Exempt small businesses from regulation – new research argues

New IEA research released

New research released today by the Institute of Economic Affairs shows:

  • Small businesses disproportionately employ vulnerable people, such as those with no qualifications.
  • Government regulation is making it hard for self-employed people to take on employees.
  • There is an urgent need for the government to create exemptions from regulations for small businesses.

Small business provides employment for the vulnerable

Self-employment, Small Firms and Enterprise, by Peter Urwin, reveals that small businesses provide vital opportunities for those who often struggle to find work in the rest of the labour market – those with no or few qualifications, immigrants, women with domestic responsibilities and those with poor English language skills. There is therefore not only an important economic, but also a social dimension to ensure the government is not holding back this sector.

  • 11% of employees of small firms had no qualifications, compared with 4% of employees of large firms.
  • Only 8% of people working in large companies had a language problem, whereas in companies with less than ten employees this is 18%.
  • Only 1% of people working in large companies had been unemployed twelve months ago, but within micro-companies with less than ten employees this was nearly 2.5%.

Regulation is curbing employment opportunities

At a time when Britain’s economy requires thriving businesses, this research shows that complex regulation such as employment protection legislation and costs such as National Insurance prevent the self-employed from taking on employees.

There is therefore an increasing tendency for people to be self-employed without employees or to work for larger companies that are better able to cope with the costs of regulation. In short, there are too many barriers preventing people from moving from self-employment to becoming employers of small numbers of people and this affects vulnerable groups in the labour market.

  • Between 1981 and 2009 the proportion of those who are self-employed but have no employees has increased by nearly a third. (79% of self-employed people had no employees, a drop from 61% in 1981).
  • Between 2000 and 2009 there has been a fall in the proportion of micro-businesses with employees of nearly one fifth, from (25% to 21%) while over the same 9 years the proportion of firms without employees grew substantially from 70% to 75%.

A regulatory reform programme

Regulatory exceptions should be made for those who are self-employed but who want to take on staff. For example:

  • Small firms should be able to take on employees who retain self-employed status. This would reduce regulatory costs enormously.
  • Employees of small firms should be exempt from the right to request flexible working; the right to request time off for training; statutory holidays; and the minimum wage for those under 21.
  • Small firms should be exempt from the requirements under the National Employment Savings Trust pensions arrangements that require auto-enrolment, compulsory deductions from employees’ pay packets and will, when fully rolled out, require employer contributions.
  • Product market regulation should be rolled back in key sectors that affect small firms such as child care.

The author also suggests:

  • The removal of a number of tax reliefs, as this would reduce compliance costs for small businesses.
  • Aligning income tax with the corporation tax rate.
  • Allowing small firms to discuss retirement arrangements with employees without the threat of age-discrimination legislation being invoked.
  • Permitting small firms to write temporary contracts of employment and employ agency workers without employment rights accruing.

Commenting on the report, Mark Littlewood, Director General at the Institute of Economic Affairs, said:

“Small companies face countless barriers, yet they are the lifeblood of Britain’s economy. It is imperative that the government lift the regulatory burden on businesses that is currently preventing many self-employed people from developing their businesses and employing people.

“If the government is serious about growth it can’t just say it. It is time they proved it by exempting small businesses from various regulations.”

 

To arrange an interview with Mark Littlewood (Director General of the Institute of Economic Affairs) or Prof. Philip Booth (Editorial Director at the Institute of Economic affairs) please contact Ruth Porter, Communications Director, rporter@iea.org.uk or 077 5171 7781.

 

Notes to editors

The full report Self-employment, Small Firms and Enterprise can be downloaded by clicking here.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.

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