Small Business, Enterprise and Employment Bill

Written evidence submitted by the Federation of Small Businesses (SB 08)


1.1 The Federation of Small Businesses (FSB) welcomes the introduction of the Small Business, Employment and Enterprise Bill, the first ever Government Bill focused entirely on small businesses, to support them in the day to day running of their firms, thereby boosting productivity and business growth.

1.2 The FSB is the UK’s leading business organisation, with approximately 200,000 members. In the past 40 years we have gone from strength to strength by remaining truly member-led and being able to authoritatively protect and champion the interests of the small business sector through our ‘Voice of Small Business’ surveys.

1.3 Our National Chairman John Allan has remarked of the Bill that "it reflects the growing recognition of the role small businesses have to play in driving forward the economy and the need to do all we can to support them in that effort."

Part 1 – Access to Finance

Late Payments

1.4 The FSB believes it is imperative the Bill seeks to address the current imbalance of power that exists in the relationship between creditors and debtors. This would provide small firms with a clear legal justification if they decided to seek redress or reject certain terms.

1.5 Retrospective discounting is in breach of agreed payment terms, and is too often used by large companies to maintain their margins and in some cases expand their own business. As the large company can be a significant customer, the small business has little choice but to absorb the cost. We would like this practice to be prohibited, regardless of offers to offset the cost, for example through trade finance.

1.6 We hear too often of invoices being challenged near their due date. This can occur even under long payment terms. Where the debtor delays challenging an invoice until close to the due date, the small business can suffer from an unplanned reduction in cash flow. The disruption to cash flow can have severe knock-on effects to other creditors in the supply chain. We would therefore suggest that once goods or services have been received to the customer’s satisfaction and the invoice is issued, a time limit should be imposed on challenging the invoice. We suggest that should be 21 days from confirmed receipt of invoice.

1.7 There is no justification for the practice of requiring payments to belong on a supplier list. This should be prohibited, not least on fairness grounds, but also for its potential implications on competition (larger firms having the greater potential to pay the upfront costs than smaller businesses).

1.8 The FSB would like to see a mandatory prompt payment code for larger firms included in the Bill in order to encourage a more rapid cultural change with regard to late payment. Compliance with the code has been limited, with signatories regularly unilaterally extending payment terms, in some cases to 120 days, without any sanction or approbation from the Prompt Payment Council. 

1.9 We support the measure included in the Bill which will allow the Secretary of State to force a business to provide an explanation if a payment is late, as it falls within our broader call for a more thorough and transparent reporting framework around prompt payments. Current reporting requirements only produce a ‘snap shot’ of a company’s performance against a single point in the payment cycle. Furthermore, especially for larger companies, reporting is only made on a group basis, disguising the behaviour of subsidiaries’ payment practices which may vary widely. This needs to be addressed to include group subsidiaries. The FSB awaits further details from the Government on how the Secretary of State’s power will be used.

1.10 We would like to know what further measures the Government could put in place to minimise the costs and time associated with using the court system to enforce the contract terms that businesses must pay their invoice within 60 days, unless expressly agreed otherwise, such as for trade credit, and provided it is not unfair to the creditor.

Specific clause on invoice finance

1.11 The FSB supports the measure included in the Bill to nullify the impact of clauses in business contracts that prohibit a business from selling their invoices to a third party finance provider. This should help to improve small businesses’ cash flow by removing legal barriers to invoice finance.

Specific clauses on the duties for banks and credit reference agencies to share more information about their SME customers

1.12 The FSB welcomes measures included in the Bill that impose a duty on designated banks and credit reference agencies (CRAs) to provide specified information about their small and medium sized business customers. This will help to ensure equal access to data for all lenders, which is an important step towards helping alternative finance lenders assess risk and help open up greater competition.

1.13 We would also like to see a duty included in the Bill which requires banks and credit reference agencies to provide information about the criteria used to calculate the credit score of the small and medium sized business customer. This would increase transparency and guidance to help small firms to understand their credit score and help them take steps to improve it. The customer would request this information in writing and no charge would be made for providing it.

Specific clause on VAT registration information

1.14 The FSB broadly supports the sharing of data where it helps to increase the availability of credit to SMEs. The specific measure relating to the disclosure of VAT registration intends to increase the availability of trade finance. However, we are keen to ensure that any data sharing will be subject to strict controls in order to prevent misuse and does not allow access to the entire tax record, but only a limited and tightly defined information set.

Mandated referrals mechanism

1.15 The FSB believes that a referral mechanism marks the next stage in the process of widening the marketplace for small businesses finance. We would like to see the Bill define the scope of which businesses fall under the Government’s plans to introduce a mandated referrals mechanism so we can ensure as many firms can benefit as possible.

Specific clauses on exporting

1.16 In order to boost the number of small firms exporting, the FSB would like to ensure support is more tailored and streamlined to make it easier and quicker for small businesses to access.

1.17 Opening up different types of export support that can be funded by UKEF will be a useful step to boost export finance. The ability to provide general support to exporters rather than just individual contracts, the support of intangible exports such as intellectual property, and supporting the supply chain will enable UKEF to be more flexible in providing support to increase exports. It is crucial that UKEF have the resources to deliver a wider range of support, so it is welcome that the Budget increased the amount of direct lending available.

Specific clause on speeding up the process of paying in cheques

1.18 The FSB welcomes measures such as cheque imaging, which should speed up the clearing process for cheques and potentially reduce transaction costs. This will directly benefit many of our members who often suffer from cash flow problems and rely on cheques as their primary means of cash flow (and payment).

Part 2 – Regulatory Reform

1.19 The FSB welcomes measures included in the Bill which help to reduce the costs of company registration and make Companies House more efficient. In addition, allowing e-registration is a very welcome initiative. However, we would seek an assurance that Government will consult widely on the details of the changes, including with the small business community.

Specific clause on appointing a body to verify assessments and lists in reports

1.20 We support the proposal in the Bill to put into law a body to independently scrutinise Government Impact Assessments. However, we believe the Clause should go further – our recommendations are outlined below.

1.21 The Regulatory Policy Committee (RPC) should be enshrined in law as the independent body to conduct assessments of Government IA’s. While the RPC currently carries out this function we believe naming the body in law would strengthen its role further and build on the progress that it has already made in ensuring rigorous analysis of the impact of Government policy measures. [1]

1.22 In addition, we believe the role of the RPC should be further enhanced, creating an RPC+ model of scrutiny. This would give the RPC further roles to that of scrutinising IAs. These should include the RPC establishing ‘Challenge Panels’ for all areas of regulation and regulatory enforcement and the RPC acting as a single point of contact should problems arise with regulators and taking up regulatory issues identified by trade associations and business groups.

Specific clauses on company filing, ownership transparency, compensation orders and creditor meetings

1.23 The FSB broadly welcomes the proposed changes to company and insolvency law and processes proposed in the Small Business Bill. In particular we welcome the attempts to:

· Reduce some of the burdens around company information filing at the margins;

· Measures to improve transparency around company ownership; and

· Improve the rules on director disqualifications, which currently enable too many directors to avoid accountability.

1.24 In order to be clear and ensure full compliance the definition of ‘significant control’ will have to be carefully crafted.

1.25 We support the proposal to introduce compensation orders for disqualified directors and for administrators to assign causes of actions to creditors. While we believe this latter change could be useful for small business creditors there is a good argument for the rules to be further developed so that administrators are required to positively consider assigning causes of actions to creditors and where there is a request from a creditor to do so, to assign an action where it is reasonable to do so. In addition, if creditors, especially small ones, are to bring an action they will need access to the right information. We consider that the proposed changes should ensure that administrators have to pass on the required information. The danger otherwise is that this new avenue will be impractical to use.

1.26 We are also concerned that the changes to the requirements for creditor meetings could be detrimental in some cases to small businesses. The meeting of creditors with the director(s) of the insolvent company can offer the only opportunity a small creditor has of getting answers about why the businesses went bankrupt. We would be worried if the chances of holding a creditors meeting were significantly reduced through the proposed changes.

Part 3 - Public Sector Procurement

1.27 The FSB strongly supports the intentions of the Bill, which if realised, should address a number of issues affecting the ability of small firms to bid for and win public sector contracts. We would welcome the opportunity to engage early in the regulatory design process and would be seeking to assist the Government to make the most of the opportunities created by this regulatory package.

1.28 In addition to the Government’s stated objectives, the FSB would like to explore the opportunities for using regulation and/or guidance to address any issues left outstanding, following the first round of reforms under the Lord Young agenda which are expected to be announced shortly.

Part 4 - Pubs Code and Adjudicator

1.29 Whilst the FSB welcomes a number of measures included within Part 4 of the Bill, we believe the proposed legislation should be enhanced in order to provide better protection for tied pubs.

1.30 Tied publicans need to be convinced that the parallel rent assessment process will be accessible and relatively straightforward, and provide timely resolution. While the enhanced code procedures are intended to support the principle that a tied tenant should be no worse off than a non-tied tenant, additional clarity is required to establish how it will lead to that outcome, without an option to go free-of-tie.

1.31 The FSB also believes the Bill should provide a mandatory option for tenants to operate free of tie, with an independently assessed fair rent, known as the market rent only (MRO) option. Further, we would like to see guest beer rights introduced to ensure more diversity in the market. Our survey results from 2013 show that tied publicans would strongly support both measures.

1.32 The FSB welcomes relevant provisions in the Draft Code that include a right for tied pubs to request a rent review if they haven’t had one for five years, and to access information that has been used by their landlord to calculate the rent.

1.33 We further welcome access to the enhanced code for tenants of pub companies with over 500 pubs. This will allow them to request a parallel rent assessment which would set out the equivalent cost if the tenant was free of tie if rent negotiations fail - as this is designed to protect the principle that tied tenants should be no worse off than those that are free of tie.

Part 6 - Education Evaluation

1.34 The FSB believes a lack of appropriately skilled staff is a significant barrier to growth and that the UK’s skills shortage (particularly in the STEM industries) suggests that further education institutions are not meeting the needs of the labour market.

1.35 We agree that policymakers need to glean a greater understanding of why this is the case through additional information sharing. Furthermore, we support destination information being available to young people so that they can make an informed choice and consider a wider variety of education options based on their career aspirations.

1.36 The FSB would like to see the information collected go beyond salaries and institutions to include data on qualification level achieved, course/area of study, and industry/position attained as well as where people are from, and their age. Furthermore, we believe alternative education and training routes should also be measured, such as apprenticeships, school leaver programmes and graduate schemes.

Part 11 – Employment

Specific clause on financial penalties for employers who fail to pay tribunal awards

1.37 Whilst the FSB is not opposed to penalising firms who do not comply with tribunal outcomes, we would stress that only 3 per cent of our members were summoned before an employment tribunal between 2004-2009. [2] The FSB believes small firms must be given sufficient time to pay tribunal awards and have sufficient opportunity to make an appeal.

1.38 The proposals to issue a penalty once the time for appealing a tribunal decision has expired, without an appeal or payment being made, and to give the defendant 28 days either to pay the award or to make a further appeal, are in our view, reasonable. However, the use of penalties may not fully address the issue as the problem of non-payment of tribunal awards goes wider – in many cases, non-payment occurs where the company has become insolvent– and alternative measures may therefore be necessary.

Specific clause on employment tribunal postponement

1.39 Although very few small businesses experience an employment tribunal, for those who have done, our research shows that the average cost of preparing for a tribunal, including legal costs (but excluding awards) is £6,900 for a small firm. [3]

1.40 Small business owners are resource poor and the time out preparing for and attending a tribunal is time out from growing the business. This problem is exacerbated if tribunals are postponed. We therefore support measures to limit the number of tribunal postponements, including through the use of cost orders in the case of successful late postponement applications. However, to help lessen the burden of employment tribunals on small businesses we believe further steps should be taken.

1.41 In order to address the wider problems with the Employment Tribunal system, judges should be encouraged to adopt a more proactive and directive approach to case management. Cost orders should be more widely used with monies paid to the opposing party, and the way in which cost orders are interpreted by Employment Tribunal Judges, should be clarified through clearer guidance. Greater use of cost orders would give employers a better chance of recovering costs incurred in defending themselves against an ill-founded claim.

Specific clause on increasing National Minimum Wage penalties

1.42 The FSB supported the introduction of the introduction of the National Minimum Wage (NMW) and therefore supports the Government taking a robust approach to tackling unscrupulous employers that do not comply with NMW legislation. In failing to pay NMW, many of these employers will intentionally be undercutting other law-abiding small businesses.

1.43 However, occasionally, an employer may make a genuine mistake and it is important they have an opportunity to appeal to the Secretary of State, as is currently the case, in order to support compliance.

1.44 Guidance on all aspects of the NMW (including the apprenticeship rate, the accommodation offset and how deductions from pay are treated) should be readily available to and widely promoted amongst businesses. The FSB operates an independent legal advice line for our members to provide guidance on NMW legislation and all aspects of Employment Law. Organisations like ACAS and the Pay and Work Rights helpline should also be promoted to employers.

Specific clause on banning exclusivity in zero hours contracts

1.45 A recent FSB survey found that only seven per cent of small firms employ staff on a zero hours contract [4] . As a general rule, we believe workers on zero hours contracts should not be prevented from undertaking other work under so-called ‘exclusivity clauses’.

1.46 The FSB supports a code of practice and guidance on the use of zero hours contracts. This would encourage fair use of zero hours contracts by employers and make clear their responsibilities, while at the same time improving employees understanding of their rights. It would also encourage firms to seek alternatives to outright exclusivity where appropriate.

September 2014

[1] Between 2010 and 2012 the proportion of impact assessments judged to be ‘fit for purpose’ on first submission by the RPC increased from 65% to 81%. Source: BRE (2013). ‘Seventh Statement of New Regulation’.

[2] FSB, The FSB-ICM ‘Voice of Small Business’ Annual Survey, February 2010

[3] FSB, The FSB-ICM ‘Voice of Small Business’ Annual Survey, February 2010

[4] FSB, FSB ‘Voice of Small Business’ Member Survey, March 2014

Prepared 15th October 2014