Are small businesses hampered by regulation?


11:04 am - October 25th 2011

by Richard Exell    


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How often do we hear that regulations are driving businesses into extinction? Especially the small ones?

Last month, the British Chambers of Commerce made, “Immediate and real action on existing pledges to reduce regulation” the number one item in their 5-point “Plan A” to boost business growth.

Earlier this year, the Federation of Small Businesses complained that: “Despite the rhetoric, the burden of regulation continues to get heavier.”

Back in February, the CBI’s Budget Submission argued that companies “expecially SMEs” are discouraged from hiring by employment regulations.

This made the latest edition of the BIS SME Business Barometer, published today, all the more interesting. Based on 500 interviews with owners and managers of SMEs, it gives us the opportunity to find out just how much small businesses are being held back by over-regulation.

Although the organisations that claim to speak for SMEs insist on the importance of this issue, it looks as though the economic stagnation I blogged about earlier today is much more significant. Twenty seven per cent of SMEs – more than one in four – are reducing or delaying their long-term investment plans because of “recent economic conditions”, compared with 5 per cent increasing them or bringing them forward. (In construction, 39 per cent are reducing or delaying their plans.)

But even more damning are the results of the query about the main obstacles to the success of the business. ‘The state of the economy’ was the main obstacle to success for 45 per cent of SME employers in the latest barometer –

a higher proportion than that seen in any other Barometer.

So perhaps regulations were the next most invidious problem?

No:

Obtaining finance was the second most frequently mentioned main obstacle (in a five percentage point raise since February 2011, it was mentioned by 12 per cent of SME employers). The next most frequently mentioned obstacles were taxation, cashflow, competition and regulations.

Just 6 per cent listed regulations as their main obstacle.

There is a lesson here for government, as well as business organisations. The key problem facing businesses – of all sizes – is the lack of demand. Everything else is just mood music.

 

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About the author
Richard is an regular contributor. He is the TUC’s Senior Policy Officer covering social security, tax credits and labour market issues.
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Reader comments


The fact that small businesses are correctly deciding that the current economic conditions do not represent a good moment to try to fund expansion does NOT mean that excessive regulation does not add cost to or hamper their business.

If I am running a marathon and decide that the time is not right to try to speed up, it does not follow that I wouldn’t be doing better if my legs weren’t tied together.

Stupid post made worse by Sunny’s headline.

It’s Still The Economy, Stupid:

http://zelo.tv/sF3Hj6

and that goes for all the EU ranting and frothing, too.

In any event, the UK isn’t hampered by regulations and red-tape – a variety of reports put the UK in the top 10/top 20 over how easy it is to do business http://d-notice.blogspot.com/2011/10/nothing-but-job-killing-regulations-and.html

“There is a lesson here for government, as well as business organisations. The key problem facing businesses – of all sizes – is the lack of demand. Everything else is just mood music.”

This is the probloem with not noting the difference between micro and macro economics. Sure, the macro position is bad, this is hardly news. The news that the micro situation is also bad is a very different thing though.

Micro problems affect trend growth rates. Can the economy grow at, on average, over the decades, 1.5%? 2%? 3%? Macro problems will make the grwoth rate vary around whatever than trend rate is, but it’s the micro structure of the economy that will determine trend.

And finding that we do have micro problems (whatever they are) means that we really do want to root them out. Because differences in trend compound over the years. A 1% difference doubles the size of the economy in 72 years. 2% in 36.

We want the micro set up to be as good as we can get it, get that trend rate up as high as we can. Quite apart from anything else, if we had trend of 3% (say) then we’d find it pretty easy to deal with any macro problems that came our way.

My comment seems to have disappeared after I pressed enter…

What I said was that the UK isn’t hampered by red-tape and regulations in any event – we’re in the top 10 or top 20 in a number of reports over how easy it is to do business http://d-notice.blogspot.com/2011/10/nothing-but-job-killing-regulations-and.html

D-Notice,

In any event, the UK isn’t hampered by regulations and red-tape – a variety of reports put the UK in the top 10/top 20 over how easy it is to do business http://d-notice.blogspot.com/2011/10/nothing-but-job-killing-regulations-and.html

How does something that proves we are one of the less regulated countries automatically mean that regulations are not hampering business? It may just mean that every country in the world is hampered by business. And also, the rankings you show include other aspects such as property rights, where the UK is always very strong, and which therefore skews the picture.

I know from personal experience that the regulations governing employment are a barrier to expansion – I chose not to employ someone (part-time) because I calculated the admin required was probably going to eat up the time I created. This is of course better than many other countries, but I was not looking to employ someone in another country, so that comparison is rather pointless.

D-Notice @ 5:

“My comment seems to have disappeared after I pressed enter…”

Yes, they do that sometimes. Don’t worry, they generally turn up eventually.

I have just closed the business I have been running for the last fifteen years.

It wasn’t over-regulation.

It was because the margins had shrunk coupled with the increasing risks of trading in this environment.

9. Leon Wolfson

@5 – Also;

http://www.doingbusiness.org/rankings

(And there does seem to be something funky going on with the database, yes)

This is the probloem with not noting the difference between micro and macro economics. Sure, the macro position is bad, this is hardly news.

The news is that the difficult micro situation is leading to the bad macro news. That’s the point being disputed here, and there’s no evidence for it.

11. Just Visiting

Gubbs

sorry to hear that. What sector were you in?

12. So Much For Subtlety

Asking existing business is interesting, but actually you want to ask the businesses that could have been but weren’t. Harder. A lot harder.

After all, the people you are asking are the people who are in business today. They can cope with the paper work. It was likely that when they started up, there was much less of it for a start and now they are more successful they can hire people to help them.

The people you want to ask are the people *now* who wanted to start a business but have not been able to. Regulation is likely to be a burden to them. Consider, for instance, someone from India who wants to open a Tamil restaurant. There are several thousand pages of regulations to comply with. I am not kidding either. What if this person does not speak English well? If he started it 50 years ago, he would be in business and could, you know, entertain the inspectors and so have no problem. But he cannot afford that as a start up. Especially when the other Indian restaurants in the area have a quiet word with said inspectors about the on-going food violations in his restaurant.

This is precisely the person we *want* to start a new business. But if they can’t, they can’t. You need to ask about them too.

13. Leon Wolfson

“It was likely that when they started up, there was much less of it”

No, it’s not. Cite, if you have evidence.

And yes, wow, if you’re trying to start a restaurant, you can no longer sit the inspectors down and feed them to get a free pass on opening it, you actually have to fully comply with public health law. How terrible!

And wow, someone having violations, and other restaurants notice and get rid of the competition? Say it ain’t so, it’s not like there’s a public health issue or something.

Also, cite on “several thousand pages”

You’re inventing and then burning straw men as usual. You have no idea what an actually highly-regulated system looks like.

JV @ 11

Specialist engineering activities such as reliability and supportability appraisal and improvement.

It’s quite a re-adjustment from running a business for so long to becoming a corporate surf again.

Most of the commentary seems to be questioning the strength of the evidence presented which is fair enough.. presenting arguments through statistics when you cannot cite the source is questionable.

Part of the difficulty arises when we stop looking at regulation per se and see how it is enforced. I run a small business and the requirements in the legislation are usually pretty striaght forward but the paperwork generated off the back of them is enormous and often generates nothing but a fig leaf cover for those organisations that exist on generating bureaucracy.

I had to spend a 2 weeks worth of time writing 18 letters over 12 months supported by 50 pages of evidence to convince HMRC that their guidelines were not enforceable as the legislation did not apply to us for a particular tax. I accept my responsiblity to comply but at least half of those letters were merely reinforcing the original points in my first letter becuase HMRC wouldn’t even look at the argument I was presenting. My business sells into the public sector and you can’t imagine the volumnious documentation we get asked to complete which quite often is badly drafted and worded and has nothing to do with compliance with regulation but instead minimises risk to the councils in a purely legal sense.

To say SME’s don’t suffer as a result of this kind of action isn’t fair as i’m lucky enough to have got qualifications and experience that enable me to deal with it. plenty of other small business people i’ve met seriously struggle with that burden.

16. James from Durham

Of course, regulations hamper business. They are meant to. SMFS rightly points out that the regulatuions hamper someone who wants to set up a restaurant which breaches the rules regarding hygiene and food safety. I want this guy hampered! I don’t want to have to conduct a full investigation of his kitchen before my family sit down to eat. Actually the regulations may help business. Most restaurant proprietors don’t want the customers examining their kitchens (getting in the way of the cooks etc).

17. Citizen Smudge

“Consider, for instance, someone from India who wants to open a Tamil restaurant. There are several thousand pages of regulations to comply with. I am not kidding either. What if this person does not speak English well? If he started it 50 years ago, he would be in business and could, you know, entertain the inspectors and so have no problem. But he cannot afford that as a start up. Especially when the other Indian restaurants in the area have a quiet word with said inspectors about the on-going food violations in his restaurant.

This is precisely the person we *want* to start a new business. But if they can’t, they can’t. You need to ask about them too.”

So business start-ups are deterred by red tape, paperwork and bureaucracy and your evidence SMFS is the lack of Indian restaurants in the UK? Do I have that right?

James from Durham,

Of course, regulations hamper business. They are meant to. SMFS rightly points out that the regulatuions hamper someone who wants to set up a restaurant which breaches the rules regarding hygiene and food safety. I want this guy hampered! I don’t want to have to conduct a full investigation of his kitchen before my family sit down to eat. Actually the regulations may help business. Most restaurant proprietors don’t want the customers examining their kitchens (getting in the way of the cooks etc).

Of course, we could just have the kitchen visible to the customers – that tends to make things better.

To be honest, food hygiene is hardly the worst example of regulation – because it serves a purpose and is easily measured I suspect. Furthermore, it relies mainly on inspection and qualification of staff, so is not a particular burden on the running of the business (other than ensuring staff have the right qualifications, which as you say is a minimal requirement). The problem is the paperwork that has to be completed in certain activities, especially the ridiculously complex taxation system – I used an accountant despite the fact my revenues really wouldn’t justify it – and in employing others that was always the problem.

Yes they are, I speak to these people every week.

Here’s the deal, if your work and life experiences are in journalism, law, academics, trade unionism or the public sector (the entire Labour Party) you wont understand them. Their challenges and responsibilities as an employer and potential wealth creator will be completely alien to you. You wont have a clue how even the most simple of regulations adds another cost burden against expanding and employing more people. Why would you know about this? You have no experience in commerce or running an SME. It would be like the owner of small IT firm lecturing you on how do you your job as a professional journalist and blogger.

Want to know one of the reasons the German economy is stronger than ours? Someone with an MA in Modern History isn’t advising a political party on its strategy for SME growth. Someone with an MBA and business experience will be doing that.

In response to Tory, you are correct in part.

There’s no reason that someone with an MA in Modern History couldn’t start a business or have management experience. Secondly, I’m skeptical about the validity of an ‘MBA’, far too many have the whiff of snake oil about them.

21. Leon Wolfson

@19 – And if you’re a rich fat cat (the Tories), you don’t WANT to understand them. You don’t believe in responsibilities of an employer and actively work against their better interests, withholding all possible wealth for the right classes of people. You argue strongly for protectionist regulations to prevent competition with your business, and to screw the maximum work via fear of unemployment out of the peons you employ. You have no experience in anything but finance and corporatist enterprise. It would be like the owner of News International lecturing you on honesty and integrity.

Done stereotyping yet?

I’ve run a business. The problem was NOT. In fact, I had trouble getting the staff I needed because of the poor worker protections he UK has. And the final blow was the Government refusing to *consider* allowing someone with two PhD’s, twenty-five years experience and a name in his field from entering this country. Not a “high skilled worker”, despite the fact he’s now in America on an O1 “superstar” visa.

That’s your red tape damaging business, RIGHT THERE.

@15 – Ha, you think that’d bad now? As insurance costs become unaffordable, and protections decrease, the amount of lawyering needed goes RIGHT up. Employees stop being able to sign employment contracts without one present to check it, for starters…

22. So Much For Subtlety

16. James from Durham

Of course, regulations hamper business. They are meant to.

But they overwhelmingly hamper new entrants. The older businesses more often than not are grandfathered in. It is a way of protecting the existing oligarchy at the expense of the rising working class. That is not a good idea.

SMFS rightly points out that the regulatuions hamper someone who wants to set up a restaurant which breaches the rules regarding hygiene and food safety. I want this guy hampered! I don’t want to have to conduct a full investigation of his kitchen before my family sit down to eat. Actually the regulations may help business. Most restaurant proprietors don’t want the customers examining their kitchens (getting in the way of the cooks etc).

Actually I did not say that. The rules are vague and the enforcement is openly corrupt. If you get busted, it says nothing about whether your kitchen is safe or not. It says more about the inspectors’ relations with the other restaurants in the area. Yes, bad performers are likely to be cited, but it is by no means certain. How much food safety and hygiene is enough? We really need 2,500 pages for the smallest of stalls?

17. Citizen Smudge

So business start-ups are deterred by red tape, paperwork and bureaucracy and your evidence SMFS is the lack of Indian restaurants in the UK? Do I have that right?

No you don’t.

18. Watchman

Of course, we could just have the kitchen visible to the customers – that tends to make things better.

Butchers too. There is a push for ever larger slaughter houses mainly due to the regulatory burden. It is more convenient for the bureaucrats – and no doubt their entertainment budgets are larger. But it is not better for the animals. They have to travel further. They have to be kept waiting longer – in full sight and sound of the slaughter. The meat then has to travel again. It is a good case of regulation making things worse. Much better to push for slaughtering to be visible.

To be honest, food hygiene is hardly the worst example of regulation – because it serves a purpose and is easily measured I suspect. Furthermore, it relies mainly on inspection and qualification of staff, so is not a particular burden on the running of the business (other than ensuring staff have the right qualifications, which as you say is a minimal requirement).

I am not so sure it is easy to measure. I have been told that any kitchen can be violated because there are just so many regulations. So owners have to be nice to inspectors, for various definitions of nice, or they get shut down. It is the paper work and the box ticking that is the problem. If you have to account for every single place your meat has been and for how long, it mounts up.

23. Citizen Smudge

“Consider, for instance, someone from India who wants to open a Tamil restaurant. There are several thousand pages of regulations to comply with. I am not kidding either. What if this person does not speak English well? If he started it 50 years ago, he would be in business and could, you know, entertain the inspectors and so have no problem. But he cannot afford that as a start up. Especially when the other Indian restaurants in the area have a quiet word with said inspectors about the on-going food violations in his restaurant.”

Now we know why there’s such a shortage of indian restaurants in the UK. I’d never seen it that way before.

@13 Leon Wolfson
I have been self-employed for 18 years. Regulation has got worse.
New Labour introduced a rule that if I employed someone I had to keep records of the Employer’s Liability Insurance for 40 years after I ceased to employ anyone. I do not expect to live for 40 years after stopping working.
May I politely suggest that if you really, really do not know what you are talking about you might just shut up?

24. John77

@13 Leon Wolfson

” May I politely suggest that if you really, really do not know what you are talking about you might just shut up? ”

We can but hope.

26. Leon Wolfson

@26 – Still not managed to try to wreck enough lives? You’re a typical 1% elitist Tory troll.

Your only argument is “lolz you be wronnnng!”. Logic has no way of denting your arrogant shield of superiority

@24 – Great, so put it in a folder and leave it there. So hard, that you have to struggle to find even a marginal example of something you had to so. And no, because that’s not polite. Go back to ConservativeHome, they like your kind of anecdotes.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Are small businesses hampered by regulation? http://t.co/D7TRQsuZ

  2. Lee Hyde

    Are small businesses hampered by regulation? http://t.co/D7TRQsuZ

  3. Martin McGrath

    Small businesses suffering under the burden of too much regulation? Not according to the people running the businesses http://t.co/YAcWo1QE

  4. Alex Braithwaite

    Are small businesses hampered by regulation? | Liberal Conspiracy http://t.co/t9tQcSIY via @libcon

  5. Gareth Winchester

    Is anyone else struggling to comment on @libcon? I've tried twice but both times it disappeared http://t.co/BnX5yfM5 http://t.co/A2708c3A

  6. Gareth Winchester

    My anecdote outwieghs you considering 5 reports from different sources http://t.co/7cGj8QPB

  7. tesseraction

    My anecdote outwieghs you considering 5 reports from different sources http://t.co/7cGj8QPB

  8. Doug Winter

    @kermitbantam @1stvamp don't blame employers http://t.co/5wMOIhSP industry bodies do not represent us, they are as corrupt as the rest

  9. sunny hundal

    @faisalislam Surveys of SMEs don't mention council tax http://t.co/oY2i5Iy9 (via @richardexell)





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