Examination of witnesses
Martin McTague, Mark Brownridge, John Foster, Adam Marshall, Irene Graham, Ian Cass, Professor John Wilson, Rob Vivian, Philip Salter and Simon Hansford.
Q1 The Chairman: Good morning. Welcome. Thanks very much for coming. This is a public session, so do not say anything you would not wish to read in the newspapers. That is not to say that your every word will be avidly followed, but this is on the public record.
During our varied assessments of the different impacts of Brexit, we find that almost everywhere people are concerned about the impact on small and medium businesses, so we thought we would try to bring together a number of people who either represent or have an expert interest in small businesses, to see how Brexit is going so far and what they anticipate in the future. It is a wide agenda.
As an opening, I would like you to give us your overall assessment of where you are as the small business sector, or the particular dimension of the small business sector that you are here to represent. We have some questions, but feel free to speak for two or three minutes on your general impressions. We will go round the table from left to right. If anybody feels they have failed to mention anything, they will have further time in response to questions from us. Introduce yourselves and set out your general assessment of where we are, how the Government are dealing with it, how they relate to small businesses in particular, and where you see the problems and opportunities in the future.
Martin McTague: I am from the Federation of Small Businesses. The starting point is transition. We were extremely nervous about the prospect of that not being delivered, and we got very close to recommending a mitigation approach to our members and the small business community in general. Most small businesses are not following the blow-by-blow process of the negotiation, and they are traditionally very ill prepared for this kind of major change in their trading environment.
Of the roughly 20% that export, more than 90% trade almost exclusively with the EU. They have no previous experience of border problems or of any kind of friction dealing across the EU. They have always treated access to EU talent as something akin to finding local labour. Most small businesses have recruited the labour they need, regardless of its origins in the EU. Many of them will struggle, especially with mid‑skills. The assumption is that the problem will be a shortage of either brain surgeons or fruit pickers. For us, the much more serious problem is mid‑skills: technicians, engineers and care workers.
Then there is the problem of how migration will take place after we exit, and the potential bureaucratic barriers that will be in place: in particular, how business owners can travel to the EU to do business and the other way round, and how EU nationals currently running successful businesses in the UK can carry on doing business. The Windrush problems have unnerved a lot of people who may have considered that to be a settled issue.
We did a lot of work on the impact of structural funds on small businesses. There are hotspots around the country where it is a much more significant issue, but, broadly speaking, the impact on business support will be quite severe. The Government have made the right noises about what they are going to do to replace those funds, but at the moment it is still vague.
Rob Vivian: I own a technology reseller business based in the south-west. We are a small business. I was invited here as a result of our commentary on the impact of the Brexit vote on how we have been trading over the last couple of years. We have noticed three key areas. The first is rising costs from our suppliers. A lot of the equipment we were sourcing was from the EU, predominantly Germany, and once the result of the referendum was announced we saw a very sharp increase in costs over a period of six or seven months. That has now plateaued. It drove us to look at the suppliers we were using. We switched suppliers and products to try to keep ourselves competitive.
The other thing we noticed was a slowdown in the growth of our customers. We are a service provider. The simplest way to describe it is that we send out an invoice based on how much people use us each month. We had seen very good growth over the previous six to seven years in our customer base, and that was helping to fuel our growth. Over the last 18 months, we have noticed that that has plateaued. It is not restricted to industry sectors or verticals; it seems to be across the board with our customer base.
The third area where we have been challenged is that our customers are becoming much more cost conscious. We were seeing procurement that I would describe as best value from clients, where they looked to challenge technology to try to enrich their businesses. The predominant message we now get from our clients is that it is all about cost. As a business, we very much have to adapt our strategy.
We have made some changes in the last 12 months. We have trimmed our sails a bit on staff members, and looked at our internal processes and the products we sell. As a small business, we are fortunate in having the ability to adapt quickly to that environment, because it has changed quite rapidly, and I am extremely positive about change. Change in any market can be a force for good, and small businesses are quite well structured and set up to adapt to that and be successful. The wider impact on larger businesses is not really my area; SMEs are where I tend to function.
Philip Salter: I am the founder of the Entrepreneurs Network. We are a think tank based just around the corner. Our constituent entrepreneurs, of which we have about 10,000 in our network, are mostly fast-growing companies and start-ups with ambitions to grow.
The initial reaction to Brexit and what was going on was one of abject horror among quite a lot of the companies. Since then, there has been a will to carry on and a certain amount of resilience, but also a certain amount of uncertainty, which is obviously embedded in the negotiation process, which they look to be resolved as quickly as possible.
Ultimately, there are undeniable challenges with Brexit. The gravity model of trade is such that at the macro level it will affect all businesses. The dichotomy between small and large matters at the micro level; at the larger level, on net, it will impact on all businesses to one degree or another. It throws up certain challenges for entrepreneurs specifically. From a lot of the research we have done, we see that the critical issue for entrepreneurs in our network, which are fast growth rather than smaller businesses as such, is visas and access to talent. The current visa system is very complex for getting in international employees. For the EU, it is obviously very straightforward, and whatever replaces it will be critical.
On regulation, there are potential positives. I guess we will get into the opportunities with things like the FCA’s work on regulatory sandboxes. I think we can lead the way in certain areas.
That ties into the next point, which you bring up in some of your questions, about what the Government should be doing. Some of it is obviously constant updating so that businesses know as much as possible, but there are limits. They should also be distracting businesses to some degree and giving them things to get excited about. Part of that could be offering a positive view on visas and access to talent. Part of it could be about ensuring that there is funding, especially with the EIB stuff, which I am sure we will get on to. It is a mixed bag so far, but the Government need to step up and distract entrepreneurs with some more exciting schemes.
Simon Hansford: I am the chief executive of UKCloud. We are a British SME cloud provider purely to the UK public sector. Many of the digital services that we have all used in UK government are hosted on our platform. Last year, we were Britain’s fastest-growing technology company according to the Sunday Times Tech Track, and the third-fastest growing technology company in Europe according to Deloitte.
There are three points that I hope we can discuss or make to you today. First, small and mid-sized businesses find it hard to engage with government and be listened to by them. I am delighted to be invited today because, frankly, it is very hard to engage and get our voice heard. Secondly, the divergence of data and legal regulation will particularly harm small businesses, as will our inability to access the EU talent pool. Small businesses will be disproportionately disadvantaged.
Finally, there is an amazing opportunity, which I fear the Government will miss, to help cultivate the British technology industry through public procurement. There is an amazing opportunity in the coming period to help British industry by using social value to place contracts with small British businesses, in the same way as the French, the Germans and the US today positively discriminate for their incumbent providers.
Irene Graham: I am the CEO of the ScaleUp Institute, which is a not-for-profit organisation set up by the private sector. Our mission is to make sure that the UK becomes the best place in the world to scale and grow a business and not just start one. That is important, because for many years we have lagged behind the rest of the world in that. The OECD ranks us in 13th place in growing a business, yet third in starting one, so we need to redress that balance.
To pick up some of the themes mentioned by Rob and Simon, there are about 35,000 businesses growing fast across all sectors and geographies of the economy. They are very innovative, international and productive. We estimate that they create about 3,000 jobs a week, so they add real value to the UK economy and the export agenda, but they have barriers to break down.
As we reflect on Brexit today, we are not facing new challenges in scaling up; they predate Brexit. The challenges that scaleup businesses have faced for many years are very well articulated in the 2014 Scale-up report on UK Economic Growth: getting quick and effective access to talent, both home-grown and international; building leadership capacity; access to markets; procurement, whether public procurement, corporate procurement in collaboration or the international marketplace, where they are keen to do more; access to finance and infrastructure; and, for finance in particular, access to patient risk capital.
Scaleup businesses are getting on with business. They are confident in their own ability to grow and have high expectation of further growth this year. The majority of them export, and they want to do more in the export markets. The EU and the US are particular markets for those businesses, but they are also expanding into Asia, Africa and the Middle East, where there are big opportunities for us. They do not, however, consider that the UK, across the public and private sectors, has sufficiently aligned resources and support for their needs, and there is growing sentiment at the moment that the UK may become a harder place to grow business.
What does that take us on to as we negotiate what have been challenges for us anyway, and as we approach Brexit? What do we think is going to be important for the Government and the private sector to do? First, it is really important that we maintain confidence, and build on the existing policies that have added to our being third in the world for start-ups. It is very important that we maintain EIS, SEIS and the various tax incentives or infrastructures that we have built. Next, we must implement the industrial strategy and the patient capital review effectively. They are welcome initiatives from the Government. We have a scale‑up task force and a Minister to champion scale-ups. Those things need to be driven forward.
At the moment, the Government are looking at their export strategy. That has to be right. It has to be aligned with resources for scale‑ups, making better use of data held in government so that we can align resources at a local level to businesses and make it easier to navigate into government support initiatives, whether Innovate UK or others. That will be important overall.
We should recognise that the world is not standing still. To pick up Philip’s point about sandboxes, when I speak to businesses, they say that one of the reasons they enjoy being in the UK and growing in the UK is that we have been innovative. Initiatives such as sandboxes and some of the tax regimes we have in place for growing businesses have been very effective, and we need to make sure that we continue that innovation and to be focused on that.
The Chairman: Could you spell out the sandbox concept?
Irene Graham: Basically, it is an enabler for growing businesses and innovators, or those that are established but want to bring new services to the marketplace. The FCA has a stand-alone unit looking at how to build that collaborative environment quicker and more effectively, to bring products to market more effectively and to tackle regulatory issues that might be faced by growing businesses. We can send more detail on that separately.
Adam Marshall: I represent the chamber of commerce network around the UK. We have 53 chambers of commerce with 75,000 businesses in membership, which employ about 6 million people between them, so it is a significant chunk of the UK private sector.
Focusing on the SMEs in that membership, we have a third, a third and a third. A third are proactively looking at Brexit and what they may need to do about it; a third are watching and waiting; and another third are doing absolutely nothing, either because they think it does not affect them in any way, shape or form, or because they think it has already happened. The final third probably has a fairly significant information gap. Those who are watching and waiting tend to have good reasons for doing so. They tend to say, “I can’t commit people, resources or capital to deal with something until I know what I am going to be changing for”. The third who are acting right now are those who would say they are directly affected; they are in supply chains or are affected by potential rule changes or divergences, and need to put contingencies in place now.
I differentiate the impact on SMEs to date from the implications to come. Impacts to date have been two. The first is the lower value of sterling since the referendum. For most SMEs, the single biggest thing to have happened to them has been currency fluctuation and uncertainty. In the political debate, that often passes less noticed when people are talking about institutions, structures and regulations, but currency fluctuation and uncertainty has been a major issue.
The other impact has already been alluded to by several of my colleagues: filling skills gaps in businesses. Many SMEs that have used European labour in the past are now not finding the candidates they need to fill vacant roles. Of course, they try first at home and then go to the European market, but they say it is harder and harder because people are less inclined to come here. That is related to the sterling question as well, because of remittances.
As regards implications to come, there are three main areas where we are focusing our attention. One is borders and the shipment of goods. Martin already mentioned that many SMEs have no experience of handling customs procedures. By way of background, chambers of commerce facilitated £22 billion-worth of UK goods across borders last year alone, so we have some experience of it and people who are skilled in it. We are trying to build a support network so that we can help SMEs deal with some of the complexities when we are more certain about what the final customs arrangements are to be.
The second area where we think big implications are to come for SMEs has to do with tax questions, VAT in particular, whether import VAT for those with goods coming in or VAT for service businesses that might have to register in every EU country where they want to do business in future. VAT is an underreported area but one of huge import.
The final implication, which colleagues have mentioned too, is the follow‑on or transition away from EU funding programmes. Many SMEs have had some sort of engagement with those programmes over time, whether direct or indirect, and understanding what the UK Government’s replacement is to be will be a big issue.
For a lot of SMEs, the Brexit debate is happening at 35,000 feet; it is not happening at the level of practicalities. We maintain a list of dozens and dozens of very practical questions, such as the VAT point I raised earlier and many others, and we will be holding the Government to account on whether those questions have answers at the end of the negotiation process, because that will determine whether SMEs can succeed or not. It is not about the institutional structures or the wrapper within which you put the final result; it is about those practicalities.
There needs to be constant engagement with the representatives of SMEs and with SMEs themselves during this process, and we think the Government could do better at creating structures for that engagement. Our big competitors around the world are very good. When they go into trade negotiations, they have businesses either in the next room or at the end of a telephone line, and they say, “Here’s something coming out of the negotiation. What do you think?” They can flag it if there is a problem. We do not have those structures yet, and we need them.
The final thing we need to do is to focus on the fundamentals. Colleagues round the table have said that problems existed long before Brexit. Whatever the nature of the Brexit deal, if you have a poor mobile phone signal, poor broadband, potholed roads, blocked-up ports and an inability to settle your apprenticeship and training system so that people get the skills they need, the Brexit deal will not matter, because you will not have fixed the fundamentals at home. Much more attention on the domestic business environment will be needed to help SMEs get through this process.
The Chairman: Can I pick up the point about structures for sounding out and getting feedback on the negotiations? Is none of that happening for small businesses, or is it happening but not widely known?
Adam Marshall: Those of us who are business representative organisations are being engaged well at ministerial level. The question arises when you get into the detail of some of the issues. I mentioned VAT as an example. The president of my chamber in south Wales is a VAT expert. That is what she does in her business. She said that she would be perfectly happy to be on call to help HMRC and DExEU when they go into talks about VAT, but no one is asking for that kind of business input at the moment. That is the thing we need to connect.
Professor John Wilson: I am a professor of banking finance at the University of St Andrews. In the School of Management at St Andrews, we have a centre for responsible banking and finance, of which I am the director. A particular interest of the centre is to examine economic and financial issues that face UK SMEs. The reason I am here today is that I and my colleagues Ross Brown, who is also at St Andrews, and José Liñares-Zegarra, who is based at the University of Essex, have been investigating some of the ongoing challenges that Brexit has been throwing up for SMEs and how they are likely to impact and play out. I will come back to that in a second or two.
We all know that SMEs are fundamentally important to the UK economy, accounting for more than 99% of firms and over 60% of private sector employment. Since 2010, they have accounted for a disproportionate share of increased employment in the private sector, amounting to 73% of all new jobs created. The sorts of challenges SMEs face with regard to regulation, taxation, late payment, access to appropriate labour, access to financial advice and appropriate forms of funding, and competition, have already been very well articulated.
The vote to leave in June 2016 has the potential to augment and change those challenges in quite fundamental ways. At one level, we heard from Rob that SMEs can be very nimble and react to change very quickly, perhaps even quicker than large corporates. That is true, but at the same time we heard that sometimes SMEs lack the financial and human resources to do contingency and preparatory planning for unforeseen big events such as Brexit. Overall, the extent to which Brexit is likely to impact on SMEs will depend on the fundamental deal that is ultimately struck between the EU and the UK Government, and, for the sorts of SMEs we are looking at, on where they are located in the country and on their business models and attitudes to internationalisation.
My colleagues Ross Brown and José Liñares-Zegarra and I recently conducted some research. I will speak to some of the details later if there is an opportunity. That research looked at the immediate aftermath of the referendum result in 2016. The Department for Business, Energy and Industrial Strategy, as part of a longitudinal small business survey, asked a very large sample of SMEs, which was representative of the population as a whole, whether they thought Brexit was going to be a fundamental obstacle to the future success of their business.
We used that information to try to interrogate which SMEs, if any, were likely to be affected by Brexit, and, if so, the implications of that for their future strategic intentions with regard to innovation, growth, applying for external funding, exporting and so on. We found that only 16% of SMEs in the sample were concerned about Brexit as a significant business obstacle to their future business. Although that is quite a small percentage proportion, put into context, it would account for about 900,000 SMEs throughout the UK purporting to have grave concerns about Brexit being an obstacle to their future business success.
Moreover, when we started to drill down, we found that different SMEs are concerned about Brexit. For example, larger SMEs are more concerned about Brexit; younger firms are more concerned; in different parts of the country, firms have more concerns than in others; and in different industries, firms are more concerned than in others. In the orientation of businesses, those that purport to be innovative or export oriented seem to be very concerned about Brexit.
Why does all of that matter? To look at how it plays through, we asked SMEs, “If you perceive Brexit as an obstacle to your future business success, what does that mean for strategic decisions that you are likely to make in the future—for example, to apply for external finance, engage in innovation and increase capital investment?” We found that in fact it does matter. The SMEs that see Brexit as an obstacle to their future success also say that in the future they are likely to apply for less external finance, and likely to invest less, innovate less and export less.
Those are just perceptions of what might happen, but if they were to come to fruition, we argue that they would have a big impact on real economic outcomes in the UK economy, not just in the SME sector. It is concerning from a productivity perspective, because if innovative and export-oriented firms, and those that aim to grow, are the ones most affected by Brexit, the whole Brexit challenge facing SMEs could have really big implications for productivity in the UK.
The research is ongoing. We feel that there is a real need to try to have stronger and more in-depth academic research to understand the impact of Brexit on the traditional challenges that we have heard normally face SMEs, and, following that, to think about what that means for the strategic intentions of SMEs over time and, in turn, for the real economy.
Lord Wigley: When you have completed your work, might it be possible for us to have access to it?
Professor John Wilson: Certainly.
Mark Brownridge: I am director-general of the EIS Association. We are the trade body for the enterprise investment scheme and the seed enterprise investment scheme. EIS is a government-backed venture capital scheme that helps SMEs, start-ups and scale-ups to raise equity finance from private individuals. It has been going since 1994, and was a Conservative idea at the time. Since then, it has helped 26,000 companies not only to start and grow their business, but to develop it. The scheme has raised about £16 billion in that time. It is a very successful scheme that has helped a lot of small companies to get up and running.
Over the last few years, particularly as the banks have pulled away from the sector, venture capital has helped to fill a niche that allows the necessary capital to reach some of the least developed and most uncertain ideas. Those are perhaps technology-based investments, medtech, life sciences and those kinds of areas. Banks have pulled out from investing in those areas; they do not have the risk appetite for it. Venture capital comes in and helps companies to get up and running. Without that money, those companies might not be able to get started.
As the banks have pulled out over the years, there are probably two main areas where there is a funding gap at the moment. The first is pre-seed. The companies might be university spin-outs or life sciences or medtech companies and are pretty much a concept or idea at that stage. They might have a long runway to profit, or even revenue, so they find it hard to get funding to get started and get their ideas into operation.
The second area tends to come post-EIS investment. EIS has a lifetime limit of £12 million. When a company has started up, begun to grow and become successful, it needs the next big round of funding, probably from £12 million to about £20 million. There are not too many pools of capital in the UK that companies can go to at that point. That is when we tend to lose them to the US, China or Japan. I suppose the good thing about Brexit is that we are pretty much ahead of the EU on that front, but we lose a lot of IP, a lot of our best people and a lot of tax revenue because valuations and more pools of capital exist in China, Japan and particularly the US.
What does that mean in relation to Brexit? One of the best things about the EU has been the European Investment Fund. The EIF has helped to bring about £400 million every year to UK SMEs. If we leave the EU, there is a good chance that we will lose that money, so it is great that the Government have committed investment of £2.5 billion through the British Business Bank, which Irene alluded to earlier. We have some concerns about how that will be divvied up and where the money will go. Traditionally, a lot of money has gone to the London region, and other regions in the UK have been left behind. We hope that the midlands engine investment fund and northern powerhouse funds will see some of that money and help to grow businesses outside London.
Overall, we are pretty positive about Brexit. Most of the members we speak to still see a lot of inward investment. There was £8.2 billion-worth of inward foreign investment to UK SMEs last year, which was double the figure in 2016 and seems to suggest that the UK can be a mecca for entrepreneurial activity for technology businesses. These days, most of the funding in the EIS is in technology, growth and innovation, so it is pretty much aligned to what the Government seem to be trying to do with the patient capital review, the Budget and the industrial strategy.
Ian Cass: I am managing director of the Forum of Private Business. We have just over 30,000 member companies, most of which are of a size where they employ people, but they tend not to have their own HR and legal resources behind them.
For us, one of the main issues with government is that, just after the Brexit vote, about 84% of members said that the quality of information they received about what Brexit would mean for their business was atrocious. Most of the arguments were in soundbites and were un-nuanced. Members felt that they were not given the right information at the start. That survey figure has gone up; 87% feel that on the issues, opportunities, scenarios and possibilities, the quality of information from government is still very poor. It is not there.
It is not only that the information is not there; I question the ability to target SMEs. SMEs are a big sector, and very often government seems to think that SMEs are like big businesses but smaller. They are not. They have different resources and they work in different ways; there might be corner shops, but there are also world-beating businesses. The means for targeting and differentiating in the SME market are poor.
Adam and I were talking earlier. If you have some kind of skin in the game, you are probably doing something about Brexit at the moment. If you are already exporting, are involved in the supply chain and relying on labour that you traditionally got from Europe, and if currency has affected your suppliers, you are doing something. My big concern is that a hell of a lot of businesses are not, either deliberately or because they just do not know what to do.
I keep hearing about businesses seeking certainty. If we dig deeper, for some SMEs certainty means that they need to know what is going on so that they can deal with it. For a lot of businesses, their idea of certainty is, “Let’s just get to the ‘it’. Can you do what you are going to do quickly so I know what I’m dealing with, and then I’m relying on the fact that I will be able to deal with it?” I am not sure whether that is a good place for us to be.
It is not all bleak. Opportunity-wise, we have noticed that an awful lot of members are interested in the whole export piece now. It has raised questions such as, “We’re not exporting. Could we be?” Martin said that only a small number of them are, but one healthy side of this is that a lot of businesses are starting to say, “Could we export? If so, who would we export with?” That is a positive conversation. That probably sums up my main piece without replicating what everybody else has said.
John Foster: I am the director of campaigns at the CBI. SMEs are an incredibly important part of the fabric of the CBI. Our business parliament of regional councils, which sets the mandate for our policy direction, consists of 800 businesses, the overwhelming majority of which are SMEs; 80% are outside the FTSE 350. Interestingly, one of the most common messages from our larger businesses is that they feel they are only as strong as their weakest link, which, with the ongoing negotiations, is particularly pertinent.
Just before Christmas, we conducted a survey on business preparations. It found that 47% of SMEs, or one in two, had done some kind of scenario planning about Brexit. I echo Adam’s comments that, for the majority, the scenario planning would be a watching brief. In that survey, 87% of SMEs said they simply did not have enough information to make effective business decisions.
On the policy implications, there is a lot of consistency with what colleagues have already said, but for the CBI there are three areas in particular. The first is trade, and it is exactly as Martin described: small businesses exporting to the EU and dipping their toe into the water. Of the businesses that export, 78% do so to the European Union and 96% of those are SMEs. A fairly hard-headed economic approach tells you that what is necessary is some form of customs union, alongside a deep relationship with the single market, both to avoid a hard border in Northern Ireland and to secure the Government’s ambition for frictionless trade.
The second area is regulation and rules. SMEs agree that the Government’s objective of frictionless trade is the right one. A really interesting piece of research by Oliver Wyman found that, of the potential barriers to trade, 40% would come from our customs relationship and 60% would come from our relationship with regulation and rules. For SMEs, any change to the rules is hugely significant; it means a disproportionate amount of senior management leadership time spent managing that change and not investing and growing their business.
The final area is people. Small and medium-sized businesses in particular rely on access to EU migrants to plug the gaps in the UK skills market. For example, we have a number of highly successful AI machine-learning start‑ups in the UK. They want to recruit from the UK, but if they cannot they look to the European Union. Simply replicating the tier 2 non‑EEA migration system would be deeply burdensome for SMEs, so it is really important that the Government seek to negotiate a preferential migration system with the European Union.
Q2 Lord Aberdare: I have a broad question but I am rather nervous about asking a question that all 10 of you might want to answer, especially as you have given us quite a lot of answers to some of the points already, so I will focus on the information point that Adam Marshall and Ian Cass raised, as did others. What are your thoughts on how it could be addressed? How could better information be made available to SMEs in particular, perhaps on an ongoing basis so that it is not just a one-off: “Here’s some information about Brexit. Now go away and do your thing”? Do you have any suggestions about how that could be tackled effectively?
Adam Marshall: Thank you for the question. It is difficult, but I have a very simple answer. Have the Government gone out and asked businesses what they are worried about, in order to formulate the questions they then try to give information about? They need to make it demand-led. Businesses ask me very simple things: “Who can I hire, and how long can they stay in my business? Who do I pay VAT to? Who is going to be my regulator? What standards do I need to follow?”
Those are the questions of real-world business. Unfortunately, a lot of the information that has come out to SMEs has been, “The Government have negotiated a transition period”. The response from SMEs, particularly those that are unsophisticated, is, “So what? I don’t know what that means for my practical questions”. It is about making whatever information comes out from the square mile around this place as practical and focused as possible. I am not sure whether Ian would agree with me.
Lord Aberdare: You made the point earlier that they needed somebody available to ask the questions. It is very easy with the big companies. They go to the company and cover a huge swathe. With SMEs, they are going to people such as you, the forum and so forth. My impression from what you are saying is that that is not really addressing the diversity of the sector, so how do you do that?
Adam Marshall: It is two-way. There are two points: engagement and information. You want SMEs to be feeding into the negotiations process to ensure that their practical points are answered when you get into the detail. Equally, you want updated information on their key practical questions to come back in the other direction. You want both. Of course, organisations such as ours serve as dissemination points. We do that not just with our own memberships but with non-member businesses as well. That is hugely important; some of the brands around the table are trusted by businesses and, therefore, the information we can put forward is useful. It is a matter of getting the feedback loop right. What I do not want is a civil servant devising the questions and giving the answers to businesses; you want them coming from the businesses themselves.
Ian Cass: I agree entirely. As regards targeting and thinking about who you are speaking to, you should always have the end-user in mind. It can be fairly crude: “One size fits all. Here’s an answer for business”. We need to start looking at that. If we are talking to a small manufacturer already trading in Europe, what are the practical things for them? It is about information, but it is also thinking about the state aid and starting to segment and target in a more sophisticated manner, which business is pretty good at. Maybe government could learn a bit from that and get the right practical answers out there.
Philip Salter: As regards the process for contacting businesses, the Institute of Directors put together a policy paper that we called A Boost for British Businesses about what should be done despite Brexit, and what kind of policies would engender confidence. One thing that came up was about HMRC. Obviously, HMRC contacts businesses regularly. There would have to be stringent guidelines on what it can suggest, and the other organisations around the table that it can push people towards, but that avenue might be explored for giving people basic information, so that they can ask the right questions and get the right answers from other organisations.
John Foster: On the quality of the information available, to which both Adam and Simon alluded, the CBI survey found that, first, 32% of businesses said the information was too complex for them to understand and use, and transition is a perfect example of that. Secondly, 65% said that there were too many scenarios for them to plan for, whether that be people, customs or VAT.
As to what the Government can do, a really intensive period of business readiness and preparation would be welcome. The Government have tried to take steps. In particular, DExEU has tried to provide business with pamphlets and newsletters, and they are certainly welcome. To echo Simon’s point, a second suggestion would be a kind of streamlined process, which DExEU should lead, on how small businesses can feed in. It is incredibly burdensome if small businesses have to keep having the same conversation over and over again.
With that in mind, some kind of online portal, hotline or one-stop place where small businesses can get questions answered quickly would be incredibly helpful. There is merit in the Government continuing to publish more position papers. The raft of papers we saw last summer was incredibly helpful. There are position papers on energy. Dare I say that an immigration White Paper would be helpful in giving businesses more certainty so that they can start to take steps to plan?
Martin McTague: We have 160,000 members across the UK. We found that a lot of the early debate on this was very ideological, so we decided that we would focus on practical solutions that appealed to the largest number of small businesses. We did a lot of research. Despite the fact that lots of people were taking knee-jerk positions in the early stages, we made sure that what we said was supported by the largest group of small businesses.
We have continued that process. We are now focusing on the situation in Northern Ireland because we see that as the main pressure point. We are concentrating on what small businesses on both sides of the border want and how they would best operate, and trying to provide that information to government. In the end, it can be a bit of a debate of the deaf. They are not listening, but at least we are giving them information as part of the process.
The Chairman: Those answers have been from representative organisations, so perhaps I could ask a question of Rob Vivian and Simon Hansford. In your particular company, how much of that small business experience is feeding through to you, and how much are you having to pick up from the newspapers or whatever?
Rob Vivian: That last comment about picking it up from the newspapers is probably the most pertinent. The information being fed through to us is scant. We are members of about three chambers of commerce, but we are not getting any real information. We are getting what I consider to be an element of scaremongering, which is basically the media. We have a very narrow focus as a business. We are very focused on what we are trying to achieve and what we are doing. I have heard some ideas here, and I think it would be very useful if small businesses were able to pose questions directly.
As I understand it, at the moment we are in a negotiating process, which means that this is not the point where we will end up, so you cannot give business a definitive answer as to what the world will look like in a year or five years. It would be helpful for companies such as ours to have the ability to ask those questions, and to have some information back that says what it could look like if we achieve our main objectives in the negotiation, and what the scenarios and impacts for our businesses would be if we got 50% of our objectives, or none of them. If it was possible to arrive at that point, it would be hugely valuable to small companies.
From some of the comments I have heard here, there might almost be apathy in an element of small businesses. The negotiations are taking place; they do not really understand what is being said, or what is going to happen, so they will just concentrate on running the business and worry about it when it hits them. If there was some way of gaining insight into what might be the outcome of negotiations in different scenarios, it would be very useful.
Simon Hansford: I am part of Adam’s third that cares passionately about the impact of Brexit and spends a lot of time thinking about it. To pick up Rob’s point that there is not much information because, frankly, government does not know the answer today, I am probably more concerned about whether, when that information is available, our civil servants and departments are structured such that they can get the information to us rapidly in a comprehensive, co‑ordinated way. I certainly agree that HMRC is the one department that we are regularly in communication with, or that we receive communications from. That would seem a good point, but are government prepared for communicating with us once it knows the answers?
Ian Cass: Nobody knows what the outcome will be. Adam and I were talking about this earlier. We have to get businesses to start asking the right questions. You do not have to tell them all the answers, but you need to tell them what they should be thinking about and triggering that. That would be a great piece of information to have. We are not asking for somebody to give more information.
We are all doing our very best with our members, but the fact that they have joined us would suggest that they are the more proactive businesses anyway. With more than 5 million SMEs out there, if we represent 600,000 or 700,000, what is happening to the rest? They are in a void. They are not hearing from us, whatever we are talking about. It is very important to remember that.
Adam Marshall: We have what we call a Brexit health check, a series of open-ended questions that we disseminate to businesses, through our chambers, on people, trade, contracts and taxation. It assumes nothing about the endgame of the negotiations; it is just trying to do what Ian is talking about, which is to formulate for businesses questions they may wish to ask themselves, so that they can be ready when those scenarios become available. I would be happy to make that available to the Committee.
Lord Aberdare: Rob Vivian’s experience is very practical. What happens if your supplier costs are rising? What happens if you find your customers are peeling off? There are some very good answers there. That is probably what you are doing with your questions, is it not?
Adam Marshall: Yes.
Q3 Lord German: That neatly follows Ian’s point about the level of understanding in order to be able to ask the right questions. The headline of what I am trying to find out is that we have had one third, one third and one third; we have had 16% and we had a different figure from somewhere else. The overarching question is about the level of understanding of what the outcomes could be, given the potential hierarchy of scenarios, of being in a single market and a customs union or having what is called frictionless trade. Frictionless trade, as defined by the Prime Minister, means HMRC inspections of every company. That is how it exists at the moment; “trusted trader” means that you get inspected and there is a whole company aspect. Is uncertainty the new normal? If that is the case, how do you answer Ian’s question? How do people find the right questions to ask?
Martin McTague: Our role as an organisation is to fill the role that a lot of John’s member companies would have. They would have somebody who was a government relations director doing scenario planning and possible outcomes, based on the various negotiated descriptions you have come up with. We are trying to give the best possible advice to a large group of SMEs, and we are also making sure that it is publicly available. That is the best we can do. There are so many small businesses that are ill informed.
What worries me, and it echoes what John said earlier, is that the most common reaction we get from people is, “If this goes badly, I am scaling back. I am cutting back my investment; I am not hiring extra people”. Their typical time scenario for making such decisions is about six months from when they know it is real. That is a typical SME time scenario. They decide to scale back in most cases, unless there is a very clear indication that things have gone well.
Adam Marshall: You asked about different institutions as potential outcomes, such as the single market and the customs union. Every bit of research we have done, both quantitative and qualitative, reveals that there is very limited understanding among SMEs of what any of those concepts mean. That debate tends to go right over people’s heads, or they answer reflexively based on their vote in the referendum, or their ideological starting point as an individual, rather than how it would work for their business.
I fear that two different debates are going on. One is at the 35,000-foot level where we are talking about collections of institutions, and one is at the everyday business level, where the helicopter is skimming the trees and you are trying to firefight and deal with the basics of running a business. Until we break down what those big labels mean in very practical terms, that level of understanding is not likely to rise.
Lord German: Whose job is that?
Adam Marshall: The Government, having set out their position on what they want to achieve, need to link their preferred outcome to those practical questions. They have a responsibility to do that. All of us sitting here today who have communication responsibilities need to do the same. Many of our organisations have not taken positions on the end state; others have. Obviously, we have to work within those constraints, but we can certainly set out some of the detail involved.
Lord German: I go back to my point. Is uncertainty the new normal? If your helicopter is flying over the top of the trees and you are interpreting the three or four general scenarios you could possibly have, how are you answering the question for people in order for them to understand better what those choices will mean for them?
Adam Marshall: I think uncertainty is the new normal. Optimistically, if there was a group of businesses placed to deal with uncertainty in a more agile respect, it would be SMEs, because they are not supertankers that need a big turning radius. That is an optimistic point. As I said in my previous answer, we are setting out for them the very basic questions: “Have you considered in your business what it would mean if the flow of people from Europe was to decrease in future? Have you considered the implications for your business if cross-border trade contracts need to be rewritten?” You cannot ask the questions in any more detail than that, but you can at least get the thought process going, and that is the best thing we can do right now.
John Foster: Adam is absolutely right, but the first point needs to be for SMEs to work out what their exposure is to Brexit. There are two slightly counterintuitive points. The first is that for SMEs it could potentially be easier. We have heard a couple of anecdotal stories. A small manufacturer in Wales who employs 10 people said, “I can now identify the one area that will affect me, which is people. I can’t split up my operations because I am a small business. I can now prepare for that”.
Interestingly, large businesses in our survey found that it was more difficult for them to prepare because of the sheer number of scenarios, whereas for SMEs that are being affected right now, it is probably less about tariffs and regulations than about relationships. It is a large supplier withdrawing or increasing their prices, or customers struggling because the SME has to put up its prices. There is relatively little they can do about that right now. As a principal starting point, our advice to all businesses, but in particular to SMEs, is, “Work out what your exposure is to Brexit and, once you have that, you can plan accordingly regardless of the myriad scenarios currently being debated”.
Irene Graham: Building on the points made in the earlier question and in this one, what are the practical solutions? If I need to hire people from overseas, how do we make sure that is as fast-tracked as possible? How does it operate for fast-growing businesses and those needing technical skills? If it is trade contracts, large businesses have lots of advisers and legal experts. How do the Government help smaller businesses and scaling businesses on the contractual arrangements? It is about that help, and how we engage across all the locally based resources that work with those businesses, to make sure that they are aligned to their needs.
Simon Hansford: I absolutely agree. Today, uncertainty is the new norm, but I cannot see that it is in any of our interests to allow that state to continue. It is not in government’s or industry’s interest to do that. Business is about confidence. If we have uncertainty, clearly we do not have confidence. It is very hard as an entrepreneur to motivate oneself to get out of bed and work as hard as we do if we are not confident of outcomes.
It will be hard to get funded. Funding is hard enough today and, if you do not have certainty for your plan, it will be even harder. Most of all, Britain will suffer because our European competitors, our global competitors, do not have that uncertainty. They can plough ahead and take market share where we are battling hard every day to get that.
Philip Salter: I echo that. It is exactly right. A Bank of England working paper that just came out gives firm‑level analysis on the potential impact of Brexit, and it is negative. One of the misconceptions is that, because firms are small, they can adapt quickly. That is true, but if there is some form of economic shock, the impact for small and medium firms will be as much as for large firms. Small businesses will be able to recover quicker, and will be the drivers of any kind of growth after that, as we see in economic shocks, but the actual impact of some form of downturn that may happen as a result of Brexit will be on SMEs as much as on large businesses.
The Chairman: Baroness Donaghy, we have partly covered your point.
Q4 Baroness Donaghy: My question was about engaging with government and the extent to which you are confident that your views will be incorporated into the Government’s negotiating position. There were some common themes across the piece. The impression I have from your statements is that the Government are just considering business as a whole, and not the extra requirements of small and medium‑sized enterprises. Would anybody like to add to what they have already said about engagement with government and how confident you are that they might have incorporated your views into their negotiating strategy?
Martin McTague: Adam and I sit on a business group of five major business organisations. I am pretty confident that they are aware of the differences between small businesses, and, if they are not aware, certainly lots of MPs are, because we make sure that they are aware of those differences. It is a battle, though, because big corporate entities have a louder voice to government, and more influence generally, but we are certainly making sure that the Government are aware of the implications of a lot of these decisions.
Irene Graham: There is the SME advisory group, and the scale-up task force is continuing, so we are able to access officials and senior Ministers. There have been a lot of round‑table meetings with businesses around the country. It is very integrated. We talk about larger businesses and smaller businesses, but they have very integrated supply chains.
A point was made about that interconnection. There is a role for larger businesses, and those that have supply chains, to work with SMEs and the supply chain in relation to Brexit, to make sure that there is an aligned engagement strategy. We see that occurring. There is a desire to make sure that input has been taken from the SME and scale‑up community.
Adam Marshall: Just as you have to differentiate within businesses and segment the business community, you have to segment government in its engagement with us. For example, we took members of the Migration Advisory Committee to 20 of our chamber business communities around the UK for the recent work they have been doing to try to understand in granular detail the needs of a post‑Brexit migration policy. That enabled quite a lot of SMEs, and quite a lot of synthesis of SME points of view and geographic differences, to come to the fore. That kind of forensic work is very important. Other elements of government are working on Brexit‑related issues that will not have done that sort of deep dive into the detail, and that is where I have more concerns. We are working with people at HMRC, because they are trying to understand the things that really concern businesses about Brexit regarding the tax and excise system.
There are forms of engagement that are quite good, but I come back to the point about the difference between engagement of the sort that Martin and I are part of with Ministers and engagement in the formal negotiation process, and being able to influence the blow-by-blow negotiations to some degree, whether that be with the EU or with any other partner in future. That is where we do not have the structure in place. The BCC has recently done some work with the London School of Economics to look at that. Around the world, the best countries establish those structures. They have lots of businesses on call—some large, some small—to feed in their expertise, and their trade policy and their outcomes from negotiations are more agile because of that.
Baroness Donaghy: I like the idea of an expert on VAT having a hotline to HMRC. Obviously, that person will not be representative in any democratic sense, but it makes sense to me that those networks should be established. How confident are you that the Government are maximising that expertise?
Adam Marshall: It is a work in progress and there is more to do.
The Chairman: Part of it is timing. Although the negotiations appear to be interminable, we are still only in the first phase, and serious discussions on trade have not yet begun. One of you referred to the fact that other countries have better sounding boxes for negotiating trade negotiations. Are there any international examples that you would like to point us to where smaller businesses as well as the big industrial lobbyists have engaged in trade negotiations?
Martin McTague: The one that stood out for me was the TTIP process, even though it came off the rails at the Brexit stage, or just before it. There was a negotiated small business chapter as part of that. It was quite an important factor in ensuring that the concerns of small business were taken into account, and that the way the agreement worked could be more nuanced. When we visited the US and talked to counterpart organisations and small businesses there and asked them whether they were interested in a trade deal with the UK, I was struck by their reaction. They were more interested in a trade deal with neighbouring countries, such as Mexico and Canada. The usual gravity of trade applied equally there, as it does in Europe.
Ian Cass: I do not mean to take a contrary view, but I am probably going to. John raised the point that 16% of businesses are concerned at the moment. We can pat ourselves on the back that, yes, we are engaging, but I do not think we are engaging with the SME community as well as we should. We are all doing our best, but it worries me that only 16% are expressing any kind of concern. I would expect that figure to be higher. I am sorry, but I do not think the message is getting through as effectively as it could. We are all trying very hard and working together, but there is concern. We should not think everything is fine, we are all talking and it is great. There is an issue.
I go the other way on the certainty idea—sorry. It is change, and change has never been more rapid. Universities are struggling to run computer courses. Academics say that they are teaching students on a four‑year course a computer language and it is dead four years later. Change is the norm now; it is rapid, and technology is driving it, so you are never going to get absolute certainty. You will get parts of it around Brexit, but change is here and the businesses that survive will be those asking, “What is going to happen next?”, not just doing the business day in, day out. They will be the ones thinking about what is coming up next. It is about the quality of the questions they are asking, and, for me, that is what is missing. I am sorry if that goes against a few other people, but I felt I had to say it.
The Chairman: Does anybody want to argue with that?
Professor John Wilson: I would like to add a minor point. In our research as a whole, we found that 16% of SMEs were very concerned about Brexit, but there was a big variation. For the larger companies, the medium‑sized ones with 50 to 249 employees, that figure jumps to nearly 30%, so there is huge variation. We would expect that, given that those firms will be much more internationally exposed.
Simon Hansford: May I go back to the original question? We are very well represented to government by our trade bodies, but direct representation as an SME is close on impossible. The Tech Nation digital Britain report stated that 98.8% of digital companies are SMEs. We in that digital SME world are ill represented in our voice to the Government and find it very hard to have a direct conversation with them. The Digital Economy Advisory Group is an example. In part, it was set up to understand our industry’s concerns around Brexit. It is representative of either absolute start‑ups or very large conglomerates and global businesses, and, quite frankly, as the CEO of an SME, it is very hard, if not impossible, to get a meeting with a senior civil servant, whereas a large global company has almost instant access.
Irene Graham: We are strong advocates for better local relationship management of our fast‑growing businesses, using the growth hub network, and being much more targeted and segmented towards scaleup businesses such as yours, Simon, with a relationship management engagement model that mirrors the private sector.
We talk a lot about trade negotiations at the most significant level between country and country, but the Government are looking at an export strategy now, and there is much more we can do to make sure that trade missions are focused on growing companies. An example is the Mayor of London’s Go to Grow programme, which could be replicated elsewhere. There are really practical things that we can do now about the connection between international opportunities. Many SMEs that export today want to export more, and we should be getting those resources aligned, properly relationship-managed, and giving businesses the opportunities that we see in other markets. We should not lose practical steps for an export strategy that now needs to focus on harnessing resources towards those scaleup and scaling businesses.
Q5 Lord Liddle: We have heard a bit about the kind of new trade opportunities of Brexit. What is your overall impression from your membership? Does it share the Government’s belief that there are large trade opportunities outside the EU that an independent trade policy can give us more opportunity to exploit? That is the first question.
The second question is about the political debate between maximum regulatory alignment with the EU to make trade more frictionless and the opportunities for breaking free by getting rid of cumbersome EU regulation. Where does the small business community stand? Which side of that divide do people come down on?
Martin McTague: As regards non‑EU trade, there was a distinct preference for the US, Australia and China in the responses that we received. Outside that, there was a lot less enthusiasm, as it became more difficult to access markets. I was struck by a conversation people from JLR were having with a DExEU Minister. They were complaining that in Brazil they have 50 people dealing with regulations alone, and they felt ill equipped to deal with it. A lot of small businesses would be singularly ill equipped to deal with that market. That was reflected in a lot of the responses. Their No. 1 preference was the US. That was their preferred market as an alternative to the EU.
About 50% of responses to our inquiries on regulation were that departure from the EU was a real opportunity, and that we could radically change the way we regulate.
Lord Liddle: In what areas do they think the greatest potential lies?
Martin McTague: That is the usual question that comes up. When there are detailed questions about it, most people respond that the problem is the number of regulations, and that complexity and poor enforcement are issues. In the past, when people have asked about a particular regulation, the stock response was, “We’d love to do something about that, but it is an EU regulation, so I am afraid we can’t”. That excuse has gone, so now there will be a lot more searching questions about individual pieces of regulation.
Adam Marshall: On the first point about trade opportunities, we leap immediately to the overarching architecture around them, but the place where we should start is product: do we have products that others want to buy? A lot of our businesses tell me that their No. 1 customer is in the US and their No. 2 customer is in China, and that, although we have never had trade agreements with either of those markets, they can do business there on the strength of the quality of their product.
Business’s natural inclination is not to think about the architecture; it is to think about whether it has a good product that it can then sell in the market. We need to have more discussion about that than necessarily about free‑trade agreements, which have been pushed up into the ether as the be-all and end-all. Very often, they support and enhance business that is already happening between markets rather than cause it to be there in the first place.
The second thing businesses say is that, because they now have a good product, they are interested in the right kind of support. Irene mentioned trade missions earlier. Ministers in other countries, our competitor countries, go on market‑making missions with SMEs; they arrange them six months to a year in advance. They are not there to sign deals and come home with a sheaf of signed deals; they are there to open doors. That sort of commercial diplomacy approach helps a lot of SMEs to get into the market and trade effectively.
That is a non‑answer to your question in a certain sense, but it is an answer in another sense. I am not directly answering the question about trade architecture, but I am saying that there are things that, for many businesses, are more important and deserve more focus in the debate.
On the alignment versus divergence point, an important subset is industrial standards. Many people in these Houses confuse regulation and industrial standards, the latter being voluntarily set by industry. When industries coalesce around them, they are able to get a higher level of market access on the basis of the standard they apply. The UK is currently a major standard setter as part of the pan‑European—not EU, but pan‑European—standard‑setting bodies. We must retain that role in future, otherwise we will be in an army of one caught between two standards superpowers, the EU and the US, with China rising, and our businesses will have to comply with three different sets of standards when they are trying to sell into market, which is just more cost. Keeping our role on standards, and alignment on standards, will be very important.
Irene Graham: To build on those two points briefly, first, it comes down again to segmentation and targeting. Businesses that are growing fast are generally exporters, and they want to do more. It is about the product and it is about then getting access to the market, knowledge of who to sell to, sales capability, and market knowledge, which is where government Ministers in the DIT can now play a much more important role. That is very practical.
On the regulatory point, international regulations and finance also emanate from Basel, so alignment and engagement is very important.
John Foster: My points are similar. It depends on the product. Companies that are already exporting are much more likely to be looking for further opportunities. Collectively, the CBI’s SME base would say that the priority should be a deep, meaningful relationship with the European Union above everything else; secondly, to echo a previous point, there is much more to trade than FTAs.
We can look at the comparison with Germany. It does five and a half times more trade with China than the UK does. The Prime Minister went to China and signed £9 billion‑worth of deals. That is all while we remain in a customs union. German mid‑sized businesses export two and a half times more than UK businesses. There is lots we can be doing, such as closing the export gap, which the DIT should be focusing on, where UKTI did not. The industrial strategy represents a real opportunity to put exporting right at the heart of the vision for the economy. There is more that we can be doing to upskill our commercial expertise across our embassies, for example.
On the regulation point, the CBI recently published a report called Smooth Operations, which looks at the regulatory relationship with the EU across 23 sectors; 18 sectors would prefer either high alignment or a convergence relationship with regulation. That is consistent with our SME members. In two particular sectors they would prefer high alignment, but saw some opportunities for divergence, most notably in agriculture and in hospitality and leisure. In agriculture, it was with things such as the nitrates directive.
For hospitality and leisure, there is a piece of regulation on package holidays that is particularly burdensome for SME bed and breakfasts; if they provide transport for a guest to go to an amusement park, they are then legally liable for everything that happens as part of the trip. There are some examples where divergence in regulation could be beneficial in particular to SMEs.
The Chairman: Could I check that I have the figures right? You said that, of the 23 sectors, 18 were broadly in favour of convergence.
John Foster: Yes, convergence or high alignment. There were another three sectors where stability was the priority. High alignment was preferred but not necessarily immediately.
The Chairman: Thank you very much.
Q6 Lord Wigley: We have had some mention already of EU funding schemes for SMEs. I think Mr McTague and Mr Brownridge touched on them earlier. To what extent are you confident that the schemes for SMEs can be fully replaced by equivalent UK government programmes or possibly by other financing sources?
Irene Graham: I referenced the patient capital review, so let us start there. It was very important that last year the Treasury commissioned the patient capital review and had independent engagement from the investor community, which Sir Damon Buffini led. The movement forward from that were the Budget announcements of additional capital going into the British Business Bank, and that we would look not just at the EIB and the EIF, but at the broader context. As a country, we have long had an issue about releasing institutional capital from UK institutions into growing businesses. China, Japan and others are investing in them. As Mark said, inward investment is very strong, but we need to look at how we release institutional investment, so the review was important.
The recommendations from the review and the intent to implement a patient capital vehicle through the business bank, as well as looking at the EIB and EIF in separate vehicles, is very important. It is critical that that is engaging across the country as we see regional disparity around equity, availability and risk capital availability. The British Business Bank is looking at setting up a relationship structure across the country and looking at the education piece so that businesses know where they can get growth capital. Our view is that that is an important step. We now need to see how it is implemented. It is about the private and public sectors working together.
Lord Wigley: You mentioned regional disparity, which was touched on earlier as well. How do you see a mechanism for overcoming that? If it is not following what appear to be the market opportunities from the activity already there, is there a danger of distortion?
Irene Graham: The Government and the British Business Bank are very alive to that. For example, as you look at which funds you co‑invest through, one mechanism is a requirement that there is regional access and engagement with local businesses in local areas, outside London. There are ways you can achieve that. It is also about selecting the right players to work with to have that regional distribution.
Mark Brownridge: I think there is a way that we can encourage institutional funds, and pension funds in particular, to allocate some of their resources to alternative finance or to SMEs and venture capital. At the moment, the vast majority go into listed companies, to the big funds. Very few allocate funds to venture capital, private equity or SMEs at the lowest level. If there was some way to encourage that kind of investment, it would be a massive help to a lot of small companies.
The second thing that we touched on earlier was the EU state aid rules. In the EIS, for example, there is a lifetime funding limit of £12 million. That is a state aid limit imposed by the EU. We would like to see it extended, to encourage it above and beyond £12 million. As I said earlier, that is where the funding cap exists for a lot of small companies; there are no big, deep pools of capital when you get to that point as a scale‑up company.
I very much agree with the other point about regional disparity. So much of venture capital and private equity is London‑focused and London‑based. We are starting to see that change a bit with the midlands engine investment fund and the northern powerhouse investment fund, which are great initiatives. Hopefully, the British Business Bank can deal out some of that money to different areas and different pockets around the country, because there are growth hubs and LEPs across the country doing great work with great innovators and entrepreneurs. Those guys just need some funding to be able to start up or scale up.
Lord Wigley: You mentioned the state aid rules. Do you see an opportunity now to be a little more flexible in that regard? There was mention earlier of procurement policy, for example, which sometimes can come up against state aid rules.
Mark Brownridge: Certainly we hope so from a funding point of view. The funding limit is No. 1, and No. 2 is the age limit for an EIS company. For example, if your company is more than seven years old, you cannot get access to EIS funding. Seven years is a very arbitrary age. Why seven years? It is quite an odd number to pick. Age is not relevant; it is size and access to finance. That is what companies need when they are looking for funding. We are very hopeful that come 2019 or 2020, whatever the eventual date, we can remove some of the obstacles we face at the moment.
Adam Marshall: The regional point is very important for two particular types of European funding where the regions have benefited disproportionately. The first is the European Investment Bank funding that has gone into major infrastructure and utilities projects. That has then had consequences for SMEs in the regions, in their supply chains or in the build chains for those projects. How we replace that and ensure that those major infrastructure projects are funded appropriately will be of huge import to regional economic growth and to SMEs in a lot of areas.
The other point is on the ESI funds and the transition to what the Government call the UK shared prosperity fund—SPF. It sounds like a kind of sun block. Joking aside, there has been significant delay in the Government coming forward with their proposals as to how that replacement fund could work. That causes concern. Any delay that causes the ramp‑up of the fund to happen later than expected would mean a gap between the end of the European funds and the availability of future funds for regional development. That would have an impact on SMEs.
Lord Wigley: The availability of European funds is often directed by criteria relating to regional disparities for investors, whereas the UK fund may be geared to the opportunities relating to business. How would you feel about that?
Adam Marshall: We do not yet know. They probably need elements of both because you do not want to go back to the old regional development agency VC funds, for example, where basically you were told to pick the best of a very limited lot, never mind that other opportunities might have better investment returns. We do not want to go back to that, but equally we do not want concentration of the available capital in one geographic part of the country. There is probably a balance between the two that we need to achieve.
Simon Hansford: I would like to pick up the procurement point I started with. Currently, I am going out for funding for many tens of millions and being complimented on the quality of the plan and the quality of the business, but two questions are asked at every single investment meeting: “What is happening with Brexit, and how is that going to affect you?” All I can answer with is the uncertainty question and, secondly, saying that there has been a stall in public procurement. Public procurement for British businesses outstrips any need for investment. If I know there is a purchase order and a certainty of a purchase order, it makes investment go away.
John Foster: To sum up overall, it may be possible to replace some of the sources of funding with alternatives, but it may be difficult to replicate some of the benefits. Programme funding for Horizon 2020, for example—the framework programme, I should say—is a good example of the innovation funding that is provided for business. The next round will be framework 9. At the moment, it is of huge benefit to UK businesses, in particular SMEs. The UK is the fifth largest recipient of framework programme funding. Of the total amount of funding that the UK has received, 65% has been delivered to SMEs, despite SMEs contributing 5% to the overall UK business expenditure for R&D. In that kind of scenario, we particularly want enhanced associate status, so that the UK can continue to receive the benefits of framework programme funding.
Martin McTague: Echoing some of Adam’s points, as our research showed, the funding is clearly concentrated in three areas of the UK: the north‑east, Wales and the south‑west. In those areas, they have become very dependent on business support funded through structural funds, and there is no obvious replacement coming along. Adam’s sun cream has yet to be defined. We are waiting to try to influence the design of that new fund, but it is by no means clear.
The Chairman: I have one more question, but do any of my colleagues have any further questions?
Lord Aberdare: Can I pick up one thing that we have not come back to? I think Ms Graham raised the issue of data versus regulation. Is there anything, briefly, that one can say about whether there is an opportunity there? It seems to me that we are all struggling at the moment with what GDPR means for charities, businesses, or whatever, and it is clearly quite a significant burden for SMEs in particular, but are there opportunities as well?
Irene Graham: Yes. I will talk about the opportunities we see. This points to what was said by a number of colleagues about targeting, segmentation and engagement strategies. Obviously, there is very good Companies House data, which is available to all. HMRC has some excellent data sources, and the ONS across government, and that gives us a lot of intelligence on our SME community and our scale‑up community.
One of the things we are very focused on, and are working on with government and HMRC at the moment, is how one can harness that data resource more effectively across government departments and into local areas, in engagement with our scale‑up businesses and our fast‑growing SMEs, to make sure that those who are exporting get proactive engagement around the potential to be part of a trade mission, or in public procurement, which I agree is a huge opportunity for our SME and scale‑up community.
The Crown Commercial Service is doing more to put emphasis on procuring from our SMEs and scale‑ups, and new initiatives were announced last week. If we harness the data we have on those businesses more effectively, we have huge ability to invite them to procure, or to be part of a sandbox looking at innovation and strategies around that. We see real potential there. That is why, as part of the industrial strategy and the harnessing of data, we think there is a real opportunity to be much more effective and more engaged with the SME and scale‑up community.
Simon Hansford: May I give a couple of examples? I am a strong believer that data has the opportunity to become a new currency. I will give a brief example. Today, the Department of Health and Social Care and the National Health Service fund Genomics England, our 100,000 genomes project. That is an amazing wealth of data on the human genome that we have in Britain. That is valuable. It could be sold, bought or used for better research by pharmaceutical companies and biomedical companies. That would have value. They would pay for it. That money could go back into our National Health Service, but actually it becomes a greater currency, and I will explain one level.
As much as I would want that money to go back to the NHS, it is actually my genomic data, it is my personal data, so why do I not monetise that and have some small part of it? To extend the story, should I be more engaged in my health because I can monetise it? I could be more engaged with government because there is a monetary gain to me. We can take that story in many different directions.
Britain is a trusted nation because of our history, and because of our Data Protection Act, shortly to come through, we potentially have the ability for a bar for data protection that is set higher than anywhere else in the world. That means that data could gravitate towards Britain, because we are a trusted nation to store data, in the same way as Switzerland is a trusted nation to store money. Data comes into the country. More businesses will start understanding the aggregation of data, and start seeing insights into data. That would draw more wealth into our country and more innovation. Data is key to our future and is a key opportunity if our Government see that. I am pleased to see a lot of nodding around the room.
The Chairman: We have touched on various aspects of that complex issue and no doubt the Committee will return to it.
Simon Hansford: I would like to share more opinions at some point.
Q7 The Chairman: Indeed. We will put you on our list.
Finally, I return to a point raised by Lord Liddle and relate it to our absent colleague Lord Mawson, who usually asks this kind of question. We all know there is a lot of splendid entrepreneurship and dynamic innovation in the small business sector, not all of it but in parts of it. It is frequently argued that the burden of regulation, in particular European‑style regulation, has inhibited some of that.
The burden of what you have said is that, by and large, you are in favour of maintaining a degree of regulatory alignment with Europe for trade and export reasons, and for standards reasons. Is there a contradiction? Is some of the case for simplifying, loosening or changing regulation not being articulated today, or is the balance more towards maintaining the certainty of the current situation? We as a House are engaged in the long and tedious process of transposing the whole of EU legislation, as it is, into British law. If there are other areas of regulatory change that you would like, or issues where you think we are going down the wrong road, you probably should get them on the table today.
Philip Salter: There are trade‑offs in deregulation versus non‑tariff barriers with our trading partners, and there are examples, as were mentioned before, where we could certainly lead the way, but that is not the right way to think about things. I do not want to obsess about sandboxes, because they are not the answer to everything, obviously, but that is an example where the FCA has led the world in creating a regulatory environment where fintech firms can flourish in the UK and lead the world. The FCA is now looking to export that globally by setting up a global sandbox, working with other regulators around the world. That is the kind of future we are looking at.
I think it would please people who want deregulation. Sandboxes are a deregulated, safe space for innovative companies to take risks and not face criminal prosecution, which they would potentially in the US if they were doing similar things there. I think innovative regulation is the future, not deregulation versus excessive EU regulation. Neither of those models makes much sense in the modern world.
Irene Graham: A fast-growing fintech firm would say, “Don’t paralyse government processes by Brexit”. You have been very innovative in the last number of years in the way we have approached the Tech Nation visa scheme and the R&D aspects of innovation, and we need more of that to continue, with domestic policy and that focus leading the way. In many instances, whether it be EIS, SEIS, aspects of fintech or Tech Nation visa activity, we should make sure that we keep those innovative structures and build on them. That is why the industrial strategy and its implementation is critical.
Adam Marshall: One of the things to bear in mind is that for SMEs the one thing greater than fear of regulation is fear of further change in regulation. The costs associated with change, whether it be a deregulatory or regulatory aspect, are front of mind for SMEs. It is important for us to differentiate what is already on the books, where SMEs have already paid out the adjustment costs and dealt with the consequences, and what may happen in future.
Because there is no appetite today for an upheaval of regulation, with all the other change and uncertainty that is going on, the important thing for us to pay attention to is what we would do in the future when new areas come up to be regulated. Colleagues have talked about creating sandboxes and safe spaces to do innovative things, and those are almost more important to a lot of businesses, or having the freedom in future to diverge from a trading partner but knowing that that comes at the cost of a certain level of market access with that partner. Those are things that businesses are thinking about. They are not saying, “Let’s throw up absolutely everything we have already adjusted to”.
The Chairman: Thank you very much. Does anybody feel that they have not had their final say?
Our deepest thanks to you. You have given us a very good run round the position and actually quite a coherent one, in my view. When there are 10 people in the room, that is not always the case. I will give my colleagues one last chance to say something. No. Everybody is happy. Thank you very much indeed. We will take this into account in our forward work on Brexit and beyond.
I repeat the point I made earlier: we are now entering a period of negotiations where the voice of businesses of all sorts, but I am focusing particularly on yours, needs to get through to government and into the general arguments, because specific, hard deals have to be made over the next few months. It is probably, in our view, going to be years, although the Government do not always admit it. There will be quite a long process of trade negotiations, and the way the Government relate to business during those trade negotiations is, to my mind, a very important dimension, so get stuck in there. Thank you very much indeed.
