Memorandum by the Federation of Small
Businesses
The Federation of Small Businesses (FSB) welcomes
the opportunity to respond to this call for evidence. The FSB
is the UK's leading non-party political lobbying group for UK
small businesses existing to promote and protect the interests
of all who own and/or manage their own businesses. With over 205,000
members, the FSB is also the largest organisation representing
small and medium sized businesses in the UK.
A. THE
CURRENT STATE
OF THE
SINGLE MARKET
Barriers remaining within the single market
The internal market remains incomplete. With 99.8%
of EU businesses are SMEs, of which 89% operate in the service
sector; the continuing presence of trade barriers in this sector
represents a massive impediment to the completion of the internal
market.
The transposition across the EU of the Services
Directive should, in theory, remove these barriers and boost economic
activity. However, the FSB is concerned about the lacklustre approach
in some Member States to its implementation. The success of the
Directive will depend on accessibility for small businesses to
reliable and timely information on market conditions in other
Member States. This presupposes the need for a uniform network
of single-points-of-contact.
The FSB represents UK small businesses on the
government's implementation steering group. Whilst the UK and
Austria are at the forefront in implementation, other Member States
have either not started this process or have divergent views on
how the directive should be implemented. As a consequence, businesses
in other Member States may find it easy to access the UK market,
whilst our own businesses still face artificial barriers to providing
services across the EU. In this and other areas, the European
Commission and Council could play a more active role in ensuring
that Member States correctly implement single market rules.
The greatest barrier to SME involvement in the
single market
The greatest barrier small businesses face entering
the internal market is access to reliable information and advice.
The example of the Services Directives demonstrates the importance
of easy access to information. This is critical given the time
constraints that entrepreneurs already encounter in running a
business. Businesses with low staff numbers must dedicate all
of their time to their main line of activity; unlike larger organisations,
they cannot afford to devote significant resources to investigating
internal market opportunities or schemes run by the EU or national
governments.
The EU currently provides a number of networks
to provide assistance and information to SMEs wanting to access
the internal market. However, these networks are diffuse, poorly
resourced and all but invisible to most small businesses. The
FSB has campaigned for the rationalisation of the EU's Innovation
Relay Centres, Euro Info Centres, SOLVIT and other sources of
information on the single market. We are pleased to see that the
European Commission is to bring together these outlets into something
approaching a single-point-of-contact. However, if these are to
be truly effective they need to be visible, freestanding and properly
financed.
Threats to the internal market
The FSB believes that economic nationalism and
the protectionist tendencies of some stakeholders and Member States
does represent a serious threat to the internal market. In particular,
the FSB perceives a sustained attempt to undermine the Country
of Origin Principle, which is enshrined in the Treaty of Rome.
The replacement of the Country of Origin Principle in the Services
Directive with the nebulous "freedom to provide services"
is a case in point. As a result of this dilution of the text a
single market in services will be achieved through judgments by
the European Court of Justice, rather than being set down as a
basic right.
More recently, the Country of Origin Principle
has come under attack from the European Commission's Rome I proposal.
The proposal, in particular Article 5, introduces new and complex
barriers to cross-border e-commerce. The proposal reverses existing
rules covering contractual obligations, forcing online selling
by businesses to comply with 27 different sets of consumer law.
As a consequence suppliers will be unable to operate throughout
the EU with a single model contract, but will need a different
contract for all 27 national legal systems.
For small businesses operating in local and
regional economies, the internet and e-commerce is the best way
of entering the internal market. In the UK alone e-commerce is
worth over £100 billion per annum but this is a fraction
of its potential value. Currently, 18% of FSB members sell on-line
and 20% buy on-line. Growth of commerce in this area could significantly
boost the internal market. However, conservative estimates drawn
up by the FSB through consultation with business and legal experts
suggest that a small business wishing to sell services or goods
on-line could face costs of around €15,000 per Member State.
Not only does the Rome I proposal contradict
the principles of the internal market, it has proceeded without
a regulatory impact assessment.
Further legislative measures and implementation
The FSB considers that there might be areas
where further legislation could extend the internal market. For
example, we have welcomed the Commission's home state taxation
proposal, which introduces a new, voluntary, simplified tax regime
for small businesses operating across national borders. SMEs operating
across EU borders encounter administrative difficulties in calculating
profits according to the different tax rules in each of the Member
States. This voluntary system retains the corporate tax rates
of the Member States, but allows small businesses to calculate
all of their profits according to the tax rules of the country
where they are based.
Whether within the euro zone or not, high charges
and long delays when transferring payments across borders remain
a significant obstacle to the internal market, not only for businesses,
but also for consumers. It is important to SMEs that electronic
payments between Member States are as easy, cheap and secure as
they are already domestically. This would represent a significant
step in allowing SMEs to reap the benefits of the internal market.
We therefore support the objectives of the Directive on Payment
Services in the Internal Market.
However, what the single market most requires
is a higher standard of legislation at EU level and better implementation
by Member States. Bad legislation undermines the single market
and erratic implementation generates peaks and troughs of regulation
instead of a level playing field. There needs to be a real culture
shift within all EU institutions and Member States, away from
the "regulate first, measure later" approach, towards
embedding in policy making processes measures to assess the impact
of policies, to simplify the regulatory framework, and to consider
more systematically alternatives to regulation.
This is still not happening and there is evidence
to suggest that the quality of regulatory impact assessments at
EU level has declined since 2003.[1]
The European Commission's Rome I proposal, despite affecting a
market worth over £100 billion per annum in the UK and reversing
the country of origin principle, has not received an impact assessment
in any of the three main EU institutions.
The FSB would welcome greater cooperation between
National Regulatory Authorities. This would be useful to combat
the problem of over-implementation of EU Directives, which still
poses a serious threat to the functioning of the single market,
creating peaks and troughs in levels of regulation across the
EU. The FSB was disappointed by the Davidson Review's failure
to propose an independent body at UK level to assess the potential
burden of all new legislation. Such a body, combined with greater
parliamentary oversight, could help ensure that implementation
of single market rules in the UK is equal to those across the
EU—thus ensuring a truly level playing field for business.
R&D and Innovation in the single market
The FSB believes that technology and research
have an important part to play in promoting economic growth within
the single market. However, the current goal of achieving the
Barcelona target of 3% R&D spending misses the point that
there is almost no correlation between the percentage of net revenue
spent on R&D and the innovative capabilities of an organisation
or country.
The FSB believes that the EU should look at
how the most basic forms of innovation and R&D are fostered
in the United States. In the US small businesses are more likely
to engage in R&D than their European counterparts. Furthermore,
US small firms have an R&D budget seven to eight times higher
than European small firms.[2]
There is no significant difference between large firms in Europe
and the US in the total amount they spend on R&D, which demonstrates
the extent to which achieving the Barcelona 3% target will depend
largely on SME participation in innovation and R&D. The FSB
would like to see programmes at EU and UK level, such as the R&D
tax credit, reformed accordingly.
B. SECTOR-SPECIFIC
QUESTIONS
Energy
Despite a liberalisation program launched seven
years ago many EU countries (Britain apart) remain dominated by
former monopolies. It would appear that something approaching
an energy cartel has been formed across some EU countries and
that this could have contributed to high and rising energy prices
in the UK. The EU's Competition Commissioner has threatened to
take anti-trust action against utilities to help deliver greater
competition in the energy industry. The FSB believes that this
is the best course of action and is doubtful about the effectiveness
of a single EU energy regulator. OFGEM, the energy regulator in
the UK, has not been particularly effective and there is no reason
to believe that an EU equivalent could make more progress than
effective EU anti-trust action.
In the past, energy was low on the list of priorities
for many small businesses but with energy prices escalating this
is changing. A recent npower survey demonstrated that rising costs
are having an impact on profitability and competitiveness with
77% of SMEs reporting lower profits and 30% reporting reduced
competitiveness. Small businesses are under particular strain
in a volatile energy market and this is coupled with unclear pricing
policies and poor standards of service from some gas and electricity
suppliers. The npower survey findings demonstrate that 40% of
SMEs experienced energy cost rises of on average 25% in the last
six months and 40% are expecting costs to rise by 50% in the next
three years.
Small businesses behave in a similar way to
domestic energy users, in terms of lack of expertise and levels
of energy consumption; but do not enjoy the regulatory safeguards
that domestic users receive. In light of this data it is essential
that unbundling of gas and electricity proceed in tandem with
support for a genuine Common European strategy to ensure healthy
competition, better levels of service and predictability of supply.
Financial Services
Elements of the Financial Services Action Plan
have been particularly burdensome for small businesses, in particular
the Money Laundering Directive, 2001 and the Insurance Mediation
Directive, 2002. Concerns centre on the way these Directives have
been implemented in the UK.
The Insurance Mediation Directive has introduced
a hugely complex regulatory framework which has proved extremely
difficult and costly for many smaller businesses to implement.
On average 3.7% of a company's annual income is spent on meeting
regulation. However, for companies with less than £100,000
in income that figure rises to 5.20%, compared with 1.13% for
companies with an annual income of more than £100,000,000.[3]
In their responses to the Davidson Review, HM Treasury and the
Financial Services Authority did not deny that the stringent requirements
amounted to gold-plating and went beyond the scope of the original
directive.
There has also been an over-implementation,
or gold-plating, of the Money Laundering Directive. In the UK
the rules on money laundering are extended to a wider range of
businesses and professional activities than was foreseen in the
original Directive. Furthermore, the UK has also made reporting
requirements more onerous than was required by the directive.
This has hit small businesses hard, resulting in some having to
stop trading.[4]
It also represents a distortion of the single market, which is
supposed to establish a level playing field.
1 A Statistical Analysis of the Quality of Impact Assessment
in the European Union, AEI-Brookings Joint Centre for Regulatory
Studies, May 2007. Back
2
Report on SMEs and ERA, EU Research Advisory Board, 2004. Back
3
Contained within the British Insurance Broker's Association (BIBA)
submission to the Davidson Review. Back
4
Burdened by Brussels or the UK? Improving the Implementation of
EU Directives. Foreign Policy Centre and Federation of Small Businesses,
September 2006. Back
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