Small businesses and productivity: Government response to the Committee's Fifteenth Report of Session 2017-19

Seventeenth Special Report

On 5 December 2018, the Business, Energy and Industrial Strategy Committee published its Fifteenth Report of Session 2017–19, on Small businesses and productivity [HC 807]. The response from the Government was received on 26 February 2019. The response is appended below.

Appendix: Government Response

Summary by Small Business Minister Kelly Tolhurst

The Government welcomes the Business, Energy and Industrial Strategy Committee’s Fifteenth Report of Session 2017–19, ‘Small businesses and productivity’, published on 5 December 2018. The inquiry explored the productivity problem and a wide range of issues affecting Small and Medium Sized Enterprises (SMEs). The Government has considered the Committee’s findings and recommendations and our responses are set out in this document.

Small businesses are the backbone of our economy. Employing 16.3 million, 60% of total UK private sector employment. Our modern Industrial Strategy sets out to make the UK the best place in the world to start and grow a business. Supporting small businesses and boosting productivity is a key commitment in order to ultimately raise living standards and quality of life for all our citizens.

The Government is undertaking activity across a wide range of policy areas discussed over the course of the Small businesses and productivity inquiry. We are encouraging leadership and management skills in SMEs to increase the UK’s productivity against its competitors with £56 million announced at Autumn Budget 2018 by the Chancellor for ambitious new policies, including a Small Business Leadership Programme and supporting local peer-to-peer networks. We recognise that ensuring SMEs can access the right support and advice is essential to maintaining a consistent and reliable business support offer. This involves a robust local and national support system, through GOV.UK to Growth Hubs.

The Government understands that tackling late payments is a top priority for SMEs. Through policies such as the Prompt Payment Code and the powers of the Small Business Commissioner, we strive to banish bad payment practice. We have also made it easier for SMEs to access the working capital they need. Regulations that came into force on 31 December 2018 ensure that large customers can no longer prevent their SME suppliers from using invoice finance. The economic benefits of this reform have been assessed as having a value to the economy of just under £1bn.

High growth businesses are also a critical part of driving growth and productivity. As part of the modern Industrial Strategy, we have a 10-year action plan to unlock over £20bn of investment in innovative and high potential businesses. This includes a significant expansion of the British Business Bank’s ENABLE product to provide finance guarantees for smaller housebuilders with a total value of up to £1bn. This will support the delivery of around 12,000 homes over the lifetime of the programme.

Ensuring SMEs thrive is essential to a prosperous society. We will continue to seek feedback to ensure we are continuously responding to the needs of the SME community.

1. SMEs and Productivity

Recommendation

We recommend that the Government’s Productivity Review sets out how it will promote the improvement of productivity across the whole of the UK economy to ensure that it is sustainable and equitable. This should include policies designed to reduce imbalances between small businesses in different sectors and regions, with relevant metrics, such as those indicating progress in reducing the productivity gap between London and the South East and other regions.

Government Response

Through the Business Productivity Review, we have explored what actions could be most effective in improving the productivity and growth of businesses, including how we spread best practice of our most productive firms to those in the long tail, including Scotland, Wales and Northern Ireland, as set out in our Call for Evidence which was launched in May. Throughout the UK pockets of best practice already exist and it is our aim to help diffuse these across the country.

When looking at the UK’s productivity, there appears to be more variation between individual businesses, rather than between, regions, sectors, and sizes. There are a lot of very low productivity firms, with 6.5% of firms experiencing zero or negative levels of productivity in 2015. The variation between firms is also large, with the top 25% of firms around 2–5 times more productive than the bottom 25%, depending on industry and region. This and the untapped productivity potential amongst large parts of the UK business population further underpins the rationale for focusing specifically on firm-level factors.

A £56 million was announced at Budget to deliver some of the actions of the Business Productivity Review. This includes £11m Small Business Leadership programme, £20m to strengthen sectoral networks, and £25m for Knowledge Transfer Partnerships.

In England, Mayoral Combined Authorities and Local Enterprise Partnerships are all preparing Local Industrial Strategies to prioritise long-term opportunities and challenges to increasing local growth and improve productivity. Local Industrial Strategies will help areas maximise the long-term impact of the UK Shared Prosperity Fund (UKSPF) once details of its operation and priorities are announced following the Spending Review.

Recommendation

The Government should connect and engage with SMEs, both directly and through representative bodies, to ensure that businesses have a more meaningful understanding of productivity, why it matters to them and why they should invest time in measuring and acting upon it.

Government Response

We recognise the importance of meaningful and effective business engagement to build a better understanding among SMEs of the challenges, opportunities and value of productivity improvements. Government has built strong relationships with a range of key SME stakeholder organisations; through their, and our own regional and sector networks, we are engaging with the business community to share accessible information and advice on productivity and the benefits of taking steps to improve it at firm level.

BEIS delivers an ongoing multilayered programme of SME-focused engagement that reaches out to companies both directly, on specific issues or policies, and through multipliers such as the main business representative organizations and other stakeholders, whose networks reach hundreds of thousands of businesses UK-wide.

The Secretary of State for BEIS meets the main five business representative organisations (the Federation of Small Businesses, the Confederation of British Industry, the British Chambers of Commerce, the Institute of Directors and EEF – the Manufacturers’ Organisation) regularly. The Small Business Minister also chairs the SME Advisory Board, which convenes thirteen key industry organisations regarding issues and challenges affecting SMEs. Ministers and senior officials actively engage a wider stakeholder and business audience through attending external events such as the Lloyds National Business Awards, International Business Festival and those of partners like Start Up Loans, as well as through direct one-to-one meetings.

As part of this, we will continue to support Be the Business in their work to offer the inspiration, practical tools and resources for businesses to identify improvement opportunities and develop tried and tested approaches to boost their productivity through expert analysis and direct advice from the business community at local level.

We are working closely with Be the Business who are mobilising the business community across the UK and building a national movement of businesses large and small who want to improve their own performance and share their advice and experiences to help others do the same. As part of this, Be the Business are researching the most effective means to engage SMEs and are developing a holistic approach, by building engagement that focuses on both demand for advice and support and its supply. This engagement work aims to develop a breadth and depth of business outreach, by building strategic partnerships with those who have local knowledge, sectoral expertise, and who reach into different business communities, such as trade bodies, trusted intermediaries, business services providers, leading businesses, and SMEs who have benefited from support and can act as advocates.

We are providing up to £18.6m over three years to Be the Business, which is backed by some of Britain’s most high-profile business leaders and focuses on identifying practical steps to raise productivity among British businesses through the adoption of best practice, particularly around modern leadership and management practices and proven digital technologies.

Be the Business enables small businesses from across the UK to improve their business processes and competitiveness, management and leadership capabilities and employee engagement by helping them to benchmark their current levels of productivity and join place-based peer-to-peer improvement networks, and access bespoke mentoring with expert business leaders as well as structured executive training delivered by leading business schools.

Recommendation

We recommend that available tools to measure productivity, such as those developed by the Office for National Statistics and Be the Business, should be clearly visible on a single portal for SMEs. The Government should ensure that data analytics are used to track how these tools are being used and to ascertain if they need to be recalibrated to encourage wider use.

Government Response

We have supported Be the Business who have launched and continue to develop online tools for businesses to assess and benchmark their current productivity levels and access expert guidance, practical case studies and peer-to-peer support. Based on cited research linking adoption of effective management practices to increased productivity, Be the Business’ benchmarking tool provides quantitative insights and helps businesses identify specific areas for improvement, including around employee engagement, as well as access tailored advice and guidance based on existing best-practice.

Be the Business and ONS have been working jointly on improving and aligning their benchmarking offer to businesses. As part of our work referenced below to make it easier for businesses to find the information they need online, we will consider how we can improve signposting to a range of online tools, available from Be the Business, ONS and others. This will improve the customer experience for businesses accessing online information and services, including Government advice on how businesses can grow domestically and internationally.

2. SME Access to Support and Advice

Recommendation

We recommend that the Government should urgently review its online hosting of support for SMEs and create a more visible and accessible portal for SMEs, LEPs and Growth Hubs to navigate.

Government Response

In the Industrial Strategy, the Government committed to make it easier for businesses to find the information they need online. BEIS is working with other government departments to address this and has engaged with SMEs from a range of sectors, as well as business representative organisations and the network of LEP-led Growth Hubs, to hear their views. We will use the evidence gathered during this research to explore options to improve our online hosting of support and help SMEs, LEPs, Growth Hubs and other providers to navigate the range of support schemes available.

Currently, all businesses can access core services, information and guidance on starting up and running a business, as well as their statutory rights and obligations, on GOV.UK. GOV.UK also gives businesses the opportunity to search for publicly funded programmes via the Business Finance and Support Finder tool. The Government-backed British Business Bank’s website hosts the online advice platform, the Finance Hub, aimed at raising awareness of appropriate finance options for SMEs. Alongside this the British Business Bank offers a Start Up Loans programme which has lent £450m to more than 59,000 entrepreneurs (from inception in 2012 to September 2018). The BBB Start-up Loans Programme will be extended to 2021, supporting a further 10,000 entrepreneurs The Business Support Helpline also forms a key part of the government’s offer to SMEs in England, providing trusted and joined-up information and signposting businesses to relevant sources of support. It provides the assisted digital channel to support users of GOV.UK to find the information they need.

In addition, the great.gov.uk website has tailored support and advice for businesses on how to start exporting or increase the amount of goods and services they sell overseas. Businesses can use the website to find and apply for overseas export as well as accessing a range of other tools and services including the find a buyer service, which allows users to promote their products and services to international buyers, and the selling online overseas tool, which helps users to find the best marketplaces to showcase their products online.

Recommendation

The Government should ensure that programmes and support for SMEs have been adequately stress tested before they are introduced so that they are more likely to endure, which will improve SME confidence in them.

If the Government does decide to remove or replace schemes it should move as quickly as possible to effectively communicate this to the small business community and relevant support networks.

Government Response

The Government recognises that the business support landscape is constantly changing and this adds to the challenge for SMEs to find the right support at the right time. The Government continues to review and improve its current business support offer. For example, we are giving an additional £12m per year to Growth Hubs along with driving up standards. Through our Business Productivity Review, we also drew upon experts to explore what actions could be most effective in improving the productivity and growth of businesses. The full report will be published in due course.

Government launched the £9 million Business Basics Programme, as announced in the Industrial Strategy, to test innovative ways of encouraging SMEs to take up the good practices that can help them to become more productive. The programme will help us to build evidence on what works in encouraging SMEs to adopt the kinds of existing technology (such as accountancy or CRM software) and management practices that are proven to boost firm productivity. We are doing this by funding businesses, universities, trade bodies and public sector organisations to develop new ideas and run trials that are evaluated to a high standard. We will publish the results of these projects to support local and national policy making and innovation.

The central pillar of the Programme is the Business Basics Fund, which is being delivered in partnership with Innovate UK and Nesta’s Innovation Growth Lab. The first round of the Business Basics Fund, worth a total of £2 million, received over 140 bids from a wide range of public, private and third sector organisations. On 29 January 2019 we announced the 15 winning projects, including randomised control trials and proof of concepts. The projects include:

Further details of the winning projects are available on gov.uk.1 Alongside this we have announced second round of competitive funding worth up to £2 million to fund further projects. There will be further opportunities through future calls to propose ideas.

For the Business Basics Programme and other BEIS-funded business support programmes, including those announced as part of the £56 million secured at Budget 2018, we have published a business support evaluation framework. This framework will set out the quality standards that are expected for evaluations of BEIS-funded business support programmes and will enable the effectiveness of different policies and programmes to be compared. The framework is designed to assist policy makers, evaluators and delivery bodies in generating robust evidence of what works, so BEIS can make better informed decisions of current and future policies.

Recommendation

Government should explain how it will match any shortfall in EU funding for local business support after Brexit.

Government Response

In July, the MHCLG Secretary of State said that the UK Shared Prosperity Fund (UKSPF) will invest in the foundations of productivity as set out in our modern Industrial Strategy, including the Business Environment. The new fund will do so to support people to benefit from economic prosperity across the UK, especially in those parts of our country whose economies are furthest behind. The UKSPF is a fresh opportunity to design a programme of investment according to our own priorities rather than those set by the EU. We can cut out bureaucracy and deliver a simpler fund, which will be easier for businesses and other end users to access.

The government intends to consult widely on the design of the UKSPF. We encourage all interested parties, including SMEs, to take part in this process. This consultation will take place shortly and will help inform how the UKSPF should be designed, ensuring it works for SMEs and other organisations across the country. Final decisions on the detail and operation of the UKSPF will be made following the consultation and the Spending Review which will take place in 2019.

In July 2018, we announced the extension of the HMG guarantee to cover the full 2014–20 programme period and new spending commitments up to 2020 in the event of a no deal, which builds on the previous guarantee commitment. The extended HMG guarantee means that projects that deliver good value for money and align with domestic strategic priorities as well as other programme requirements will continue to be agreed during 2019 and 2020. This provides businesses with certainty over local business support.

Recommendations

The Government should urgently ensure that the support offered by LEPS and Growth Hubs is consistent and that they are visible and digitally accessible to local small businesses, including through social media platforms.

Government should ensure that LEPs and Growth Hubs have the resources to offer long-term support to SMEs and meet their various complex needs.

Government Response

We are working with LEPs and existing business representative organisations to ensure their effectiveness at raising the profile of the SME sector in local decision making, through the sharing of best practice via the LEP Network. We also recognise that many LEPs have already established best practice examples of how to engage their local business community, including SMEs which is monitored within their annual performance reviews.

Recognising the support needed to ensure LEPs can continue to engage effectively with the business community, we announced up to £20 million to fund LEPs in 18–19. Therefore, each LEP will retain the £500,000 of funding that they received this financial year. In addition to core funding Government has provided, those LEPs who are compliant with the recommendations of the LEP Review will receive an additional £200,000 to support implementation. Government has also provided the LEP Network £78,000 for 2018–19 to help it continue to support LEPs by providing a shared platform for the exchange of knowledge and best practice.

Within the Industrial Strategy, we have committed to ensure that businesses in every region have access to a Growth Hub in order that all businesses, no matter their size or sector, can access the advice and support they need and are working closely with LEPs to ensure that Growth Hubs meet minimum standards and deliver what is expected of them.

Government has invested a total of £44.4m in LEPs for their Growth Hubs and has committed a further £24m of core funding up to 2020.

As Growth Hubs are locally driven, owned and governed by LEPs, there is no single defined model for a Growth Hub. They have been set up by LEPs in ways that reflect local needs, economic priorities and geographies, and therefore a range of different typologies exist. However, where Government provides funding all LEPs via their Growth Hubs are required to provide a core offer to ensure that local Growth Hub services are accessible to all businesses (including SMEs) via a range of channels that will typically include a local website; social media channels, telephone, web chat, events, peer to peer network and access to face-to-face advisers.

At the national level Government also promotes the availability of Growth Hubs via GOV.UK, LEP Network, Business Support Helpline and a range of other channels and we will endeavour to do more to increase their visibility both locally and nationally in the year ahead.

Recommendation

The Government should survey local small businesses on a regular basis to ascertain whether local support is accessible, offering the range of support required by different types of small businesses and maximising local networks.

Government Response

Government already funds the annual Longitudinal Small Business Survey which provides information about the performance, experience and views of SMEs. The survey includes a range of questions on the use of external information or advice, the reason it is sought, and the source of the advice. The survey shows that 29% of SME employers sought advice in 2017, most commonly from consultants/business advisers or accountants. Just three per cent of SME employers in England and Wales reported that they had an unmet need for advice.

Analysis of the data for 2015, 2016 and 2017 shows that use of business support increases the probability of a business achieving high growth in turnover on the OECD definition by 14%.2

The 2018 survey is currently being conducted and reports will be published in summer 2019.

3. Leadership, Management and Digital Skills

Recommendations

[The Government] should examine how it can reach more companies. For instance, we recommend that it uses the lessons learnt from programmes such as those run by Goldman Sachs to produce scaleable offerings, such as bite-size online learning, which can address SME time and money constraints. This can be combined with local peer-to-peer networks which can enrich such learning.

We also recommend that the Government introduces financial incentives, such as vouchers, as soon as possible to encourage SMEs to explore and then take-up management and leadership training.

Government Response

Strong leadership and management practices have been shown to be strongly correlated to firm-level productivity, with even small improvements in management practices being associated with up to a 5% increase in the growth rate of a business’ productivity. This is why we announced £11m of funding for 2019/20 to provide small business leaders with leadership training, building on existing world-class training programmes. Some businesses require more bespoke skills which is why we are funding 200 new Knowledge Transfer Partnerships to access the skills and talent to realise productivity growth opportunities.

We know from respondents to the Business Productivity Review call for evidence the importance of business managers learning from their peers, and some of the most effective peer-to-peer networks have a sectoral or local focus. That is why we have committed £20m to develop peer to peer networks.

We will also work with Be the Business to support their activities to provide the inspiration, tools and resources for business to get started on improving their own performance, including through their wider peer-to-peer improvement networks. We will also work closely with other partners and trusted intermediaries including accountants, trade bodies and sector councils to propagate messaging to small businesses.

There are various businesses support measures on offer from the private sector and we believe that by working together better we can ensure even more support is available to businesses and is directed where it is most needed.

We have commissioned the Behavioural Insights Team to run a series of trials on how best to communicate with small businesses to encourage them to take action to improve their productivity. These findings will then impact on how we communicate with SMEs in the future to ensure our take-up levels are high.

Recommendation

We recommend that the Government should set out immediately how it will track and report on the effectiveness of [the productivity] package of measures.

Government response

To ensure robust evaluation of schemes we will work closely with academics, the What Works Centre for Local Economic Growth, and the Enterprise Research Centre, to raise the standards of evaluation and disseminate best practice across the network of business support providers. To support this, we published in January the Business Support Evaluation Framework that sets out the quality standards that are expected for evaluations of BEIS-funded business support programmes.

Recommendation

The Government should ensure that digital skills are at the heart of local business support offered by LEPs, Growth hubs and business networks. Its recently announced funding for local business networks should include a focus on digital skills.

Government Response

We recognise that addressing the digital skills gap is essential to supporting businesses. DCMS has convened the Digital Skills Partnership (DSP) to bring government together with national and local businesses and charities to ensure that we address the digital skills gap in a more collaborative way, and that digital skills initiatives are better coordinated and targeted more effectively. The DSP will also build upon the 4 million pledges of free digital skills training opportunities that our corporate partners pledged as part of the Digital Strategy, published in March 2017.

A key priority for the DSP is to work with regional stakeholders who are best-placed to understand the skills needs of their local economies and communities. Therefore, the DSP will also support the development of Local Digital Skills Partnerships in English regions which can identify the needs of local economies and communities and facilitate the delivery of targeted digital skills training. The DSP will support Local DSPs to deliver face-to-face and online digital skills training opportunities at all levels where a need is identified; from boosting digital inclusion to training the digital specialists that our economy increasingly requires. Another priority will be helping small businesses and charities to upskill their employees and increase their digital capabilities so they can take advantage of the productivity gains that digital technology provides.

Recommendation

[The Government] should continue to fund digital knowledge exchange forums and explore how financial incentives can help SMEs and their staff to invest in both basic digital skills and the adoption of new technologies and processes.

Government Response

The digital knowledge exchange forums operate in the Leeds City Region and is a jointly funded programme, including funds from the European Regional Development Fund (ERDF). As mentioned above, we will create the UKSPF to tackle inequalities between communities by raising productivity following our departure from the European Union. The UKSPF will invest in the foundations of productivity as set out in our modern Industrial Strategy to support people to benefit from economic prosperity, especially in those parts of our country whose economies are furthest behind.

Recommendation

The Government should also run an annual survey of SMEs to assess progress on improving SME digital capability and the effectiveness of its programmes, its funding and the local provision provided by LEPs and Growth Hubs.

Government Response

Government already funds the annual Longitudinal Small Business Survey which provides information about the performance, experience and views of SMEs. The survey includes a range of questions on the use of external information or advice, the reason it is sought, and the source of the advice. We will consider whether these aspects could be enhanced within this survey and the range of other surveys that are undertaken by partner organisations.

4. Scale-Ups

Recommendation

Government should work with the providers of scale-up programmes and LEPs and Growth Hubs, so that it uses the lessons learnt to support the full range of SMEs by providing cost effective packages, such as online bite-size management training.

Government Response

High growth businesses are a critical part of driving economic growth. In order to explore what more the Government and private sector could do to support high growth businesses, a Scale Up Taskforce, composed of business representative bodies and industry experts, was set up in 2017 and developed recommendations to feed into our Industrial Strategy.

LEP-led Growth Hubs now have a greater focus on supporting scale ups and we have agreed with LEPs that this should be a focus of their Growth Hub core grant funding from 2018–19. LEPs and Growth Hub providers have also been encouraged to use their ERDF allocations to prioritise support for scaleups and to use their BEIS Growth Hub funding to leverage other sources of public and private sector investment.

LEP-led Growth Hubs play an important role in helping to simplify and coordinate the local business support landscape by providing a free and impartial local ‘single point of contact’ aimed at helping firms to understand their business support needs and improving awareness and take-up of local and national training and business support services available from the public and private sector.

The ongoing development of a Growth Hub network in England is increasing collaboration, identification and sharing of best practice and creating joined up working between local areas and national bodies such as DIT, Innovate UK, British Business Bank, Be the Business and HMRC. This provides a wraparound support service based on business need creating better outcomes for businesses. A series of joint Government and LEP chaired advisory groups are in place to drive this work forward.

Progress is being made to embed scale-up activities within Growth Hubs via Local Enterprise Partnerships, using them as the local institutions through which we can bring together sectors and place-based business support. This includes consideration of how best to use data to generate a pipeline, segment and stream businesses into the most appropriate delivery channel (local, national, public and private). Alongside this Government recently announced £31 million to strengthen local networks and leadership and management training provision (as outlined in s3) linked to the Business Productivity Review.

Recommendations

Government should ensure that digital platforms and media channels are optimised to promote and facilitate easy navigation of its scale-up offer.

Government should also explore how online support can be optimised so that SMEs can quickly produce a profile that matches their specific needs to the support available.

Government Response

As outlined above, Government is exploring options to improve our online hosting of support and help SMEs, LEPs Growth Hubs and other providers to navigate the range of support schemes available to help businesses grow. This will include exploring how we can use business data to inform the provision of tailored information and signpost users to the right support at the right time.

Recommendation

Government should publish its response to the Patient Capital Review Industry Panel without delay, so that scale-ups have greater access to finance to grow and innovate.

Government Response

The government’s response to the Patient Capital Review, “Financing growth in innovative firms: consultation response’ published by HM Treasury at Budget 2017 summarised responses received to the consultation, including the response to the Patient Capital Review Industry Panel convened by Sir Damon Buffini as part of the review.

At Budget 2018, the government published ‘Financing growth in innovative firms: one year on,’ which outlines the government’s progress on implementing the patient capital action plan and new measures announced at Budget 2018 to support DC pension schemes to invest in patient capital.

As part of the modern Industrial Strategy, we have a 10-year action plan to unlock over £20bn of investment in innovative and high growth potential businesses. A key outcome of the Patient Capital Review, British Patient Capital – a wholly-owned commercial subsidiary of the British Business Bank – has been given resources of £2.5bn and will deliver a new programme designed to support UK businesses with high growth potential to access the long-term financing they need to develop and scale up. The Bank has launched a digital platform to raise awareness of appropriate sources of finance and is rolling out a network of Relationship Managers to ensure businesses across the UK know how to access sources of finance.

Recommendation

Government should consider how the existing nexus of support can nurture scale-ups particularly in areas such as finance, exports, advice, digital adoption, management skills, infrastructure and issues around late payment and public procurement. This should include looking at how LEPs and Growth Hubs can better accommodate the specific needs of scale-ups, signposting national support and enabling local networking and collaboration.

Government Response

Government recognises businesses often learn best from their peers. In October we announced £20m of investment to strengthen local networks so that business leaders can learn from each other about management excellence and technology adoption. Be the Business has also launched a new nationwide mentoring scheme, Mentoring for Growth, pairing senior figures from some of the UK’s most prominent companies with ambitious SME leaders.

We are working with Crown Commercial Services and DIT to make it easier for scale ups to identify market opportunities through public procurement and international trade. All contracts over £10,000 must be advertised on the Government’s Contracts Finder.

The Export Strategy includes a commitment that DIT, UKEF and BEIS will work with Growth Hubs, LEPs, Chambers of Commerce and other regional bodies to further bring together the national and sub-national offer on export and business support, including support for scale-ups, so that businesses can move more easily around the system. This will be done through data sharing, co-location of DIT staff with local partners where possible, and regional coordination of export and business support.

In England, Mayoral Combined Authorities and Local Enterprise Partnerships are all preparing Local Industrial Strategies to prioritise long-term opportunities and challenges to increasing local growth and improve productivity. Local Industrial Strategies will help areas maximise the long-term impact of the UKSPF once details of its operation and priorities are announced following the Spending Review.

We are determined to tackle the issues of late payment. In October we launched a call for evidence, inviting views on how we can create a responsible payment culture to tackle the problem once and for all. The call for evidence closed on 29th November and Government will respond to this in due course.

Recommendation

Government should move swiftly to use improved data on scale-ups to identify and proactively support scale-ups. This data should also be used to set ambitious targets and measure progress on improving the UK’s scale-up performance.

Government Response

BEIS and HMRC are working together to utilise novel and innovative analytics approaches to identify high growth business of the future and to improve understanding of the characteristics of high growth through access to better business data. We will undertake a series of trials using this data in early 2019 to proactively offer support to businesses with high growth potential. This will enable us to evaluate how effective an expansion of this activity might be in improving the UKs scale up performance.

5. Late Payments, Retentions and Public Procurement

Recommendations

Government should give consideration as to whether mandatory interest on late payments would offer a greater incentive to pay on time in a way that does not expose individual SMEs to supply chain vulnerability.

Government needs to require all medium and large companies to sign the Prompt Payment Code and quickly adopts a statutory limit of paying within 30 days.

Government should widen the current payment reporting requirement to include more businesses.

Government should legislate to give the Small Business Commissioner powers to fine companies who pay late, require the Commissioner to publish an annual survey of SMEs on companies who pay late, and expands the remit of the Commissioner to cover construction SMEs.

Government Response

The Late Payment of Commercial Debts (Interest) Act 1998, sets out that payment terms between two businesses should not exceed 60 days, unless they are fair to both parties. Suppliers can also claim statutory interest, and debt recovery costs, on invoices not paid within the agreed period or (if no period is agreed) within 30 days.

Government agrees that we need to tackle the scourge of late payment, and support SMEs in continuing to grow and thrive. This is why the Government announced in October that it would take immediate action to tackle late payments by introducing a new, tough and transparent compliance regime which underpins the Prompt Payment Code, including appointing the Small Business Commissioner to the Code’s Compliance Board.

The Department for Business, Energy and Industrial Strategy recently conducted a Call for Evidence on this issue which included questions on how we could strengthen existing measures designed to tackle late payment in private sector contracts, including the role of the Small Business Commissioner in further supporting SMEs. We also sought views on steps we can take to strengthen the Prompt Payment Code, and measures that could be introduced to make it easier for suppliers to charge interest when they are paid beyond agreed terms. The Call for Evidence also considers the best way to ensure company boards put in place responsible payment practices throughout their supply chain, including elevating responsibility for prompt payment to Board level.

The Call for Evidence closed on 29th November and received almost 300 responses; Government will give careful consideration to the views submitted and intends to publish a response in due course.

Recommendations

Government should bring forward proposals to introduce compulsory project accounts so that retention money can be held independently and its release subject to fair and timely oversight.

Government Response

It is clear that some payment practices which are prevalent in the construction industry can be subject to abuse. The contractual practice of cash retention is one example and we are aware of the repeated concerns expressed by parts of the industry about unjustified late, partial and non-payment of these monies. That is why the Department for Business, Energy and Industrial Strategy is reviewing the practice of cash retentions and continue to work with industry to gain a better understanding of the impact and various options to address the issues that have been identified.

We commissioned independent research to better understand the costs and benefits of retentions and consider alternatives. The research was published alongside a consultation. The consultation sought to gather information about the practice of retentions under construction contracts; including the effectiveness of existing prompt and fair payment measures for retentions, and explored existing alternative mechanisms and policy options including a retention deposit scheme.

Since the consultation closed, we have undertaken significant analysis, working with representatives of the whole construction supply chain. Work has demonstrated that there remains a range of view across the industry and its clients about the use and problems associated with the withholding of retentions, and how these might be addressed.

A recent ministerial roundtable brought key representatives from across the construction sector together, to consider the issues surrounding cash retentions, with the aim of reaching agreement upon a course of action that can be supported by both industry and government. The discussion was positive and our work on policy options for retentions continues.

Recommendations

Government should bring forward proposals on how it will get back on track to meet its 33% target by 2022.

Government should explain how it will make more progress on wider public sector procurement, for example ensuring that local councils are increasing SME involvement in their procurements and measuring and reporting their progress.

Government should publish the Cabinet Office’s payment data.

Government should widen the application of its proposals on public sector contracts requiring bidding companies to demonstrate good payment practices within their supply chains.

Government Response

We are committed to one pound in every three of central government procurement spend going to SMEs, directly or via the supply chain, by 2022. In April 2018 the Government announced a series of measures to support delivery of the target. These included a consultation on how to exclude bidders from major government procurements if they cannot demonstrate prompt payment to their subcontractors (concluded in June 2018) and requiring large suppliers to advertise subcontracting opportunities on the Government’s procurement website, Contracts Finder, and report their spend with smaller businesses to improve visibility. Cabinet Office data on procurement can also be found on Gov.UK.3

The Prime Minister has also appointed a Minister in each department as Small Business Champion. SMEs benefitted from £11.1 billion worth of central government spending in 2016–17, and 30% of contracts within BEIS went to SMEs in 2016/17. We will continue to make public sector contracts more accessible to SMEs and to further incentivise innovation and all central government contracts above £10,000 are openly advertised on Contracts Finder.

We are taking action to simplify the process for small businesses which want to supply to government and to increase visibility of subcontracting opportunities. Crown Commercial Service (CCS) - the Government’s central procurement body - is leading the way in simplifying the application processes for small businesses which wish to become government and wider public sector suppliers. It is signing up thousands of SMEs in fields as diverse as cloud technology, printing, vehicle conversion, communications and utilities.

The Government notes the recommendation to widen the application of its proposals on public sector contracts requiring bidding companies to demonstrate good payment practices within their supply chains. From September 2019, failure of companies to demonstrate prompt payment to their suppliers could result in them being prevented from winning government contracts.

1 https://www.gov.uk/government/collections/business-basics-programme

2 The OECD definition of a high growth firm requires that a firm is more than three years old, that it has initial employment of 10 or more employees, and that it achieves average growth of either employment or turnover of 20 per cent per year for three consecutive years.

3 https://www.gov.uk/government/publications/cabinet-office-prompt-payment-data



Published: 7 March 2019