Small Business, Enterprise and Employment Bill

Written evidence submitted by the Forum of Private Business (SB 04)

1. This evidence is submitted from the Forum of Private Business. The Forum of Private Business is a business membership organisation. Members are small, private sector employers.

2. All figures in this response, unless otherwise stated, come from Forum of Private Business research. We are happy to support this submission with oral evidence.

Summary

3. The Forum of Private Business broadly welcomes clauses in the bill that support better cash flow for small businesses: a reporting requirement to create more transparency in payment terms and times of large companies; the opening of business data to other financial lenders subject to relevant safeguards; regulations to support new ways of paying in cheques. Whilst there is support for businesses being directed to alternative sources of finance beyond banks, such a redirection should be offered prior to, not after, rejection by the bank. The Forum of Private Business feels the Bill can go further in the area of late payment, specifically by amending the law to faithfully transpose the 2011 EU Late Payment Directive.

4. Given the largely disappointing content of the Deregulation Bill, the Forum of Private Business is pleased to see stronger measures around the structure of regulation creation and enforcement in this Bill. There is strong support for a review of business appeals procedures and a definition of micro businesses. Business Impact Targets, whilst useful, need to be strengthened to take account of the impact of the frequency of change of legislation, rather than just their strict monetary value. Further, EU legislation should be included in such targets. The Forum of Private Business also has concerns that a single click registration process at Companies House, whilst desirable, may exacerbate the issue that Companies House is not subject to the same due diligence procedures as registration agents in the private sector.

5. The Forum of Private Business welcomes clauses that encourage e-Invoicing in the public sector and the automatic paying of interest on late payment to procurers. This needs to be passed down the supply chain. Putting the Mystery Shopper scheme on a statutory footing is a positive move, though clarity is needed as to why there are restrictions on the public sector bodies to which this applies.

6. The Forum of Private Business welcomes a Pubs Adjudicator and pub code but feels the government could go further to protect tied tenants.

7. The over use of zero hour contracts by large companies has overshadowed the more proportionate and appropriate use of them by small businesses. Whilst there are few legitimate reasons for maintaining ‘exclusivity’ in these contracts, businesses should have the option of applying it where it can be justified.

Part 1: Access to Finance

Clause 3: Companies: duty to publish report on payment practices.

8. BACs report £46.1bn is now tied up in late payment, of which nearly £40bn is outstanding to small businesses. Forum of Private Business research illustrates late payment is having a significant impact on business development, productivity and growth. Access to finance, cost of finance and credit trade insurance were all cited by business as problems linked to late payment. Late payments are also having a knock on effect; 77% of businesses reported that being paid late led, in turn, to them failing to pay their suppliers on time.

9. Late payment remains a significant issue for businesses. This Bill seeks to give the Secretary of State a power to force larger companies to publish payment terms and times. Such publication must be done in a transparent, clearly referenced and consistent manner to ensure it is useful.

10. As an example, in the last 12 months, Marks and Spencer extended payment times to some suppliers to 75 days in order to bring their terms in line with the ‘industry average’. The Forum of Private Business immediately challenged their status on the Prompt Payment Code. The company was unable to explain to what industry average they were referring and how it was calculated. The Forum of Private Business believes that a reporting requirement on payment times will mean larger companies are forced to better justify their payment practices to their suppliers, customers and shareholders.

11. In addition to having companies provide a standardised form of payment terms and times, the Bill should prescribe a central database into which such data is entered. This can collate averages across different sectors and remove the rather oblique justifications often given for extending payment times.

12. However, more needs to be done to tackle late payment. In responding to the Government’s discussion paper in January the Forum of Private Business stopped short of calling for legislation on maximum payment terms, but did request the government fulfil what we believe is its obligation under Article 7 of the 2011 EU Late Payment Directive to put in place a mechanism that allows businesses to maintain their anonymity when challenging ‘grossly unfair’ practices. It is our understanding that the ability to challenge ‘grossly unfair’ is not yet in law and therefore cannot be used to challenge companies.

13. Discussions with the Department for Business, Innovation and Skills suggest there is concern at a lack of evidence base to grant the power to business representatives to take larger companies to court on behalf of their members. We believe the evidence base is irrelevant in this case, given the cases could be taken on a single member basis, should they wish a body to represent them anonymously in challenging what is believed as ‘grossly unfair’ practice by a customer.

Clauses 4 and 5: Provision of credit information on small and medium sized businesses

14. Small businesses are reporting a more confident outlook in 2014, with many looking to employ or increase hours this year. For the first time since 2008, private sector employers report time, not cost, as their biggest barrier to growth. Nevertheless, the issue of credit remains high on their agenda.

15. The past financial performance of business is often a critical piece of information for lending but whilst the existing lender has that history, competitors have a more limited amount of information. This provides an advantage to the incumbent lender. It remains the case that 80% of term lending to UK SMEs is by the incumbent bank.

16. We support the proposals as they stand in the Bill to widen access to this with express permission of the business. The Forum of Private Business believes the power should lie with the borrower, not the bank or an intermediary, in deciding where they want to seek finance and who can access a credit history.

Clause 11: Electronic paying in of cheques

17. Small businesses welcome changes that make it easier to pay and be paid and the Forum of Private Business supports changes to allow the electronic paying in of cheques, which retains the payment mechanism for those that still value it whilst adapting it to those that want quicker and more convenient methods of payment.

18. Cheque imaging must add to, not reduce, options for customers in how they transact. Small businesses in particular can receive a large volume of cheques for which Smartphone technology might not be an appropriate substitute for the convenience of local branch scanning. Businesses are not likely to support any proposal that could lead to the closure of more branches. Against a backdrop of declining bank branches government must be vigilant that more are not closed as automation attains wider use amongst customers.

Unnumbered clause: Signposting businesses to alternative sources of finance

19. The latest research from the Forum of Private Business suggested that 18% of businesses would consider using an alternative lender to replace their current banking services. A larger proportion (27%) would consider alternative providers to supplement their existing finance provision. Whilst the number of businesses using alternative providers of finance is growing steadily, there remain some significant awareness and cultural barriers.

20. The Forum of Private Business supports a mandatory process for banks to offer a matching service to small businesses but not automatic enrolment within it. Such automation may cause issues for businesses if a) they are already going through the relevant bank’s appeal process or b) the business might be clear following the application refusal that they are not currently in a state of financial readiness. This might mean exposure to other lending platforms would provide similarly negative outcomes, either discouraging a business from seeking future finance or potentially damaging future applications. The Forum of Private Business believes there is a case for referring businesses to alternative providers but it must be a conscious choice following a clear set of reasons for refusal from a bank, or prior to a bank’s formal consideration of a funding request.

21. The Forum of Private Business believes a better situation would see relationship managers give an indicative idea of whether a bank will fund and then, where necessary, refer the business instead to an alternative lender first, so that a bank credit check process does not pointlessly damage a business’ opportunity to obtain finance.

Part 2: Regulatory Reform

Clause 13: Target for streamlined company registration

22. A proposed single electronic registration to both form a company and register with HMRC for tax purposes through a ‘single click’ is to be welcomed. However, the Forum of Private Business is concerned that the private sector does not benefit from such a simplification. It is likely to drive more businesses to register through Companies House.

23. The Forum of Private Business has raised concerns in the past that registration through Companies House, whilst easy, means businesses do not go through all the relevant checks enforced upon registration agents in the private sector. In order to fully support this proposal we would wish either that Companies House fulfils all the regulatory requirements undertaken by the private sector or that those same regulations are lifted from the private sector. The latter is undesirable but whilst this mismatch remains government is benefitting from an uneven playing field, undercutting private sector provision.

24. The Forum of Private Business recommends that the Association of Company Registration Agents is invited to give further evidence on this clause.

Clauses 15-17: Review of business appeals procedure

25. The Forum of Private Business welcomes support and clarity around business challenge to regulators. Nevertheless, a fear will remain that should challenges be made, the business might be subjected to an increased level of assessment. The government should ensure that current consideration of proposals to share information between regulators should specifically exclude whether a business has challenged regulators in the past.

Clauses 18-24: Business impact targets

26. In 2013 the Forum of Private Business found the cost of compliance for all businesses was £18.2bn, equating to £14,800 per small business (£9,200 in internal costs, £5,600 in external costs). Major costs are health and safety (3.7bn), employment law (4.7bn) and tax compliance (6.0bn).

27. The Coalition Government intends to be the first government in history to reduce – not increase - the burden of regulation. Measures to tackle the regulatory stock (Red Tape Challenge, One in Two Out), together with changes to the regulatory flow (Regulatory Policy Committee and Growth Duty), mean that in terms of sheer volume of regulation the Government is likely to meet that objective. Putting legislative commitments into statute is an important step for accountability and the Forum of Private Business supports the proposal, with some caveats.

28. The cost of compliance reported to the Forum of Private Business by its members continues to rise and there is a difference between government deregulation and impact at the shop floor. All governments must understand that part of the regulatory impact comes not from the size of regulations, or their enforcement, but their frequency of change.

29. In order to better reflect this, the Forum of Private Business proposes that targets take account of regulations not just in financial ‘in’ and ‘out’ values but introduces stronger safeguards against the continuous changes experienced in certain areas of law. For example, parental leave has changed on average every 18 months since 2004. Each time employment law changes, small businesses need to understand the rules. The constant state of flux of employment law is often a disincentive to train staff and leads to expensive outsourcing for advice. Where many changes are EU driven, too little consideration is given by government in introducing domestic reforms at the same time, increasing the frequency of change. The proposal is that government should be legally restricted to legislate on employment law just once during a parliamentary term. Should further changes be needed outside of that allowance, it would require approval by the independent body to be created in the Bill.

30. A second amendment to the Bill should be to include EU legislation in targets. This would ensure governments are aware of the whole impact of regulation on business, not just domestic sources.

Clause 30: Definitions of small and micro business

31. The Forum of Private Business welcomes a statutory definition of micro businesses. This will align government policy across different departments and simplify which laws and protections apply to which size of business.

Part 3: Public Sector Procurement

Clause 33: Regulations about procurement

32. The Forum of Private Business welcomes the measures that will see procurers to the public sector have interest paid on late invoices automatically. This is an important step in wider use of powers under the EU Late Payment of Commercial Debts Directive.

33. The Forum also welcomes steps towards the adoption of e-Invoicing in the public sector.

Clause 34: Investigation of Procurement functions

34. The Forum of Private Business welcomes the strengthening of the Mystery Shopper scheme, which has been highly useful for smaller businesses in raising examples of poor procurement practices. Clarity is needed as to why government departments do not qualify for this clause.

Part 4: The Pubs Code Adjudicator and the Pubs Code

Clause 35 - 63: The Adjudicator and the Pubs Code

35. The Business Select Committee have done four reports into the issue of tied tenants over eight years. All concluded that abuse of the tie was taking place and that the solution is the market rent only option.

36. The British Beer and Pub Association figures show that over ten years non-managed pubs decreased by over 8,000 whilst the free trade sector actually expanded by 1,600.

37. The Groceries Code Adjudicator has worked well for in the grocery sector and with some tied tenants in need of protection a Pubs Code Adjudicator will help the sector.

38. As a member of the Fair Deal for Your Local campaign coalition, the Forum of Private Business believes that tied tenants should be no worse off than non-tied tenants. The position of the Fair Deal for Your Local campaign is that the legislation is a good first step but could go further. Tied tenants should have a free-of-tie option and access to a Market Rent Only option that would see a fairer assessed market rent. That the average tied rent is higher than the average rent for free of tie pubs is bad enough but when coupled with a beer tie at artificially high prices, many tenants continue to go out of business.

Part 7: Companies: Transparency

Clauses 70-71: Register of people with significant control

39. The only concerns with these clauses are that they may impose additional costs on private sector company registrars which are themselves often small businesses. These costs may of course be passed on to clients, however, that is likely to drive more business towards the government’s own Companies House service. There is potential here for uncompetitive practice here in imposing such costs on the private sector.

Clauses 76-77: Corporate Directors

40. There is currently no requirement that any of the directors should be within the jurisdiction in which the company is registered. The Forum of Private Business suggests the committee might consider this point by inviting the Association of Company Registration Agents to give evidence.

Part 11: Employment

Clause 139: Zero hour contracts

41. The reputation of zero hour contracts has been damaged through their over-use by larger businesses. However, they remain valid for a number of reasons, not least the flexibility they offer seasonal and start-up businesses.

42. There are few legitimate reasons for maintaining the exclusivity clause in these contracts. The Forum of Private Business suggested to government a new ‘primary employer’ status, that meant an employee would be obliged to work the hours made available by their primary employer, but would be free to seek extra hours outside of those already committed to. This would remove the exclusivity clause for employees, yet maintain the workforce security required by the employer. Removing the exclusivity clause is the primary issue for zero hour contracts and the Forum of Private Business does not believe further change in the law around their use is merited.

Prepared 15th October 2014