Small Business, Enterprise and Employment Bill

Written evidence submitted by Grant Thornton UK (SB 37)

1. Grant Thornton UK LLP provides independent assurance, tax and advisory services to over 40,000 public interest entities, privately owned and publicly listed businesses and individuals. We are led by more than 185 partners in 25 offices across the UK and employ nearly 4,200 people, who use insights, experience and instinct to advise dynamic organisations on growth. We deliver a number of government programmes that support business growth (including GrowthAccelerator, the Manufacturing Advisory Service and UKTI events management). Through our Audit Commission appointment we are the leading auditor to local government and the NHS.

2. We have the following comments on the Small Business Enterprise and Employment Bill.

3. Overall we welcome the Bill. The majority of provisions are positive measures in support of economic growth in the UK and in particular we strongly support the Bill's aims of reducing regulatory burdens, supporting SME access to finance including export finance, and increasing competition. Our comments concern two areas:

i. Mid-Sized businesses

4. Grant Thornton, through its 'Agents for Growth' programme, has looked extensively at the mid-sized business market. In the UK there are 34,000 mid-sized businesses – firms with 50-499 employees and/or turnover £25m-£500m. These 34,000 mid-sized businesses (MSBs) play a disproportionate part in economic growth: over recent years MSBs have out-performed small firms and large corporates on employment growth and productivity and on R&D and capital investment growth. We would encourage the government and the Public Bill Committee to consider how the Small Business, Enterprise and Employment Bill impacts on mid-sized businesses as well as small and medium sized enterprises (SMEs). Some provisions may create unnecessary burdens for MSBs (eg the duty to publish a report on payment practices) and some clauses unnecessarily exclude MSBs from the benefits of provisions currently limited to SMEs (eg on access to finance and credit information)

ii. Company Transparency

5. The provisions on Company Transparency aim to improve law enforcement by requiring companies to take steps to identify persons with significant control and makes failure to do so a criminal offence. We support crime-fighting initiatives but are concerned that these additional disclosure requirements may impose additional regulatory burdens on the honest and risk criminalising honest mistakes, while the dishonest would be able to evade them.


Detail

PART 1: Access to Finance

Clause 3. Duty to Publish report on Payment Practices

6. Late payment is as much an issue for mid-sized business as it is for SMEs. A Grant Thornton / ICAEW Business Confidence Monitor in 2013 showed that 27% of MSBs were finding late payment a greater challenge than the previous year (compared to 22.7% of the entire business population). The Grant Thornton International Business Review showed that sales invoices of UK MSBs took on average 48 days to be paid, compared to the G7 average of 42 days, 32 days in Germany and 26 days in Latvia. So potentially UK MSBs can benefit from steps to reduce invoice payment periods. Equally, MSBs may face increased costs and regulatory burdens from the proposed new reporting requirements in the Bill. Micro, small and medium sized businesses (up to £25 million turnover) are exempt from the reporting requirements. This leaves a large group of 34,000 mid-sized businsses who do not have the resources of large corporates but will be faced with additional reporting requirements. We would strongly recommend that the Bill sets a higher turnover threshold for these reporting requirements – eg 499 employees or turnover of at least £100 million. We would also welcome an acknowledgement on the face of the bill that provisions to reduce payment periods should assist mid-sized businesses as well as SMEs, to inform any subsequent secondary regulations.

Clause 4: provision of credit information on small and medium sized businesses

7. The Bill limits the provisions on credit information (designed to increase competition and supply of finance for businesses) to SMEs, defined as businesses with turnover up to £25 million. The bill therefore excludes mid-sized businesses from the benefits of these provisions. Our experience of working with clients to access finance is that a funding gap exists for businesses below £5 million EBITDA; the funding gap doesn't have a turnover threshold but rather a profit threshold. Grant Thornton Agents of Growth research found that there is limited diversity in the market and a MSBs reported difficulties in accessing finance – particularly in long term finance. In order to maximize the benefit of these provisions to stimulate economic growth, the Bill should set a higher turnover threshold for those firms who would benefit. We would recommend use of the SME definition used in the R&D Tax Credit, which defines SMEs as firms with turnover up to 100 million euros (this should cover most firms with EBITDA below £5 million).

Part 7: Companies: Transparency

Clauses 70-71: Register of people with significant control

Clause 72: Register of interests disclosed

Schedule 3: Register of People with Significant Control

8. Clauses 70-72 aim to improve law enforcement by requiring companies to take steps to identify persons with significant control and make it public at Companies House. Failure to do so is a criminal offence. We support crime-fighting initiatives but like the ICAEW we are concerned that these additional disclosure requirements may impose fresh burdens on the honest, while the dishonest evade them. The Bill needs to avoid a number of unintended consequences which could arise as currently drafted :-

i The provisions will not apply to overseas companies operating in the UK through a branch, so overseas criminals can circumvent the rules by using a branch.

ii In the absence of multilateral arrangements in other countries, this could put UK businesses at a disadvantage.

iii Criminals who use ‘front’ companies are unlikely to comply with the new law, at least not properly, and detection may prove difficult.

iv Public availability of the register of persons with significant control is unnecessary for crime prevention and may increase the risk of identity theft and threats to individuals.

v The new rules may deter genuine investors from taking substantial stakes in business (including inward investors) and might make it harder for businesses to raise finance from entrepreneurial investors or even family members.

vi The new provisions will be complex and there is a significant risk that many companies will fail to comply because they don’t understand the requirements or make mistakes.  The proposed remedies provide for up to two years in prison without the need to show any dishonest intent or knowledge of breach.

vii Tracing through a corporate structure to identify the controller may be very difficult where foreign companies are interposed and there are no effective powers that can be applied to obtain information from those companies.

viii Complying with the new law could result in additional costs for many businesses, increasing regulation and red tape.

9. We would welcome further reflection from government on how the legislation can be amended and implemented to prevent an additional administrative burden, to avoid criminalising businesses who make honest mistakes, and to ensure that this will actually assist law enforcement against international criminals.

October 2014

Prepared 22nd October 2014