Small business strategy

Business confidence amongst smaller firms is too low. The Government has released a short plan, but it does not address the significant cost pressures faced by SMEs. The Department of Business and Trade must do more to improve small business cash-flows, reduce costs, and thereby improve the return on investment for small businesses. (Conclusion, Paragraph 17) Sales and cash flow

Cashflow is king. One of the most important things the Government can do to transform the economic health of SMEs is to direct a greater share of government procurement towards SMEs. (Conclusion, Paragraph 27)

Procurement accounts for £1 in every £3 of Government spending. Today, just 20% of this—£45.4 billion—goes to SMEs. If the Government directed 30% to SMEs, there would be a £22.7 billion increased cashflow to SMEs every year. Government spending with SMEs is in a rut. The Government knows it must do more, but its solution of individual departmental targets is unlikely to step up SME cashflows. Given the potential prize of such a shift, Government action needs to step up. (Conclusion, Paragraph 28)

The Government should set a 30% target for total direct spend with SMEs, to be achieved by 2028. Each department should set out its contribution towards this target, and the Department for Business and Trade should monitor departmental performance. This should be reported to Parliament annually, with departments setting out what steps they are taking to improve performance when targets are not met. These targets should include all public bodies within the department’s remit. (Recommendation, Paragraph 29)

The Government should appoint a Procurement Council of Experts. This should gather SME feedback on procurement processes and advise departments on best practice to affect a culture change throughout Government. (Recommendation, Paragraph 30) 70

The Government is right to recognise the risks to SMEs posed by late payments. Until there is new legislation, the Fair Payments Code should become the minimum expectation, rather than an optional extra, for all firms over 250 employees. (Conclusion, Paragraph 38)

The Government should accelerate its late payments legislation and mandate 30-day payment terms by the end of this Parliament. In the meantime, procurement rules should be updated to require all large suppliers to have a Fair Payments Code Gold award. (Recommendation, Paragraph 39)

Companies House should integrate Fair Payments Code information with the register, to provide small businesses with clearer intelligence about a firm’s payment practices. (Recommendation, Paragraph 40)

Late payments pose a particularly acute threat to firms in the construction sector. The Government’s construction playbook sets out that Project Bank Accounts should “be used unless there are compelling reasons not to.” This loophole had permitted government departments to turn a blind eye to poor payment practices amongst their contractors. The Government should update its construction playbook to end this loophole and drive meaningful improvements in SME cashflow. (Conclusion, Paragraph 47)

The Government should bring forward amendments to the Procurement Act 2023 that require the use of Project Bank Accounts for all construction projects that cost £2 million and above. In the meantime, it should reissue its construction playbook to reflect this requirement. The playbook should also introduce a liability cap, specifying this requirement as a contract condition for its supply chains. Government should explore ways of mandating the terms of the playbook for all large contracting authorities. (Recommendation, Paragraph 48) The tax system

The tax system is becoming more complex. This is generating significant burdens for SMEs, distracting business owners from running their companies, and jeopardising collection of tax revenues. Initiatives such as Making Tax Digital suggest such costs are not adequately appreciated by HMRC and the Treasury. The Government has recognised the importance of reducing the regulatory burden for businesses. It must now do the same for the tax system. (Conclusion, Paragraph 55)

The Government should publish a baseline assessment of SME administrative costs of complying with the tax system. The Government should aim to reduce the costs of complying with the tax system by 25% by the end of the Parliament, in line with its target to cut regulation. As a first 71 step, it should increase the roll out period for Making Tax Digital for income tax. It should also reduce the quarterly reporting requirements under Making Tax Digital. (Recommendation, Paragraph 56)

HM Treasury’s current funding arrangements mean that HMRC can meet its call answering targets and still allow 3 to 4 million calls a year to go unanswered. As the small business tax gap grows, it is essential that HMRC gets back in touch with these customers and understands how to best support them. (Conclusion, Paragraph 62)

Reiterating the recommendation of the Public Accounts Committee, HMRC should ensure it understands how far its digital services can replace telephone services and what level of telephone service it needs to retain to meet the needs of small businesses. Given the importance of telephone services to SMEs, the Government should reconsider whether the 85% target is adequate and fund an uplift. (Recommendation, Paragraph 63)

The UK’s high VAT threshold is acting as a significant brake on small business expansion. For service-based industries, like the hair and beauty sector, its impact is distortionary and disincentivises employment creation. (Conclusion, Paragraph 71)

As part of its call for evidence on Tax Support for Entrepreneurs, the Government should set out to Parliament the impact on small business growth of the current VAT system, and present options for restructuring VAT in a way that optimises small business and employment growth. (Recommendation, Paragraph 72)

Property revaluations mean that the permanently lower multipliers announced in the Autumn Budget 2025 will likely do little to bring down business rates bills for small businesses. The Government is right to recognise that certain sectors will need support, but financial support will not address the wider unfairness of the business rates system. More fundamental changes to the business rates system are needed to truly level the playing field between online and bricks and mortar businesses. (Conclusion, Paragraph 80)

The Government should complete its review of the business rates system and incorporate more ambitious options for reform. This review should include an evaluation of replacing today’s system with a turnover-based local tax, reconsider the feasibility of implementing an Online Sales Tax, and consider introducing relief for the new occupiers of properties that have previously been empty. (Recommendation, Paragraph 81)

Limited diffusion of productivity enhancing technologies is one of the primary causes of the UK’s sluggish productivity growth. Investment in R&D significantly boosts productivity. However, the administration of the 72 UK’s generous R&D tax credit system is limiting uptake amongst SMEs. The Government is right to recognise that the system requires reform, but larger-scale changes are needed to truly increase small business R&D investment. This should be combined with a clear strategy for encouraging firms to take up technology, led by local realities and designed around specific business need. (Conclusion, Paragraph 90)

The Government should reintroduce the previous 28-day target for processing R&D tax claims. It should also widen the eligibility criteria so as to include Arts, Humanities, and Social Sciences research within its scope. (Recommendation, Paragraph 91)

The Government should bring forward proposals for tax incentives to encourage increased intangible investment and the diffusion of productivity enhancing general purpose technologies, such as artificial intelligence. (Recommendation, Paragraph 92)

The Government should, through Innovate UK, roll out the Further Education Innovation Fund nationwide. (Recommendation, Paragraph 93) Labour costs and the skills system

The decision to significantly increase labour costs at the Autumn Budget 2024 has had a significant impact on labour-intensive sectors. Future policy changes must both adequately model how small businesses will be affected by tax changes and seek feedback from smaller firms about potential impacts. (Conclusion, Paragraph 100)

The Government should introduce SME impact assessments when considering future policy changes. These should model the specific cumulative impact of proposals on smaller firms. SME impact assessments should be published alongside any policy proposals. (Recommendation, Paragraph 101)

Bogus self-employment means today’s high street is not a level playing field for small firms. While practices like renting a chair are legitimate, the current framework’s lack of clarity makes it too easy for firms to use bogus self-employment to cut costs and avoid legal responsibilities. In line with its previous commitment, the Government should now act to ensure that the law rewards, rather than punishes, SME employers. (Conclusion, Paragraph 106)

Reiterating our previous recommendation, the Government should fulfil its commitments to conduct a review of employee, worker and self-employed status immediately. (Recommendation, Paragraph 107) 73

The Fair Work Agency, when operational, should work closely with partner organisations such as HMRC and prioritise the investigation of bogus self-employment in the hair and beauty sector. (Recommendation, Paragraph 108)

The Government’s future skills system is a more complicated combination of local and national initiatives. Small businesses broadly welcomed individual reforms but highlighted that they lack a clear route into the system. Skills England’s focus on data and dashboards, combined with limited SME engagement in its governance and development, risks entrenching these challenges rather than resolving them. Without clearer signposting and more meaningful involvement of small businesses, SMEs will not be effectively supported to fill their skills gaps and grow. (Conclusion, Paragraph 114)

Skills England’s business plan should contain specific metrics for engaging SMEs. Skills England should create a clear analysis and forecast for every region of the skills shortages blighting SMEs, broken down by industry and local area. There should be a clear commissioning plan to fill these gaps. (Recommendation, Paragraph 115)

The Government should ensure that the Business Growth Service operates as the front door for SMEs seeking skills. The Service should supply clear guidance on finding apprentices and funding sources. (Recommendation, Paragraph 116)

Careers advice services can play a central role in filling skills shortages and ensuring that young people enter professions in which they are genuinely interested. In order to be truly effective for small firms, the local skills system, and Local Skills Improvement Plans, must interface with the advice being given to young people at school. (Conclusion, Paragraph 119)

The Government should embed primary and secondary schools’ career services into Local Skills Improvement Plans. (Recommendation, Paragraph 120)

Boosting SME productivity depends on improving management capability. At present, support for management training has been fragmented and inconsistent. The Government should now set out a clear strategy to significantly expand access to high-quality management programmes and drive nationwide uptake among small businesses. (Conclusion, Paragraph 124)

The Government should expand nationwide programmes like Be the Business and Help to Grow: Management to transform the quality of SME management. It should work with industry bodies to encourage 74 participation, and widen the eligibility of these schemes by removing the five-employee requirement from the Help to Grow: Management programme. (Recommendation, Paragraph 125) Energy costs

High energy prices are acting as a further strain on the bottom lines of smaller firms, significantly impacting their margins and hurting their ability to compete. The Government has recognised the impact this has on larger energy intensive industries. Specific consistent support is now needed for SMEs. (Conclusion, Paragraph 132)

The Government should introduce relief schemes for SME energy costs. Priority should be given to firms that are ineligible for the Government’s current industrial energy relief schemes, such as the British Industry Supercharger or the British Industrial Competitiveness Scheme. (Recommendation, Paragraph 133)

Small business energy customers engage with the energy market more like individual consumers than companies. Despite this, they have access to none of the same protections, leaving them vulnerable to opaque bills, contracts, and a limited number of energy providers. (Conclusion, Paragraph 138)

To best support SMEs buying energy, the Government should introduce standardised billing formats for non-domestic customers. Reiterating Ofgem’s previous recommendation, the Government should conduct a review of the range of factors causing issues in the energy market for high- risk sectors. (Recommendation, Paragraph 139)

We welcome the Government’s commitment to regulating energy brokers. Poor practices in this sector have already caused and will continue to cause significant harm to smaller businesses. It is vital that legislation is not delayed. The Government needs to set out a clear timeline for action and provide SMEs with certainty about when these protections will come into force. (Conclusion, Paragraph 143)

The Government should immediately set out its timeline for regulating Third-Party Intermediaries in the retail energy market. (Recommendation, Paragraph 144) 75 The costs of crime

Businesses now confront both rising crime and the increasing costs of implementing crime prevention measures. Government should do more to help businesses protect themselves on the high street. Security investments should be supported not penalised. (Conclusion, Paragraph 149)

The Government should amend the business rates regime so that security prevention measures, such as CCTV, do not count towards a property’s rateable value. (Recommendation, Paragraph 150)

Too often successful enforcement activity disrupts rather than stops illegal trading on the high street. Enforcement agencies require new tools to put an end to these practices and to ensure that legitimate businesses are able to thrive on the high street. (Conclusion, Paragraph 160)

The Government should introduce the following amendments to the Anti- social Behaviour, Crime and Policing Act 2014: • Give all local authorities, including county councils, explicit powers to issue closure orders, with an option of permanent closure for the premises of persistent offenders. • In cases where the ultimate owner of a property is not identified, closure orders should be in place until their identity can be established. • Allow simultaneous closure orders on multiple premises that have a proven link. • Penalties should be applied to owners of properties where those responsible for the business are different and the owner cannot demonstrate adequate due diligence. (Recommendation, Paragraph 161)

The disruption of illegal trading on the high street requires a complex multi- agency approach, combining neighbourhood policing, Trading Standards, Immigration Enforcement, and specialist financial investigation. As a result, businesses remain unclear as to who leads on this issue and where they should report their concerns. (Conclusion, Paragraph 165)

The Government should ensure that there is a named Assistant Chief Constable for every police force with explicit responsibility for tackling business crime. This Assistant Chief Constable should work with local authorities through Community Safety Partnerships to ensure there is clear plan of action in every force area for combatting illegal trading on the high street. (Recommendation, Paragraph 166) 76

The Government must recognise the rising presence of organised crime groups and serious criminality on the UK’s high streets and commit to funding more financial investigators in local Trading Standards services and police forces. (Recommendation, Paragraph 167)

Chargeback scams represent a major and growing threat to SME viability. The Government must improve protections against friendly fraud as a central part of its approach to supporting and protecting small businesses. (Conclusion, Paragraph 171)

The Government should ensure that the forthcoming Fraud Strategy contains specific measures on tackling chargeback scams and friendly fraud in order to help SMEs in fighting this phenomenon. (Recommendation, Paragraph 172) High street regeneration

Stronger measures are needed to tackle long-term vacancies and improve transparency in high street property ownership. Beneficial ownership registers were supposed to make it easier for local authorities and communities to bring vacant properties back into use. It is clear, however, that these measures are currently not working as intended. (Conclusion, Paragraph 176)

The Government should bring forward proposals to ensure that local authorities and community groups have efficient means for checking ownership of commercial properties and locating the contact details for these individuals. (Recommendation, Paragraph 177)

The quality of the public realm is central to the viability of high street businesses. Improvements require both access to funding and effective partnerships between local authorities, developers and businesses. It is essential, however, that such initiatives are driven by both local need and national expertise. (Conclusion, Paragraph 183)

The Government should introduce a successor to the High Streets Taskforce, to steer implementation of the new powers for local authorities set out in the English Devolution and Community Empowerment Bill. As a first step, alongside the Government’s guidance, the taskforce should provide more tailored support to local authorities on how they can best engage with communities and businesses to develop their town centres. (Recommendation, Paragraph 184)

Community owned businesses have significant potential to support the renewal of high streets and safeguard valued local assets. The introduction of a community right to buy represents an important step 77 towards empowering local groups to take ownership of assets at risk. However, the effectiveness of this new right will depend on whether communities have the practical means to act when opportunities arise. (Conclusion, Paragraph 189)

The Government should consider reintroducing the Community Ownership Fund, or other mixed finance methods for financing the community ownership of properties on the high street. (Recommendation, Paragraph 190)

Gaps in the oversight of franchise agreements allow serious employment abuses to go unaddressed and leave franchisees exposed to unfair contractual practices. The absence of a dedicated regulatory framework, or clear accountability for employment standards within franchise networks is no longer sustainable. (Conclusion, Paragraph 194)

The Government should review the current franchising landscape and consider the introduction of a statutory code of conduct, alongside stronger independent enforcement mechanisms. (Recommendation, Paragraph 195) Business support services

The business support landscape is fragmented and poorly organised. In recent years, departments have often proposed ‘hubs’ as a low-cost way of supplying integrated services offered by many different parts of the public realm. They are often vague in design and typically lack institutional strength, staying power, and a clear intuitively understood range of services. They are no substitute for a service designed and built for the long term. The decision to grant Mayoral Strategic Authorities more autonomy over the delivery of business support is welcome - but it is not guaranteed to improve the quality of these services. Many areas are also outside of mayoral boundaries, and it is possible that some regions will not join mayoralties until the end of this Parliament. The Government must deliver a service that works for everyone, regardless of their local government arrangements. (Conclusion, Paragraph 203)

The Government should build a business support service that is fit for the long term, like the US Small Business Service. It should combine these services with arrangements for transforming access to finance, export finance, public procurement, skills, export support services, and general business advice. It should study best practice internationally and present a White Paper to Parliament with the design of a service that matches the challenge. (Recommendation, Paragraph 204) 78 Improving data

The Government will not be able to deliver change for businesses unless it is able to accurately track and monitor business activity. Current Standard Industrial Classification (SIC) codes fail to identify and define sub-sectors of economic activity. Under these classifications, hair and beauty are represented as one industry and identified as the same type of service as launderettes or funeral homes. Such distortions fail to adequately represent the reality of contemporary business activity. (Conclusion, Paragraph 210)

The Government should work with the ONS, as part of its SIC code review, to ensure that the various types of business in the hair and beauty sector are adequately represented by this framework. (Recommendation, Paragraph 211)

SMEs represent 99.9% of UK businesses, ranging from firms with 2 employees to those with 150. The Government’s decision to use this term interchangeably with ‘smaller firms’ means that it is never clear which category of enterprises’ a particular policy intervention is targeting. (Conclusion, Paragraph 215)

The Government should reconsider its use of the term SME. Moving forward it should directly link policy programmes to different categories of these business (micro, small, and medium) in order to make it clear as to which group is being targeted by a particular policy measure. (Recommendation, Paragraph 216) Cross-Whitehall working

Throughout this inquiry, SMEs have highlighted how contradictory and counterproductive advice from different departments creates confusion and undermines policy effectiveness. This lack of a joined-up approach bedevils regulation, where conflicting requirements are expensive to manage and hurt growth. The Government previously rejected the Committee’s recommendation for the Regulatory Innovation Office to act as a clearing house for conflicting regulation. However, it remains clear that businesses need a single point within Government to report contradictory and overlapping requirements. Without this, SMEs will continue to face unnecessary complexity and uncertainty. (Conclusion, Paragraph 222)

In line with our previous recommendation, the Government should create a place in Government that acts as a clearing house for regulatory conflicts and give businesses a place to report conflicting regulations. The Minister 79 for Small Business should be empowered to champion SMEs, and their experience of duplicating and conflicting regulation, cross-Whitehall. (Recommendation, Paragraph 223)

The SME Plan is one part of the Government’s interlocking plan for growth, but the plan does not empower an independent body to monitor its effective implementation. Engagement with SMEs themselves is currently limited to regional events, rather than a sustained focus on understanding the realities and needs of these businesses. (Conclusion, Paragraph 228)

The Government should, as part of its forthcoming Industrial Strategy Bill, create statutory micro, small and medium sized enterprise panels. These panels would advise departments on small business policy. A first task for these panels should be to develop metrics for assessing the impact of the SME Plan over the course of this Parliament. The Government should then present its performance against these metrics to Parliament on an annual basis. (Recommendation, Paragraph 229) 80