed last December, and the communication publishes the results, highlighting 16 areas of legislation or specific laws that SMEs identified as particularly burdensome. While we welcome the progress that the Commission has made so far, we need to keep up the pressure for it to do much more. The UK is at the forefront of that agenda in Brussels and we now have a strong alliance of 12 member states that joined our call last November for the Commission to bring forward further concrete proposals to reduce burdens on SMEs. 

Subsequently, all EU member states called at the March European Council for the Commission to come forward with concrete proposals to reduce burdens on SMEs in those areas identified as most burdensome by June this year. We eagerly await that Commission report and are working with business organisations to develop suggestions on how we can lighten burdens for SMEs in those areas. I went to Brussels 10 days ago and met Commissioner Tajani and members of the Barroso cabinet specifically to press for early action on that report. We are keen that the EU takes action in areas that we know UK businesses find burdensome, such as waste, and health and safety legislation. I look forward to discussing our work further with the Committee. 

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The Chair:  We now have until 5.30 pm for questions to the Minister. May I remind hon. Members that these should be brief? It is open to a Member, subject to my discretion, to ask related supplementary questions. 

Toby Perkins (Chesterfield) (Lab):  I welcome the directives that have come forward and recognise that the Commission acknowledges the pressures on SMEs, as was implicit in its exemptions. We particularly welcome the EU late payment directive, for which we have been calling for some time. What will be the main benefits of that directive? Why does the Minister consider that it was right that its introduction was delayed until the last possible moment? 

The Minister will be aware that under this Government the UK has gone backwards on late payments, according to the most recent EU late payers index. He will also be aware of the huge impact that late payment has on small businesses. What steps will he take to ensure that small businesses with serious concerns about the impact on their customer base of the directive’s enforcement can take advantage of the directive without disadvantaging their business? 

Michael Fallon:  Late payment was not one of the top 10 most burdensome directives identified by SMEs, probably because the measure had not been in force for a sufficiently long time during the period of the Commission’s survey. However, I absolutely recognise the problem, particularly for SMEs, which was why I launched an initiative in the autumn to increase the number of large companies that had signed the prompt payment code. We have recruited a significant number of FTSE 100 and 350 companies to sign that code. As the hon. Gentleman will know, the code is operated through the Institute of Credit Management. The institute has published the names of the large companies that have signed, in addition to, for the first time, the names of the FTSE 350 companies that have not yet signed. I hope that that will increase the pressure on companies to sign. Having focused our attention very much on the private sector and the 350 biggest companies, we are now looking at the public sector and ensuring that public authorities, local authorities, NHS bodies and police authorities are also signed up to the principles of the code. 

Kelvin Hopkins:  Clearly it is important in any kind of fair national or international arrangement that companies are treated equally wherever they are, and that no one cuts corners or takes advantage. Does the Minister know of any concerns about the abuse of discretion at the national level, with some countries deliberately cheating on regulation so that they can undercut? 

Michael Fallon:  I am not aware of specific examples, but I am happy to look at any that the hon. Gentleman brings forward. What has become fairly obvious to us is that previous Governments—I do not want to make too much of a party political point—did not taken advantage of the full discretion and flexibility that sometimes exist in directives, and simply transposed them into UK law when there was the option for variation or to be more flexible. 

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During a recent Question Time, I set out to the House the example of the composition of jam directive. The French—and, I think, other member states—were allowed to lower the percentage of sugar involved in the making of jam before it could be called jam under the directive, but a previous UK Government had unfortunately not taken advantage of that opportunity. We are re-examining the position. We are going back through the stock of European directives that have been implemented in this country to determine whether they could have been implemented with the greater discretion that other member states might have applied. We are asking businesses and trade associations to help us in that process. 

Kelvin Hopkins:  I thank the Minister for that answer. As one who takes a critical view of the EU, I would prefer such matters to be decided at the national rather than the international level. On the other hand, there are areas in which it is right that there are international standards—not just in the EU, but across the world. Are there areas, such as the safety of chemicals, in which these matters are too important to be left to the discretion of member states? 

Michael Fallon:  Yes, certainly. We are looking at these matters right across the board through the balance of competencies review, which the Foreign Office is leading on and every other Whitehall Department is contributing to, to identify areas that could happily, safely and properly be left to member states. However, there will always be areas—one can think of environmental pollution, or international legislation affecting marine and maritime activities—when a wider approach may be necessary. The objective of the balance of competencies review—it is also the objective of subsidiarity—is to ensure that what can be done at a national level should be done at a national level. 

Kelvin Hopkins:  These measures are constantly referred to as “burdens”, but many of them are things that most sensible people would regard as necessary regulation to ensure that companies behave appropriately with regard to safety for their employees, the wider community and so on. Will the Minister confirm that some of those things should be not denigrated as burdens, but accepted as useful and necessary forms of regulation? 

Michael Fallon:  It was not the British Government who identified them as the most burdensome—nor was it another Government or the Commission itself—but business and other groups. When they were asked which EU directives they found the most burdensome, they came up with their top 10, which covered a whole range of different subjects, such as data protection, the customs code, general product safety and the recognition of professional qualifications. It is true, as the hon. Gentlemen suggests, that the list includes such issues as the registration of chemicals, and health and safety, but nobody would argue for an abandonment of health and safety regimes. On the contrary, one wants to ensure that the regulatory and enforcement frameworks are focused on those areas of highest risk, that regulation and enforcement are proportionate, and that measures reflect the actual risk faced by a particular subject or premises, rather than

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imposing an undue burden on all sorts of companies that may have a good safety record or operate in a relatively low-risk environment. 

Jeremy Lefroy (Stafford) (Con):  I thank the Minister for his statement and I welcome the response to the top 10. May I focus on the response on page 9 of the Commission’s document regarding the common system of value added tax? The last sentence states: 

“The Commission has also driven forward improvements to the Refund Directive to ensure it works as intended and allows easier electronic submission of VAT refund claims.” 

Will my right hon. Friend the Minister comment about that situation, because my experience with businesses in my constituency suggests that it can be a great problem and that it causes particular concern for SMEs trying to export to EU members? One of the SMEs in my constituency exported to Italy, and its VAT refund claim of several hundred thousand pounds took months and months to reclaim, thus putting a great strain on that company’s cash flow. Is that something that the British Government are pursuing vigorously with the European Commission? I know that my constituent had support from a unit within the Department for Business, Innovation and Skills to try to get that refund processed more quickly, but it still took several months. If an overseas company is claiming from the UK, the process would probably take Her Majesty’s Revenue and Customs a matter of weeks, given that our system is so much more efficient than that in many EU countries. 

Michael Fallon:  My hon. Friend has given the Committee a very useful example of where the single market, whose virtues we are always keen to celebrate, is not yet properly complete. I thought that that problem was one of the more interesting of the top 10 that was thrown up, because there is clearly concern about legislation affecting companies trading across internal borders and seeking to reclaim VAT. I am happy to look again at the example that my hon. Friend cites because it seems that that company had to wait for a shockingly long period. 

What are we doing about this? SMEs across the EU already stand to benefit from various initiatives, including simplified and modernised rules on VAT invoicing, that arise from the previous EU strategy that started in January this year, together with the possibility of cash accounting and the introduction of the one-stop shop IT system, which is a simplified VAT registration and declaration system for businesses that trade in more than one member state, which will apply from January 2015. There is also an EU VAT forum for businesses that trade across member states and tax administrators to discuss operational issues and share best practice. An EU VAT web portal provides readily accessible information on VAT to all EU businesses. 

Future priority actions aim to make the VAT system simpler, more efficient, more robust, more fraud-proof and better tailored to the single market. Those measures include improved guidance, monitoring and analysis, as well as legislative proposals. I reassure my hon. Friend that any legislative proposal in this area requires the unanimous agreement of all member states. 

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Jeremy Lefroy:  Does the European Union publish any data on the relative performance of member states in making VAT refunds? 

Michael Fallon:  Not that I am aware of, but there are many things that I am not aware of, so it is wholly possible. If I may, I will write to my hon. Friend directly on that point. 

Kelvin Hopkins:  The top 10 burdens are set out on page 2 of the Minister’s explanatory memorandum. The most burdensome regulation—the one that caused the most complaint—was on the registration, evaluation, authorisation and restriction of chemicals. Does the Minister agree that it is important that Governments do not give way on that, given that chemicals—particularly the new hydrocarbons that are used for all sorts of things—can have unforeseen consequences for the environment? For example, a particular paint used on the bottoms of ships turned out to have terrible effects on sea life and has now been abandoned. Is it not important that we do not weaken that particular item? 

Michael Fallon:  It may well be important not to weaken the very particular item that the hon. Gentleman brings to our attention, but I have to tell the Committee that that piece of legislation is costly and complex, particularly for small and medium-sized enterprises. We were pleased that the recent Commission review on REACH, which is the registration, evaluation, authorisation and restriction of chemicals—I think that you knew that, Miss McIntosh, but the Committee might not have been aware—included measures to improve the way in which that legislation is implemented, such as by reducing the fees payable by SMEs and ensuring that they are not at a disadvantage when companies have to share data about chemical hazards and risks. The Commission has recommended a fairer and more transparent sharing of costs that fits closely with our evidence to the review. 

The Chair:  If there are no further questions, we will proceed to the debate on the motion. 

4.52 pm 

Michael Fallon:  I beg to move, 

That the Committee takes note of European Union Document No. 7268/13 and Addendum, a Commission Communication: Smart Regulation-Responding to the needs of small and medium-sized enterprises; and supports the Government's efforts to make further progress in reducing unnecessary EU regulatory burdens placed on SMEs by working with EU partners to achieve early action on the issues highlighted in the Commission's Communication. 

May I first make some general remarks? The Commission’s March SME communication is an important statement of its efforts to stimulate economic growth by reducing unnecessary burdens on the smallest businesses. I know that it is of key interest to Parliament. 

We are all aware that SMEs have a vital role in shaping the economy. They are crucial as employers— they provide more than two thirds of private sector employment—and as sources of innovation, yet they face the greatest costs when complying with regulations. Cutting regulatory burdens and red tape on small businesses is therefore extremely important, which is why it is a

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Government priority that I strongly endorse. I am delighted that we have secured a number of commitments from the European Union in recent years, to which I referred in my opening speech. I am happy to answer further questions about them. 

The challenge now is to make sure that the Commission takes ambitious and immediate action to deliver on those commitments. We eagerly await its report on concrete proposals in the areas identified as most burdensome by June, in line with the ambitious timetable set out at the March European Council. We will continue to work closely with UK business organisations and our allies across the European Union to hold the Commission to account and to deliver an ambitious programme of actions, which I will want to lead to tangible reductions in burdens on businesses. 

4.54 pm 

Toby Perkins:  The Minister said that we would all agree about the importance of reducing the impact on small businesses. We recognise that many small businesses are necessarily staffed by people performing incredibly varied roles whose performance is absolutely key to the success of those businesses. Small businesses do not always have the resources to comply with such regulations, or to prove that they have complied with them, in the way that larger firms do, so it is vital that we drive forward work with our partners in Europe to ensure that demands on small businesses are minimised as much as they safely can be. 

I echo the point made by my hon. Friend the Member for Luton North that although we recognise that some of these regulations are challenging for small businesses, it is at the same time vital that those businesses comply with them. They may be designed to ensure the safety of their employees or customers, or to protect the businesses themselves against legal challenge. While small businesses may often view measures as burdensome, many of us would none the less accept that they are important. 

The Government, particularly during their time in opposition, have put great store by their intention to reduce the burdens on small businesses. They have to prove that they have delivered not only changes to the statute book, but a practical improvement in the lives of small businesses and their employees. One of the tests that we would set the Minister is whether there is a real difference in SMEs’ perceptions of how much easier things are for them. Having met members of the Derbyshire and Nottinghamshire chamber of commerce only last Friday and reflected on what they and many other small businesses told me, I have to say that there is a long way to go before small businesses feel that there has been real delivery on the ground to make things easier for them. We will continue to support any work that the Government do that will safely remove burdens from small businesses. 

In many ways, “SMEs” is a fairly lazy term. Lots of us have got into the habit of using it over the years, but a business with five or six employees is radically different from a business with 150 employees, so it can be misleading to suggest that all such businesses are in the same category. Perhaps we need to break up the definition a little more. Some of the exemptions that are put forward recognise, just as we did in our proposal of a national insurance holiday for micro-businesses, the distinction

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between micro-businesses, small businesses and medium-sized businesses. In many ways, medium-sized businesses act much more like large firms than micros. We will continue, with the Government, to move this agenda forward in any way that we can. 

4.58 pm 

Kelvin Hopkins:  I have already mentioned my concern that the term “burdens” should not be used always to cover regulations on SMEs that are necessary to make life better for not only employees, but the community, and indeed those that can be advantageous to fair competition. Some regulations ought to be not just European, but arising from international, multilateral agreements. One would hope that when there are specific abuses by certain countries, imports from those countries should be restricted. I am not against having restrictions on imports from countries that take an unfair advantage. I noticed recently that China has been put into the frame for being appallingly cruel when it comes to farming fur, and one would hope that we would take a very serious view of the Chinese approach to animal welfare. That is just a detail, but we want to have constraints when necessary. 

The key for all small businesses in the first instance is that there is demand for their products. Most of those that go out of business do so not because of cost burdens, but because demand for their services collapses. The construction industry is notorious for that. There are probably millions of small businesses that have gone under when demand in the construction sector has collapsed, and the sector is at a low ebb now. We want small businesses to prosper, and the way to make sure that they do is to sustain a good level of demand, which means not having an economy that is consciously run on austerity lines. This weekend, of course, the International Monetary Fund said that it had made a mistake in its calculations. 

The Chair:  Order. It would be helpful if we could stick strictly to the terms of the motion before us—the regulatory needs of small and medium-sized enterprises. I am sure that the hon. Gentleman will find plenty to discuss in the wealth of documents before the Committee. 

Kelvin Hopkins:  Thank you, Miss McIntosh. I was simply setting the scene and giving the background to the debate. 

One of the specifics set out in the documents concerns free movement. There is a lot of concern about free moment of labour. Indeed, we are facing perhaps not a crisis, but certainly a problem, with free movement involving Bulgaria and Romania, which will start next year. No doubt free movement sounds like a good idea to small businesses that want to employ labour at lower wages than the domestic pay rates. 

The Chair:  Order. I think that the Committee would be most grateful if the hon. Gentleman would direct us to the exact reference in the bundle of papers. 

Kelvin Hopkins:  There is a reference to free movement in annexe 2 on page 37 of the Commission’s document, although it is not specifically mentioned as a concern of small businesses. I suggest that they quite like free

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movement, although it may not be universally popular with other people, especially those who find their negotiated rates of pay undermined by cheaper labour from abroad. However, I shall leave that on one side, Miss McIntosh. 

Labour Members, and no doubt people elsewhere, would have serious concerns if small businesses were to use arguments about burdens to undermine proper employment laws, such as on the enforcement of the minimum wage, and health and safety at work for employees. I hope that Ministers will not seek to reduce what might be regarded as burdens if that could have damaging consequences for employees and the wider community. I could develop my argument at length, Miss McIntosh, but I realise that I would be constrained by the Chair—correctly, of course—so I thank the Committee for listening to my few words. 

The Chair:  The Committee is much obliged. 

5.3 pm 

Michael Fallon:  The hon. Member for Chesterfield made a good point about the distinction between the very smallest businesses and SMEs. One of the disappointments for the UK is that despite the Commission’s promise of December 2011 that micro-businesses—those employing fewer than 10 people—would be exempted entirely from several forthcoming directives, it is only in the past couple of months that have we seen the first examples of that. There have been only two such examples in a year and three months of legislating, so we are pressing for more, given the commitment that the Commission made to the Council. 

To respond to the points made by the hon. Member for Luton North, we can have a debate about the balance of regulation, and the need for some regulation to ensure that markets are fair and that advantage is not

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taken of those who purchase goods and services. I was not particularly aware of the problem involving Chinese fur, so I will certainly look at that. 

A theme of the hon. Gentleman’s speech and questions was whether our businesses would be discriminated against if we took a particular stand, meaning that their business goes elsewhere. The example that I always use in this area is the licensing regime for arms exports. When we decide not to grant a licence to a British company, because we are worried about end use or the type of material involved, there is a system of notification so that other member states cannot provide a licence. That useful agreement operates across the European Union. 

Kelvin Hopkins:  There was an interview last week with the great Denis Healey—Lord Healey—who is now 96. He made the point that some countries are less trustworthy than others, even within the European Union. We do not want to name names, but does the Minister accept that some countries are less trustworthy than others on trade and regulation matters? 

Michael Fallon:  I am not sure that I can use the phrase “less trustworthy” about our allies in the European Union, but it is true that only 12 of the member states have so far signed up to our proposals as set out in the letter sent by the Secretary of State last November. Perhaps I may turn it round and say that some countries more ambitious in this area than others. All of us want the rules of the European Union properly policed to ensure that there is no unfair advantage. 

I hope that I have responded to the main points that have arisen in this short and useful debate. 

Question put and agreed to.  

5.7 pm 

Committee rose.  

Prepared 23rd April 2013