Sunday, March 07, 2004
Strangled
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

Red tape is costing business 30 billion a year, says the British Chambers of Commerce. When I asked Sunday Times readers about this bureaucratic burden, they responded in droves. This is my report.

It started off as a challenge. Gordon Brown had emphasised how much the government was doing for enterprise in two speeches — one delivered last month to the EEF, the manufacturers’ body, and the other in January at an enterprise conference graced by Bill Gates.

“At every stage — whether for companies starting up, investing, hiring, training, seeking equity, exporting — our aim is to be on business’s side,” the chancellor said, “and, learning from US flexibilities, remove all the old barriers holding the enterprising back.”

The aim, he said, was nothing short of imbuing the entire nation with the enterprise culture, of creating a situation “where starting and growing a business is open to all with ideas and ambition”.

But how, we asked three weeks ago, did this square with the reality of running a business in Britain today? Is this country truly enterprise-friendly or is that just a new Labour myth? Is the truth that firms, faced with an avalanche of red tape, are struggling to stay on their feet? What followed was a deluge of responses from business readers. The message was simple but stark — far from making life easier for entrepreneurs, Brown has been strangling enterprise.

“This chancellor has inflicted a mountain of red tape and taxation on small business, with more to come I fear,” said Chris Braithwaite, managing director of REM, which designs and makes equipment for the hair and beauty sector. “My company employs 120 people and we have had to add the equivalent of one full-time head just to deal with the plethora of demands for reports, returns, health and safety issues, and so on.”

Many admit that they cannot cope with the sheer amount of red tape being churned out by the government. “The volume and pace of change in employment law has meant that keeping up to date with changes is beyond the capacity of reasonably intelligent people for whom personnel is not their only role,” said Alun Evans of Jennings Plant Services in Colwyn Bay. “Our response has been to outsource this to consultants, increasing overheads.”

OTHERS have taken a different tack. Swamped by regulations, they risk breaking the law to stay in business. Red tape has put previously respectable firms on the wrong side of the law, turning them into what bureaucrats see as dodgy operations.

“It is completely impossible for a small firm to keep up with all the regulations, let along abide by them,” said one director. “We have many clients, and colleagues in other firms, who have taken similar decisions, and continue in business but in fear of being caught out.”

Those who comply do so at a cost. “I’ve been running my company for just over 10 years and frankly I am appalled at what this government has done to business,” said Chris Car, managing director of Optima Chemicals, based near Heathrow.

“Payroll is mind-bogglingly complicated and becoming ever more expensive to administer. They have put huge costs on business. Tony Blair and Gordon Brown act like ostriches and tell the whole world how rosy it is. It’s not.”

Antony Cox runs EPS ProTech, an employment agency in Hemel Hempstead, Hertfordshire. He gives an example where new rules have been introduced without even helping those they are intended for. “Temporary workers now receive entitlement to four weeks’ paid holiday a year,” he said. “Since this has to be paid for, they receive a lower hourly rate than before. The net result? The same amount is paid out, but in a much more complicated way. The rules governing the accrual of holiday pay are fiendishly complex and required a substantial and costly software upgrade to implement. Most of the temps I speak to, meanwhile, preferred the old system.”

While employment regulations cause most problems, they are by no means the only form of red tape. The firm of William Bartlett has been making furniture in High Wycombe, Buckinghamshire, since 1864. Now, having modernised its production methods, it is threatened with closure by the council for failing to meet emission standards under the Environmental Protection Act.

“We have now gone back to the way we originally polished furniture and the council has agreed to let us continue until 2007,” said John Bartlett. “Why? Because most of the furniture factories in the town have already gone bust and there won’t be any left soon.”

Sometimes red tape arises from the unintended consequences of official actions. Last year Customs and Excise introduced a clampdown on the use of red diesel, which is free of duty, in road vehicles.

James Pirrie, finance director of Glasgow-based LCH Generators, which has branches all over the country, takes up the story. “When it was introduced they thought it would apply only to fuel companies,” he said. “Once they started implementing it, they realised that the plant-hire industry was affected, as are marinas and even hardware shops.

“We have to fill in a monthly return detailing where all our fuel has been delivered. It has taken many thousands of pounds to change our software to cope with this, and a lot of management time. What they do with the information I’m not sure.”

Gallingly for the chancellor, many in business, far from seeing this government as pro-enterprise, see little to distinguish it from past Labour governments. “My belief is that we now have more anti-business legislation than when ‘old’ Labour was on top,” said Peter Stedman, chairman of the Loft Shop in Littlehampton, West Sussex. “But it has come in through the back door.”

Chris Humphrey, who runs an Eastbourne firm of accountants, Humphrey & Co, sums up the mood. “We are being regulated out of existence by a chancellor who has never existed in the real world,” he said. And even when the Treasury appears to give, it quickly takes away again.

“Many tens of thousands of self-employed individuals were encouraged to incorporate their businesses to take advantage of the lower tax rates available to small limited companies,” he said. “But in December’s pre-budget report, hidden away, was the chilling announcement that as yet unannounced changes would be brought in to ensure these very same people paid the ‘correct’ amount of tax in future.”

THE British Chambers of Commerce (BCC), prompted by concern about regulation among member firms, has been monitoring the damaged caused by red tape for several years. Its estimates, based on data in the government’s own regulatory impact assessments (RIAs), are the nearest thing to an official measure of the red-tape burden.

Early last year the BCC estimated the cumulative cost to be 20.6 billion. Even officials were shocked to discover that it had risen much further, to just over 30 billion, when they put together the figures for this year. “The flow of red tape is increasing,” said Sally Low, the BCC’s director of policy.

“The issues about the regulation of business are not going away. The costs are mounting and we are not getting the response from government we would like.”

In terms of costs, the biggest come from working-time regulations, introduced in 1999, and now adding up to a cumulative 11.1 billion and rising, followed by the data-protection bill, 4.6 billion, and changes in vehicle excise rules, 4.3 billion. The BCC’s figures exclude the 13.5 billion officially estimated cost of the national minimum wage.

But often, said Low, business is irritated by smaller changes, and by the cumulative impact of new rules. The BCC’s burdens barometer lists 35 separate batches of regulations introduced since 1997.

Its other big gripe is that the government’s impact assessments, intended to show that the benefits from new regulations outweigh the costs, are failing in that task.

“The government is not doing what it said it would do,” said Professor Francis Chittenden of the Manchester Business School, who advises the BCC on the impact of regulation. “They quantify the benefits in only a third of cases, and this undermines the credibility of the whole thing.”

The Treasury insists that it is serious about reducing tax and red tape for business. Corporation tax has been cut from 33% to 30%, and from 23% to 19% for smaller firms, Brown insists, and a third-term Labour government will look for ways of further reducing business taxes.

The government has launched a joint initiative with the Irish, Dutch and Luxembourg governments to make it a priority of the next four EU presidencies to reduce the weight of bureaucracy and ensure “every new regulation is subject to strict and stringent tests for its impact on enterprise and on the competitiveness of the European economy”.

Even if that comes to anything, however, business will take some convincing.

One businessman has his own measure of the rising red-tape burden. In 1997 he could store four months’ payroll data for his staff of 20 on a single floppy disk. Now, thanks to the explosion of tax credits, allowances, student-loan repayments and the rest, it requires two or three disks each month.

“That looks to me like a more-than eightfold increase in record-keeping requirements,” said John Chelsom.

IT is not just Britain’s small and medium-sized manufacturers that are suffering.

Even in the Square Mile, frustration is growing. Last year the Financial Service Authority, the City watchdog, issued 50 consultation papers. Money-laundering rules have required new, increasingly onerous requirements.

“I feel half my working day is on behalf of the government,” said the senior partner of one medium-sized City firm. “Is it any wonder that we have seen virtually no new firms opening up in our space in recent years?” Even larger firms, while better able to cope with bureaucracy, are feeling swamped.

“Nobody wants people to be injured at work, but I think we have tipped over the edge when I see people reporting paper cuts as industrial injuries,” said the finance director of one American-owned business, which employs 800 people in Britain.

“We act as collection agent for the Child Support Agency and general administrator for a range of other credits and benefits.

“And the encouragement of tribunals is a nightmare. We have one case where we received hundreds of pages from the claimant. This wouldn’t have happened if they hadn’t been encouraged to believe that there was a pot of gold at the end of the claims rainbow.”

Employment legislation comes at the top of the list of irritants for firms. The growing burden reflects both measures deliberately enacted by this government and a wave of new rules — including those blocked by the previous Tory government — emanating from Brussels.

“The suggestion that the government has cut red tape in the past five years is laughable,” said James Wilson at Hill and Knowlton, the public-relations company. “The annual growth in costs caused by new regulation and rates increases to my last company, Six Continents, was about 20m a year.”

For at least one businessman, who has built a manufacturing firm employing more than 250 people, enough is enough. “I had been looking forward to spending another five or six years with the business,” he said. “But it will now have to get on without me. I have had enough of all this red-tape nonsense and have decided to sell it off. All the companies interested in purchasing it would look to move the jobs to Asia immediately.”

If they were thinking of setting up again, many businessmen insist they would not bother. “We started out 15 years ago with the usual limited resources,” said Jim Milne, who runs Electrolab, a small engineering company based in Tewkesbury, Gloucestershire. “I have no doubt that, with the vastly increased level of bureaucracy that now exists, it would be impossible today.

“Small companies simply do not have the spare capacity to handle this mountain of red tape, nor do they have the resources to employ specialists to deal with it.”

Richard Senior, director of Duraweld, a Scarborough company that makes files, folders and other stationery products, echoes this exasperation. “What has happened to common sense?” he said.

“We live in dread of the prospect of prosecution or legal action by staff and bend over backwards to meet all our obligations. And it is costing us a huge amount of time, effort and money.

“I have run my business for 35 years, taking as much care of my staff and premises as possible and I have enjoyed it and prospered. Now I feel the fun of being entrepreneurial is being stripped away steadily by this increase in red tape — not to mention the taxes. The government has a lot to answer for.”

The question, as business finds itself increasingly strangled by a red tape burden that is costing 30 billion and growing, is whether anybody in government is listening.

TOP TEN RED TAPE BURDENS

Working time regulations

The cumulative cost for 1999-2004 is 11.1 billion. Business fears further changes in these regulations as Britain’s 48-hour-week opt-outs come under challenge

Data protection rules

The cumulative cost for 1998-2004 is 4.6 billion. Businesses could face unlimited fines if they hold information on customers and do not comply with the law. Employees can be fined if they misuse data

Vehicle excise duty (reduced pollution) regulations

Cumulative cost since 2001 is 4.3 billion. The recurring annual cost for firms is 1.2 billion, according to official estimates

Control of asbestos at work

New regulations were introduced in December 2002. About 500,000 business premises in Britain contain asbestos. The new rules cover repair, dismantling and inspection. Cost so far: 1.4 billion

Disability discrimination rules

Firms have to accommodate people with disabilities in the workplace by making existing facilities suitable, perhaps by modifying present equipment. The cumulative cost is 1 billion since 1999

Employment Act 2002

Intended to help parents devote more time to children, it provides for 26 weeks of paid maternity leave (plus an optional 26 weeks unpaid), increased maternity payments, and two weeks of paid paternity leave for new fathers. Cost so far: 565m

IR35 tax rule

This requires contractors, particularly in the IT industry, to be subject to National Insurance payments. It has been blamed for an exodus of IT specialists abroad. The cumulative cost since 2000 is 465m

The Tax Credits Act 1999

This requires firms to administer the government’s tax credits, including Gordon Brown’s flagship working families tax credit (now renamed the working tax credit). The cost so far is 465m

Stakeholder pensions

Companies with five employees or more are required to provide workers with access to a stakeholder scheme. The rule, which came into force in October 2001, is policed by the Occupational Pensions Regulatory Authority. The cost so far is 404m

Flexible working regulations, 2002

New rules, which came into effect in April last year, cover parents of children aged under six years and parents of disabled children aged up to 18. The rules allow them to apply for flexible working arrangements. The government expects 500,000 such requests annually. The cost is 400m.

From The Sunday Times, March 7 2004