The Entrepreneurial Audit: Regulation and late payments
Of all the tools and levers that policymakers can use to support the self-employed, few have received more attention than deregulation
--
This is the fifth article from our report The Entrepreneurial Audit which offers 20 policy ideas for government to strengthen self-employment and micro businesses in the UK.
The urge to purge
Of all the tools and levers that policymakers can use to support the self-employed, few have received more attention than deregulation. Successive governments since the late 1970s have been vocal in their ambition to ease the administrative burdens facing small businesses, and have taken aim at rules stretching from employment law and property law, through to product regulations and health and safety procedures.
The zeal for regulatory reform continued apace under Cameron’s leadership. In 2010, the coalition introduced a ‘one-in, one-out’ rule to manage the volume of regulations affecting businesses, and this was soon extended to ‘one-in, two-out’ in 2013. The then government also legislated for the introduction of ‘sunset clauses’, which allow for the revision of regulations after a set period of time, and bound itself to publish a target (in pounds) for cutting regulation. This included a requirement for the government to disclose its progress in reaching this target.
Measured against the volume of regulations repealed, policymakers have cleared made progress. The Red Tape Challenge resulted in over 2,400 regulations being scrapped or amended — from reducing the length of fire safety inspections for businesses with good records, to extending presumptive permission for planning on minor property extensions. The Cameron government also worked closely with the European Commission to improve EU regulations, resulting in less onerous rules for environmental impact assessments and food labelling. To say that policymakers have taken deregulation seriously is an understatement.
Distinguishing between good and bad regulation
But how much is too much? It is worth remembering that the UK already has some of the most lightly regulated markets in the developed world. We are seventh on the World Bank’s Ease of Doing Business Index, and according to the OECD have the second least regulated economy among developed countries. Evidence also suggests that the perception of regulatory pressures may be greater than the reality. According to the Small Business Survey, approximately 35 percent of non-employing businesses report that ‘regulation’ is a major obstacle to their business, yet a quarter (24 percent) of these could not point to any specific set of rules or requirements.
One reason for the hype surrounding regulation is that successive governments (and opposition parties) have themselves stoked up fears with anti-‘red tape’ rhetoric. This in turn has fuelled media commentary, leading to further government posturing in a self-perpetuating cycle. Headlines such as ‘Small firms hit by £713 extra red tape bill’ and ‘Small businesses are being smothered by red tape’ are indicative of the culture of alarm that surrounds regulation. It does not help that surveys of business owners often deploy leading questions using the pejorative term ‘red-tape’, which inevitably elicits more negative replies.
Rarely do the business community or policymakers acknowledge that regulation can be advantageous for the self-employed. Rules and procedures fundamentally exist to reduce risks and uncertainties in the market, and without them businesses would be unable to operate. So called ‘green tape’ can ward off unscrupulous competitors that cut corners, reassure customers of the safety and quality of a product or service, and lead to the creation of new markets (for example the production of safety gear or security equipment). A study involving qualitative interviews with business owners found that regulation can also reduce insurance premiums, with one interviewee (a steel supplier) reporting an £85,000 saving.
Equally important is the impact of regulation on a firm’s ability to attract talent. When the Beecroft report suggested in 2012 that small businesses be able to opt out of unfair dismissal procedures, one of the concerns raised by more thoughtful commentators was that this could serve to create a two-tier labour market. Small businesses would be seen as less scrupulous employers and in turn struggle to recruit skilled workers who are more discerning about their workplace. The EU’s Stoiber report was met with the same reaction when it suggested that the smallest firms be exempt from nearly all European laws governing business practices.
None of this is to dismiss the real barriers facing people who work for themselves. Vexing paperwork still exists and the time it takes to comply with some rules is excessive. However, sweeping statements about red tape and intermittent calls for a ‘bonfire’ of regulations are unhelpful. A better approach to managing regulation would be to focus on quality rather than quantity (ie design over volume), and to treat each rule and requirement by its individual merits. As a first step, we recommend the government remove the ‘one in, two out’ rule on regulation, as well as the £10bn target for cuts. These goals are crude and risk damaging regulatory safeguards that can help rather than hinder the self-employed.
Recommendation #17 — Remove the ‘one in, two out’ rule for regulation and shift the emphasis to quality over volume
The government should drop its commitment to the ‘one in, two out’ rule on regulation, acknowledging that quality is more important than volume. It should also preserve the ‘green tape’ that allows small businesses to attract talent, engage with customers and be protected from unscrupulous competitors.
Health and home working
It is not for this report to delve into specific types of regulation and make ad hoc suggestions for reform. However, there are two areas where there is a strong argument for regulatory change.
The first relates to the matter of health and safety. Up until 2015, the self-employed were included in the Health and Safety at Work Act (HSWA) in the same vein as employees. The Act imposes a duty upon people and organisations to protect others in the workplace, for example to perform testing and examination of machinery, ensure that potentially hazardous substances are handled and stored correctly, and provide training to anyone who needs to operate a piece of equipment that could cause harm. The duty is clear and the Act is thought to work reasonably well.
In 2011, however, the Lofstedt review into health and safety proposed that the self-employed whose work poses no harm to themselves and others should be exempt from this duty. As the TUC and the Institute of Occupational Safety and Health pointed out at the time, this was a needlessly confusing amendment to the wording of the rules, since the only time the HSWA can be applied is when the self-employed do pose the risk of causing harm to themselves or others. Put another way, the self-employed would still need to conduct some form of risk assessment, regardless of Lofstedt’s proposal.
In the end, the Deregulation Act of 2015 (which contained the amendments) stipulated that the self-employed would fall under the purview of the HSWA if they are carrying out an “undertaking of a prescribed description”, which includes work in agriculture, forestry, construction and health and social care, among other sectors. Yet this has served to create even more confusion than the original proposal, since many of the self-employed will falsely believe they are exempt from the HSWA simply because their sector is not listed. To ensure the self-employed are clear of their obligations, the government should reverse this unnecessary ruling and reinstate the original wording of the Act.
Recommendation #18 — Clarify how the self-employed are treated under the Health and Safety at Work Act
The government should reverse its confusing amendments to the Health and Safety at Work Act, which could lead many of the self-employed to falsely believe they are exempt from a general duty to protect themselves and others from the risk of harm.
The second area in need of regulatory reform is home-based working. Fifty-nine percent of non-employing business owners operate from home — from hairdressers and child minders through to architects and masseurs. Yet as research by Dr Frances Holliss has shown, it is still seen as an anomaly in our economy, if not a practice to be avoided.
A central issue is that landlords often stipulate in contracts that no work is allowed to take place in a property, regardless of whether it is safe, clean and quiet. The last government took the important step of lifting the ban on social tenants starting a business in their own home; however it is unclear whether this has filtered through into new tenancy agreements (TAs). Many TAs already include a clause prohibiting tenants from causing a nuisance to their neighbours, and this should suffice as a way of preventing disturbing work from taking place in a property. We recommend that the government steps in to ensure workers have a right to operate from the properties they rent, so long as they oblige by existing clauses.
Another issue pointed out by Holliss is that ‘dedicated workspace’ in homes may be liable for business rates. This is not an issue in itself — although see the points made about business rates in an earlier chapter — however it becomes a problem when the owner of the property is also liable for council tax. Home-based workers who feel they could be unjustly double taxed may choose not to declare their business premises to the local authority. Or they may merge their domestic dwelling with their business quarters, creating unnecessary hazards. The government should take steps to fully harmonise council tax and business rates to ensure that home-based workers do not pay twice for local services.
Recommendation #19 — Ease rules and harmonise taxes that constrain home-based businesses
The government should work with local authorities and landlords to remove unnecessary obstacles that prevent the self-employed operating from home. More specifically:
- Consider the merits of a Right to Home Working, whereby the self-employed would not need permission to operate from home so long as they abide by existing nuisance and disturbance clauses in their contracts
- Take steps to harmonise council tax and business rates to ensure home-based business owners are never double taxed
Calling time on late payments
A good example of where regulation can be an aid to the self-employed is protecting against late payments. According to a recent survey undertaken by the Federation of Small Businesses, 30 percent of its members’ bills are paid late, with nearly nine in 10 of these payments delayed by over a month. This in turn leads to cash flow problems, while time is wasted chasing clients for unpaid bills. The emergence of ‘invoice factoring’ platforms — where banks and other lenders ‘buy’ invoices in exchange for a proportion of their value — has helped to soften the blow of late payments. However, it is still unjust that the self-employed are not fully compensated for their work.
Governments past and present have sought to regulate against late payments. In 1998, the then Labour government introduced legislation giving businesses the right to charge interest on money owed to them, and in 2002 the act was amended to allow businesses to claim debt recovery costs. In 2013, the coalition government announced that public sector organisations would be required to pay all of their clients within 30 days, while private sector organisations would need to do likewise within 60 days. Cameron’s government also introduced the voluntary Prompt Payment Code, whose signatories commit to paying their clients on time with clear and fair procedures.
Looking forward, the government is set to create the new post of Small Business Commissioner, a high profile individual who will be tasked with settling late payment disputes between small firms and large clients. The Australian version of the Commissioner on which the role is based is reported to have solved more than half the cases it took on, at 30 percent the cost of alternative legal action. In addition, the government will shortly launch a new ‘duty to report’ rule for large firms, which will require them to share information on their payment terms and the average time taken to pay invoices, among other information. The aim is to make “payment behaviour a reputational boardroom issue”.
While these moves are promising, the government could and should go further to clamp down on the UK’s late payments culture. Some have suggested legislating that private sector businesses must pay within 30 days; however this simplistic reaction overlooks the legitimate reasons for longer payment times, for example payment delays that clients themselves face in their own supply chains (which may extend overseas). A more subtle response is required, which combines the power of social norms (through disclosure), prevention (through formal contracting) and deterrence (through more robust interest charges). We recommend that the government:
- Increase the interest rate charged on late payments — Suppliers are currently able to charge 8 percent annually plus the Bank of England’s base rate (currently 0.25 percent). However, for a business owed £2,000, this equates to just £165 spread over a year, or 45p per day. This interest rate should be increased to create a stronger deterrent against payment delays. The government should also consider whether to make interest rate charges compulsory, which would overcome the problem of businesses fearing reprisal for actively taking the decision to charge interest.
- Extend the ‘duty to disclose’ payment information to medium-sized businesses — The new duty to disclose rules will come into force in April 2017, yet will only apply to large UK companies (and large limited liability partnerships — LLPs) that exceed two of the following criteria: have more than 250 employees, annual turnover of £36m, or more than £18m on their balance sheets. Given the reporting requirements are not particularly onerous, there is no reason why these thresholds should not be lowered to companies in the medium-sized bracket.
- Establish a Right to a Written Contract for transactions over a given size — Late payments could be prevented early on in the client-supplier relationship by ensuring that both sides have a written contract in place, which clearly spells out deliverables, a timetable for payment and the best point of contact in the client organisation. Last year, the Freelance Isn’t Free Act in New York City made such contracts mandatory for any engagement which amounts to more than $800 over a four-month period. This move could be replicated in the UK and would address the problem of suppliers becoming unstuck in talks when no contract is surfaced.
Recommendation #20 — Strengthen protection against late payments, including through a Right to a Written Contract
The government should beef up regulation against late payments by focusing on deterrence, disclosure and prevention. More specifically:
- Increase the interest rate that can be charged on late payments
- Extend the new ‘duty to disclose’ payment terms and procedures to medium-sized companies
- Establish a Right to a Written Contract for any supplier engaging in a transaction above a given size
