With the Jumpstart Our Business Startups (or JOBS) Act having just passed in Washington, the drumbeat for cutting regulations for SMEs in the UK is reaching a deafening volume.

This recent article in the Birmingham Post has university professor Francis Green opining that “the total burden of business regulations on small business is excessive”. He cites the fact that a small business spends, on average, £15,000 on employment tribunals (interestingly there’s no time-frame for that average – is it over one year? Ten? Who knows – he doesn’t give a source).

Many other proponents of regulatory roll-backs are joining in the chant – not least the UK government themselves who, not content with mere deficit cutting, can’t wait to hear your red tape slashing suggestions.

So what’s the real story? Are the UK’s small businesses really drowning in a sea of red tape? Do they face too many regulations? Are those regulations the cause of stifled growth or is there perhaps another, larger millstone hanging around the neck of the UK economy?

58 Separate Regulations

That’s how many rules a company with seventeen workers would have to comply with according to the Better Regulation Executive. I couldn’t find the source for that statistic, also cited by Francis Green in the article above so I’can’t provide a list, but let’s assume that the figure is correct.

I’m sure you’ll agree that it’s reasonable to say that most of those 58 regulations are concerned with registering your company, conducting health and safety assessments and putting in place any H&S requirements as well as paying corporation tax, payroll tax and national insurance contributions.

No one but the most die-hard libertarian would argue that all these regulations have to be in place – a business has to be registered, has to pay taxes on its earnings and employee wages and has to not endanger the safety of its workers. The last one will invite contention for sure, but even if health and safety regulations were relaxed would you really want to bear the full liability for any accidents or injuries that took place on your premises? The laws aren’t just there to protect employees after all.

So what’s left? What I would argue are the real targets of the whole red-tape cutting brigade – employment laws. In fact most proponents make no bones about this and indeed increasing the period of time after which an employee can claim unfair dismissal from one to two years ha salready made it into law. It is claimed that such legislation will promote growth by allowing employers longer to decide whether a member of staff is worth keeping on.

But do employers really need that long? Or is this legislation merely aimed at making it easier to sack staff when the economy hits the rocks again? Is the reason that small to medium sized businesses can’t achieve growth down to heavy legislation or is there a deeper cause to this problem?

 

4 Year Credit Crunch

The following chart shows how bank lending to SMEs, and small businesses in particular collapsed after the credit crunch and hasn’t recovered since (in fact, for small businesses it continues to decline).

(Credit to Ripped Off Britons for the image)

This is despite project Merlin under which banks were forced to promise to lend £190bn to businesses during 2011 (including £76bn to small firms) – a promise on which they promptly reneged, forcing the government to promptly pretend they’d never made them promise in the first place.

What does this have to do with anything? Well, if you run an SME you’ll know that you can make as many expansionary plans as you like, plot as much growth as you fancy and it will all come to nothing without the credit to finance it. Without finance businesses can’t invest in new staff, new technologies or greater amounts of raw materials, no matter how many regulations are cut.

The Penny Drops

What the UK government is entering into is a race to the bottom. By refusing to take the banks in hand and instead attacking their own laws for protecting not only employees but their own tax revenues they’re setting themselves up in opposition to other sovereign governments also trying to attract regulation (and tax) avoiding larger firms. And who among those larger firms are the ones constantly threatening to up sticks and leave for less regulatory heavy jursidictions? Oh yes, the banks themeselves.

Don’t be fooled – red tape isn’t being cut to help you grow your business. It’s being done to make life easier for multi-national financial corporations. These are the very same businesses who are responsible for the current obstacles to economic growth – through the reckless lending and speculative activity that led to the credit crunch and record levels of private and public debt.

So the next time someone asks you to participate in a Red Tape cutting public consultation ask yourself, in the words of Roman consul and Censor Lucius Cassius Longinus Ravilla “cui bono?”

It’s probably not you.

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If you’re investigating non-bank forms of funding for your SME then be sure to check out invoice factoring – where you post your unpaid invoices as collateral against credit. It’s more expensive than bank loans but can be a quick way to inject vital capital into your business expansion plans.


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