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Baroness Chalker of Wallasey: My Lords, I have not for some time personally spoken to General Sir Michael Rose, but I believe that he considers that they can do a good job with the forces they have. If he had need for further forces I am sure that he would have asked my right honourable friend the Secretary of State

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for Defence who has been in the area recently. I am sure that he would ask my right honourable friend Mr. Hogg and myself when we are there in the weeks to come.

Lord McNair: My Lords, may I ask the Minister for a reassurance that the more helpful attitude by Mr. Milosevic towards the plan put forward by the five nation Contact Group will not win him any concessions on the stance that the British Government are taking on the situation in Kosovo?

Baroness Chalker of Wallasey: My Lords, I can give the noble Lord that assurance.

Lord Mackie of Benshie: My Lords, may I ask one more question? Does the noble Baroness consider that Mr. Milosevic's helpful attitude is due to his good nature or the effects of the blockade on his country?

Baroness Chalker of Wallasey: My Lords, I am quite sure that any sane man when deprived of resources starts to take notice and that is exactly why Britain was among the first to believe that we should have sanctions against Serbia, but we wait to see whether that is fully successful. However, I have said that medical supplies are a different matter from that of supplies which are caught by the sanctions.

Manufacturing Industry

4.22 p.m.

Debate resumed.

Lord Skelmersdale: My Lords, it seems to me that the time has come to move on. I am most grateful to my noble friend Lord Trefgarne for giving me the opportunity to speak on a subject that I have slept with for over 20 years now. Being a director of a micro family business is something that constantly engages your thoughts, even if, like myself, you no longer run it on a daily basis.

So far we have heard of the best in the small and medium-sized business sector, but I would like just briefly to paint a rather different picture. My picture is of a small, cluttered, sometimes smoke-filled room with a desk, two telephones ringing loudly, a filing cabinet, an in-tray, a pending tray, a boiling kettle, two shelves and a man with tears rolling down his face. He sits at the desk answering one telephone with one hand, picking up stamps with the other and sticking them on envelopes in front of the overflowing in-tray. With one foot he is trying to turn off the kettle, with the other he is trying, unsuccessfully, to shut an overstuffed filing cabinet. The pending tray overflows on to the floor. On the wall behind him are the two shelves. On the bottom one are four box files. The first is marked "Tax", the second "VAT", the third "Invoices" and the fourth "Receipts". On the shelf above are four bowler hats marked "Development Manager", "Marketing Manager", "Finance Director" and "Personnel Manager", and last but not least a white helmet marked "Safety".

This cartoon, which still hangs in the office at home, shows the very model of an embryonic small businessman, and something that small businessmen try very hard to get out of at the earliest opportunity.

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Governments and civil servants, it seems, often forget what it is like out there in what we sometimes refer to as the real world. That causes them to pile on the regulations, change the rate of VAT overnight; in a word, doing things without warning. They give the impression that businessmen and women are well-educated and well-organised from the time they get up in the morning till they sink, overtired, under the duvet at night. Life is not like that. From the smile on his face I anticipate that the noble Lord, Lord Weatherill, for one, will acknowledge and understand exactly what I am talking about.

Over the years I have identified four types of small business, which the noble Lord, Lord Haskel, touched on, one of which has, I believe, all but disappeared. When I was doing my vocational education in horticulture it was still quite common for there to be businesses that were designed to make a tax loss in order to mop up excess profits made in another trade or profession. Then there is the hobby business designed to break even financially but most definitely not to pay tax. There is the business which sets out from the beginning to make money, to pay fair taxes and to grow into what my noble friend's Motion calls a "medium sized" business, and eventually a corporation. The Body Shop for example would fit this description. I believe that the conglomerate chaired by my noble friend Lord Hanson also fits that description, although obviously over a very much longer timescale. Then—this is something we sometimes forget—there are the charities in which many of your Lordships are involved in one way or another. Arguably they could be said to be slightly different but there is more than one that I could think of running an obvious business which covenants its profits back to the parent charity.

Yet we are sometimes given the impression that the DTI believes that it is invariable that from little acorns mighty oaks do grow. In that well-worn phrase from the musical, "It ain't necessarily so". Horticulturally speaking, it is comparatively few acorns that grow at all. They must be given the right conditions either in the nursery, where their chances are better—or they should be if it is a decently run nursery—or in the wild. As oily seeds they must not dry out before putting down their first root.

In fact that is not a bad analogy. Experience has taught us that of those small businesses that fail, a high proportion fail in the first year. Another dangerous time is that of expansion when the embryonic businessman delegates one or more of the hats I spoke about earlier, or when, later, he tries to execute a major expansion plan. It is small wonder that there are not many Hansons or Roddicks about.

I think that the department would do well to ponder upon this, and my right honourable friend the Chancellor too. I believe that over the past 10 years or so they have become better at this and realise that they can make life easier for business. What small and medium-sized business needs is well known. The noble Lord, Lord Haskel, summed it up in two words—economic stability. They need low real interest rates so that they can afford to reinvest; a planned pay-back time

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that the banks do not suddenly change; a steady rate of inflation, preferably a low one, so that their customers are not put off by sudden swings in prices; the minimum of regulation; easily accessible information; low taxes and achievable training as my noble friend Lord Trefgarne pointed out. They also need a constant rate of VAT. Twice now I have had a catalogue just despatched to my customers when the VAT rate changed. The hidden cost of chasing up small amounts of extra money is high and one must make a difficult assessment as to whether the business can or should bear the rise in VAT from its profits. I only hope that my right honourable friend the Chancellor will not try to recoup his missing billion pounds by a small but general hike in value added tax. I am prepared to bet that if that is the case, the rate of first year failures will increase.

That said, the Government have much to be proud of: the introduction of the single market has done wonders for exports at little cost to business; the introduction of one-stop shops which save time and effort for a busy person; the reduction of corporation tax from 42 to 25 per cent., so pegging it to the basic rate of income tax; keeping VAT stable; managing to reduce interest rates to affordable levels; and, most important of all, a low rate of inflation. I believe that when the figures come out for new businesses in 1994-95 we shall see an upturn in start-ups and a drop in failures. We all have high hopes for deregulation. I look forward to the first fruits of this policy after Christmas.

The corollary of deregulation is, of course, more regulation. Small businesses are great employers of part-time labour, sometimes throughout the year and sometimes on a seasonal basis. Many of those employees are women who are prepared to work for a lower income than men to top up the general pool of the family income. Some are semi-retired men who have taken early retirement—those whom the noble Lord, Lord Desai, might call potentially economically semi-active. Those workers represent a major part of the workforce of this country. The party opposite sneers that they are not real jobs. But they are very real for the people holding them and for the businesses who employ those workers. However, the Opposition seem to wish to damage that sector of the employment market by introducing not only a minimum wage but the social chapter, giving those workers the same rights as full-time employees. I can think of no policy more damaging to small businesses and their employees.

That brings me to charities. There are 170,000 charities registered with the charity commissioners, employing 482,000 people. That represents 2 per cent. of the total workforce, 8 per cent. more than the motor industry employs today and as many as the combined water and energy industries employ. Of the top 500 fund-raising charities, 200 are in the medical field supporting the salaries of well over 500 people in British universities. The House will be as amazed as I was to learn that the 21 cancer charities provide £120 million for research. That amounts to 70 per cent. of the total spent on cancer research in this country. If that is not a business activity, I do not know what is.

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Over and above that, we increasingly expect charities to take on work in social services and in environmental protection, and government and quangos pay them to do so. More and more of that work is by contract. It makes for enormous pressures on the charities' income because the overheads cannot normally be allocated. According to the Charities Aid Foundation, the top 200 fund-raising charities raised their income by 4 per cent. in 1992 and increased their expenditure by the same amount. The second 200 charities show a different picture: a drop of 9 per cent. in income matched by an 8 per cent. drop in expenditure. From that we can see that the smaller charities are being squeezed. Why, my Lords? I believe that, as with any other small business, charities suffer from the problems of employing part-time female labour. Increases in maternity leave and the reduction in statutory maternity pay have hit them hard. So, too, would compulsory occupational pension schemes if they were introduced.

However, I wish to congratulate the Government on two fronts; on making covenant forms both shorter and easier, and on the introduction of gift aid. Alas, the figures show that only 10 per cent. of donations are made tax effectively. However, it is as much for the charities themselves as for the Government to increase that figure. What is in the Government's hands is the ability to do something about the £350 million a year which charities pay in VAT. The amount is worked out by a very complicated formula. Essentially, it means that the charities can only claim back the input tax in the ratio provided by the proportion of VAT attracting income to their total income. In other words, if 20 per cent. of their income arises from contracts or subscriptions, or a mixture of both, and the remainder from donations, charities can claim back only 20 per cent. of the tax they have paid out. The charities tax reform group has been told by Customs and Excise that there is no technical reason why that cannot be changed. It seems that the political will is lacking.

My conclusion is that with that one exception the problems of charities are identical with the problems besetting small businesses. The Government should recognise the great value that small businesses bring to this country, whether or not in the charitable sector. I believe that the Government recognise that, but they could do more in the ways already proposed and, I am sure, still to be suggested in the debate. Above all, they should always bend over backwards not to kill the goose that just sometimes lays the golden egg.

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