Bill Jamieson: Blizzard of costs swamps small firms

Few election promises have been so constantly repeated as pledges to help small firms. From earnest commitments to cut red tape to an easing of tax imposts, we should surely by now be living in an enterprise paradise. If the allure of being your own boss were not enough, the pledges to make the UK the easiest place to do business must put the cherry on the start-up cake. And all the more desirable, you may think, given the fears and uncertainties surrounding Brexit.

Interventions mean that life remains an uphill struggle for many small companies

Unfortunately, this is not the case. Business formation is down and the failure rate is on the rise. In Scotland, small firms are fearful of new imposts, from car parking charges to a mooted tourist tax. And a new analysis shows that far from life becoming easier for entrepreneurs, smaller firms are now spending 15 per cent more on government interventions compared with 2011.

The Impact of Government Policy Index (IGPI), compiled by the Centre for Economics and Business Research (Cebr) for the Federation of Small Businesses (FSB) analyses a range of policy-linked obligations, including business rates, auto-enrolment and Insurance Premium Tax.

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Its latest study released last week shows the average VAT-registered UK small business collectively spending over £480,000 each year on these interventions, up from £420,000 six years ago. Previous FSB research shows that small firms each lose an average of £5,000 and three working weeks a year to tax administration and paperwork alone.

Labour-intensive industries are hit particularly hard by government interventions, according to the index. Smaller businesses in the construction sector have suffered a 28 per cent increase in policy-linked costs. The figure is 13 percentage points higher than the IGPI reading for small UK firms as a whole.

Employment costs have soared since 2011. The minimum hourly pay rate for a member of staff over the age of 25 has risen by 29 per cent in that time. The rate is set to increase by a further five per cent in April. Employers must also make national insurance contributions of more than £1,000 a year for qualifying employees and – from next year – their minimum contribution to auto-enrolment schemes will rise to three per cent of eligible staff earnings.

But aren’t these extra costs and interventions surely reasonable? Who is really opposed to better health and safety regulation at work? And who would deny a reasonable national minimum wage? Many small firms have to scrimp and save in the early years to get their business off the ground. But the rewards for this sacrifice – in terms of higher pay and job creation in later years – can be substantial.

At the same time, there are many thousands of small firms who do not aspire to be the next Facebook or Unilever, but who exist by filling a critical or neglected niche. They may be tourist-related businesses closed for the winter months, or specialist craft outlets with limited opening hours or servicing a limited customer base. The huge variety of businesses, their working patterns and requirements – especially in the self-employed sector – are difficult to fit into a common standardised model for the purposes of regulation. Yet if their numbers are depleted, we soon feel the loss.

Currently, there are 5.6 million small firms across the UK, together accounting for 99 per cent of all private sector businesses, with a total workforce of 16.3 million or 60 per cent of all private sector employment in the UK.

Despite all the rhetoric of support for this sector, numbers are falling. Between 2017 and 2018, the private sector business population fell by 0.5 per cent or 27,000 businesses. The decrease in the business population is the first fall in the series, which started in 2000.

The number of businesses falling into insolvency in the year to the fourth quarter of 2018 reached its highest quarterly level since 2014. Both the total number of new company insolvencies as well as underlying total insolvencies have reached their highest levels since 2014. Self-employed were prominent among the casualties.

“The self-employed community, who are 4.8 million strong, are still denied basic support in too many areas,” says FSB national chairman Mike Cherry.

“Government officials scratch their heads over why small UK firms don’t expand at the same pace and frequency of small businesses elsewhere. Clearly, the burden placed on business owners as they grow their workforces needs to be looked at.

“The minute you start firing on all cylinders as a business owner – stepping up your hiring, investment and sales activity – you’re struck with an avalanche of additional cost burdens. That has to change. Proactive efforts should be made to address the debilitating cumulative impact of these interventions on small firms. In 2011 the UK was ranked the fourth best place in the world to do business. Today it’s ranked ninth.”

Nor is this likely to improve any time soon. Small firms, Cherry warns, are still set to see costs spiral as the result of government policies in the months ahead.

“Come the beginning of April, small firms will not only have Brexit day to worry about, but also Making Tax Digital, a higher living wage, rising employer auto-enrolment contributions and further business rates hikes. This will be a flashpoint for a lot of businesses, one which could threaten the futures of many.”

Here in Scotland, the latest changes to the draft budget announced by Finance Secretary Derek Mackay to secure the support of the left-of-centre Greens has been met with apprehension. While many firms might welcome the spending programme, Andrew McRae, FSB’s Scotland policy chair, said concessions “will erode the small business community’s trust in his administration. Instead of Brexit help for firms, we see more tax changes, including a levy on our vital tourism industry.

“Ministers repeatedly promised firms that they would not pave the way for tourism taxes without industry support. They’re breaking that promise.”

The FSB also reminded Tourism Secretary Fiona Hyslop of her letter to the FSB only last June in which she wrote, “The Scottish Government position remains consistent: we have no plans to introduce a levy on the tourism sector which is already subject to the second highest VAT rates in Europe by the UK government.”

For all the declarations of help and support for small firms, it still remains an uphill climb.