In a recent leader article in an issue of Director Magazine from the IOD, Lord Mandelson asserted that no Government had ever done more for small businesses than the current one. Naturally such a daft comment was met with some derision and a volley of mail was sent to the Editors to refute the claim.
The Government Schemes
True to form, the Government has tackled the Recession from the point of view of banking and the Credit Crunch. By solving the Credit issue and easing cashflow worries, the logic was that businesses can survive while consumers would spend. To support this we saw the easing of VAT from 17.5% to 15% as a first step and then £1bn was set aside as a Loan Guarantee mechanism for small businesses which would help banks make more sensible credit decisions.
Neither initiative had any appreciable effect.
VAT Easing
It is argued that the VAT giveaway would actually release around £12bn from one form of tax so that consumers, who would actually fund the giveaway through their own tax returns, would spend more in the High Street. This logic was applicable only to retail business in the main as consumers spend the brunt of the VAT in this country. But a mere 2.5% easing had zero effect and the recession hammered home. Concerns about job security, negative equity and repossessions and a decrease in household income were the main issues, spending would be cut by most consumers who already collectively owed £1 trillion as unsecured debt on credit cards. The Government had also forgotten where most of the 'new wealth' had come from - not household disposable income from wages, which had shrunk, but mortgage equity release. And that had dried up due to the collapse in house prices.
VAT easing was a complete waste of money.
Loan Guarantee Scheme
The sentiment in the letters replying to Lord Mandelson's assertions were that he had no idea about how small businesses are run.
In fact, over the course of this Government's tenure, higher burdens in terms of taxation, regulations and red tape had been placed upon small businesses as if they were actually much larger concerns which had taken away entrepreneurial spirit and made business people focus more on compliance. Instead of spreading the burden of things like maternity, each company had to fork out directly for each employee who was on maternity or paternity leave and the impact on businesses was disproportionate - a BT can easily accommodate excellent conditions for working mums while a company of just 9 staff, say, would be badly hit. It definitely caused employers to stop and think - and it was not the only regulation to affect disproportionately, as general employee HR issues were much more in favour of the employee in case of poor performance.
I don't care what anyone says, it is getting far harder to deal with under-performing employees who are Employment Law savvy than ever before.
More importantly, while large businesses like banks and drug companies, can afford to find exotic ways to avoid paying tax by relocating their headquarters or moving Intellectual Property into offshore havens, small businesses do not have the financial muscle to hide and so pay a disproportionate amount of tax for the profits they create compared to larger companies.
This Government has done little to decrease this inequity in the system as small businesses, like law-abiding citizens for parking and speeding fines, are soft touches and always pay.
The Government Loan Guarantee Scheme is more to help a small number of companies raise a loan who might not get it before. It still will not get you money just for survival - do not mistake this as simple benevolence by the Government or banks. Mandelson has been hard on the fact that the Government is not a bank and will only step in as the 'lender of last resort' and never just to save a failing business. Unless of course you are a bank when the rule book is thrown away and any amount of money you like can be used, no questions asked - certainly not about how you spend it or on who. So this Loan Guarantee Scheme has a very limited use and is really just there to give the banks some comfort in their normal lending.
Speaking to Bank employees involved in risk assessment and loans to small businesses, even without use of the Government Scheme, they had hit all their targets for loans regardless and saw the Scheme as just a publicity stunt. Loans to small business on a regular basis was never the issue.
Real Help To Small Businesses
The thrust of the letters into Director Magazine beyond telling Lord Mandelson where to go, was that the real help that could be provided for small businesses was in the form of tax breaks, and I wholeheartedly agree.
Firstly, for all business to business firms, VAT is just a bureaucracy and a tax collection service for no reward. If you deal with companies who do not pay their bills on time, it is also an unnecessary and onerous burden on cashflow - and I am experiencing precisely that in the last month which has stopped salary payments, it has got so acute.
Lowering tax for small businesses will allow more entrepreneurs to invest more in their ideas and business, allowing them to market more widely or employ more staff which will help create more sales - hence more profit and more tax in the long run. Instead a huge slice in a small business' profits, the same percentage as larger ones, goes into the Government's coffers.
National Insurance (NI) is a particularly nasty tax. Right now, the theory is it pays for a raft of things associated with benefits and pensions. At this point, over 1 in 4 jobs are in the Public Sector, yet all businesses pay some 12.5% Employer Contributions for NI. For the vast majority of us, what we get out of the system is a fixed, small national old age pension. What Public Employees get is a superb, final salary, index-linked superannuated pension, on top of the minimum old age pension, which is disproportionately funded by private businesses.
The whole system is an elaborate 'Ponzi Scheme' - the money in gets you no relative output, as there is no investment pot which is growing. The money goes immediately to those Public Servants in retirement to give them superb pension rights. Yet small businesses have no choice but to pay up, and the tax has risen and will rise again in order to pay for new Public Sector retirements.
Fending For Ourselves
Beyond decreasing tax which could directly help small businesses, where help could be put in place is to help businesses attract overseas money in terms of export of goods and services. One of the reasons that Britain has not been able to capitalise on the weak pound is that exports are a relatively small part of the country's GDP.
Would it not be a good idea to give incentives to any business to drive foreign based business by either giving tax breaks or even making money available to increase marketing or sales activities to generate sales?
Most small businesses have to fend for themselves and I have blogged ad nauseum about ways in which small businesses can drive costs down and conserve cash. But none of that help comes from the Government - it seems to believe that credit is the only thing that is needed for survival and growth.
For Lord Mandelson's edification, it is orders and sales that will drive business forward. The more of those sales that come from other countries, the better. Of course, it is difficult to see that when his head is in the clouds and the businesses he has been exposed to need the likes of Nat Rothschild's help.
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