PracticeConsultingACCOUNTANCY AGE FOCUS: SME Barometer – Snared by a red-tape jungle.

ACCOUNTANCY AGE FOCUS: SME Barometer - Snared by a red-tape jungle.

You have got to feel sorry for Mo Mowlam. She's on the verge of bringing peace to Northern Ireland, then she's ordered back to Whitehall and told she has to find a way to cut government red tape.

The task has comprehensively beaten ministers in the past. So is it any wonder the old girl harks back to happier times when there was always an exotic cheroot to knock the rough edges off a cruel world?

Making promises

Still, the new Cabinet Office minister is a trier. Last November, she launched a crusade to ‘banish the bumpf’. She promised ‘a whole new government approach to cut the unnecessary burdens of red tape, administration and form filling that can make life hell for small businesses and many in the public sector’.

She demanded a cultural change across the whole of government and set up a ministerial panel – red tape Star Chamber – to pressure departments into cutting back on bureaucracy. She said: ‘I want people to be able to see a difference – in a year.’

But it’s likely the only difference they will see is an even greater burden as new regulations add to business costs. By 30 April, the Chantrey Vellacott DFK Regulation on Business Index (see top right) will have risen by 20% since Labour came to power on 1 May 1997. Maurice Fitzpatrick, head of economics at Chantrey Vellacott DFK, predicts it will continue to rise at between 3% and 5% a year into the medium term.

And he warns: ‘I think the danger is that the index understates the position because nothing is ever repealed. Sometimes the government gives the impression of repealing something simply by virtue of not introducing a measure it had earlier threatened. This is presented in the media with slick New Labour spin as slashing red tape – and it’s not really the case at all.’

A hopeless case?

What makes Mowlam’s task seem so hopeless is that we’ve been here before.

John Major’s government introduced its own attempt to cut red tape in 1994 with the Deregulation and Contracting Out Act. This created simpler procedures for cutting or reducing the burdens of existing regulations.

But nobody at the Cabinet Office was able to say how many times it has been used or what red tape has been cut as a result of it.

More regulation loads extra costs on companies of all sizes but it proves a particularly heavy burden for small businesses, which have less infrastructure to deal with it. Research by NatWest Bank and the Small Business Research Trust, suggests that owner-managers now spend nearly eight hours – one working day – a month managing red tape. But a business with 50 employees spends on average just 43 hours – a proportionately lighter burden per employee.

Peter Ibbetson, NatWest’s head of small business services, says that by taking DTI statistics, it looks as though an average company with fewer than 50 staff spends 13.6 hours a month on compliance. That equates to 600 million hours a year for UK small business as a whole with an estimated compliance cost to the economy of 2% of GDP or £17bn.

Problem areas

Three key areas cause the most problems for small businesses. According to the NatWest/SBRT survey, 71% find that dealing with VAT takes the largest amount of time. This is followed by PAYE and NIC (57%) and tax self-assessment (48%).

The key issue is whether all this red tape is a drag on competitiveness. The UK is no more heavily regulated that most of the main European competitors.

But it’s more heavily regulated than the United States or Asia Pacific.

In particular, Ibbetson points out that small businesses enjoy significant advantages in the US where exemptions from a whole raft of legislation often apply to companies with turnovers up to $500,000.

And regulation may also stunt small businesses’ growth by discouraging them from employing more staff. ‘What is happening among small businesses – particularly husband and wife partnerships – is that they prefer to stay late at night and work weekends rather than take on an extra person,’ says Stephen Alambritis, head of parliamentary affairs at the Federation of Small Businesses.

At the moment, the best hope for small business in rolling back red tape, seems to lie with the new Small Business Service, which becomes an independent agency on 1 April. Chief executive David Irwin says there are three areas where he hopes his new agency will have an impact.

‘I think we can identify some regulations that we can aim to eliminate,’ he says. ‘I also have a suspicion that there are some that cover a broader sector of businesses than was originally intended by regulators.’ He cites the example of employment agency regulations which cast their net too widely – even making people who manage pop groups register.

‘We will be looking at areas where we could either narrow the scope or eliminate regulations altogether.’ But he admits: ‘Overall, I have to say that I don’t think there will be a lot of scope for doing that.’

Where the Small Business Service could have a significant impact is in persuading government departments to make it easier for businesses to comply with regulations. ‘For example, where there is a need to record information, we could be providing simple software on which businesses could do it,’ says Irwin.

There’s also a need to simplify guidance documents. At the moment, Irwin says, they try to cover all eventualities. It would be much better to have a shorter document covering 99% of the cases and let those affected by the 1% of exceptions, which often take a disproportionate amount of space to explain, apply for the extra information.

The third area where Irwin hopes to make an impact is in ensuring there is a reasonable period between regulations being agreed and implemented so that businesses have a chance to think what they need to do in order to comply. He cites the case of the parental leave directive implemented in December. When it went live, there was no model guidance available.

Encouraging the government

Irwin says: ‘We are trying to encourage government departments to think small first.’ But he admits, the end result may merely be to stop the costs of compliance rising further rather than rolling back the flood.

‘I would hope that the time required by businesses to comply with regulations should be no greater in two-years’ time than it is now.’

But with several more pieces of red tape expected, even that modest aim looks ambitious. Mowlam is going to find it hard to persuade business, within her stated timetable of one year, that the red tape burden is falling.


A ten-point plan to help small businesses:

– Assign management tasks. Make sure managers realise they are expected to keep on top of regulations in their area.

– Automate administration. Where new regulations impose extra administration, look for ways to computerise the work.

– Keep information current. Regulations are altering all the time, make sure all records hold latest versions of documents.

– Promote a right-first-time culture. Many regulations involve recording information. When the information is wrong, it costs even more to put it right. Authorities target lax companies for time-wasting inspections or review meetings.

– Use somebody else’s wheel. Tap associations for information on how to deal with new regulations most effectively.

– Bring in the professionals. Accountants, lawyers and other professionals are in their element decoding regulations and advising on the implications. Get them involved early.

– Work with rivals. You have a shared interest in keeping the cost of regulations in your industry at a minimum. Present a united front when lobbying government or the EU.

– Schedule red-tape work. Don’t pretend busy staff can cope with complex regulations. Allow enough time to deal with regulatory work properly.

– Understand opportunity costs. Does the cost of implementing new regulations make business sense to keep trading in some markets or business areas?

– Adopt a constructive attitude. Steer clear of the ‘all regulations are bad’ lobby. In some cases, regulations can help firms. Campaign for simple effective regulations.


According to the Regulation on Business Index compiled by Chantrey Vellacott DFK, red-tape costs will have risen by 20% between 1 May 1997 and 30 April 2000. The main costs are:

From 1 May 1997 to 30 April 1999

– EU working time directive, started 1 November 1998. Compliance costs: £2bn.

– Impact on business of Spend to Save legislation introduced in November 1996 budget. Fiscal authorities spending an extra £800m over three years from tax year 1997/98 in attempt to raise £6.7bn tax revenue. Compliance costs: £200m.

– Impact of new self-assessment of tax (work started 1997/98). Compliance costs are shifted from the Inland Revenue to taxpayers as a whole, especially business. Compliance costs: £200m.

– Impact of national minimum wage, started 1 April 1999. Compliance costs: £2.8bn.

From 1 May 1999 to 30 April 2000

– European parental leave directive, assuming fully implemented. Additional annual cost: £200m.

– Cost to business of implementing the working family tax credit, starting April 2000. Additional annual cost: £100m.

– Additional rights for employees to claim amounts from the Employment Tribunal on unfair dismissal. Additional annual cost: £300m.

– Cost to business of dealing with corporation tax self-assessment, starting for accounting periods ending after 30.6.99, including the cost to some companies having to make payments on account. Additional annual cost: £800m.

Future major costs expected in the medium term

– EU recycling directive.

– EU workers’ consultation directive.

– Extension of the EU working time directive to transport workers.

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