In defence of red tape: why a bonfire of regulations is a terrible idea for small businesses

'Freeing’ thousands of small businesses from the burden of paperwork might sound like a cost-effective move - but there could be dire consequences for SMEs.

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Written and reviewed by:
Helena Young

For the past few weeks, Liz Truss has toured TV and radio shows across the country, pedalling an overcooked analogy about the UK's ‘economic pie’. Now, Truss has rolled out her plan for the small business portion of the pie: literally, make it bigger.

Speaking at the Conservative Party Conference on Sunday afternoon, the prime minister announced that the threshold for what counts as a small business has been raised. From Monday, businesses with 500 employees are now categorised as small enterprises, and eligible for the relief. Crucially, it also makes these companies exempt from certain requirements, such as filing unabridged accounts and other regulations.

Likely, the decision is also an attempt to mitigate document chaos caused by Brexit. Startups has spoken to business owners who rely on importing or exporting to deliver their goods. Port delays earlier this year saw many struggle to move stock across borders, affecting cash flow.

Truss’s announcement has a Brexit-esque emotional beat, claiming it enables business owners to ‘take back control’ by reducing the burden of admin. For some business owners, it will prove seductive. Whatever their political leanings, plenty of entrepreneurs may bemoan the fiddly bureaucratic rules that, according to a survey by the Department for Business, Energy and Industrial Strategy (BEIS), claim an average of 22 staff days per month.

Still, while the motivation is certainly to be commended, it’s unclear who the policy is actually helping. The government says that, under its plan, an additional 40,000 businesses will be ‘released’ from red-tape terror. But firms that employ fewer than 250 people already do not have to comply with certain corporate governance and reporting requirements.

It seems this is a policy that may have its biggest impact among the UK’s 7,655 mid-sized businesses – not the 5.5 million SMEs with under 250 employees.

Abolishing bureaucracy could actually be one of the most dangerous strategies for employers in the current landscape. Where bureaucracy goes, key rights for the employee may shortly follow. Rumours are growing that the business secretary Jacob Rees-Mogg wants firms to drop EU limits on working time and parental leave, as well as protections for agency workers.

Choosing to lose these safeguards brings very real risks to staff, jeopardising wellbeing and credibility. Workers in a modern economy rightfully expect a duty of care from their employer. The idea that an organisation might be able to willingly ignore basic responsibilities – even including statutory sick pay – is alarming. Not to mention, it would have devastating consequences for the business’s ability to attract and keep talent.

The mere possibility that a team member would willingly wave goodbye to employee benefits such as holiday pay – particularly in the era of the Great Resignation – is laughably out of touch. Asking staff to do so would certainly compromise their loyalty to the business and lead to a drastic decline in productivity.

Plainly, hiring would go out the window. Benefits, corporate values, organisational culture; these are all factors that have a direct influence on job search and selection. Without them, workers will simply move on to a more attractive competitor – crippling business owners during a hiring crisis and creating an unstable environment for what is left of the workforce.

Business regulations have also done a lot of heavy lifting when it comes to corporate social responsibility. Without reporting on gender pay gaps and executive pay ratio, unions have already warned that much of the work to advance diversity, equity, and inclusion will be undone – at huge reputational risk for the companies involved.

And what about the case for net zero? Currently, Corporate Sustainability Reporting Directive (CSRD) regulations require companies with 250+ employees to report on sustainability performance. It’s unclear what specific regulation the government aims to relax, but this could be one of the first to go. In the current climate, such an ill-thought-out business strategy would only serve to alienate staff and customers, who are increasingly favouring socially responsible or sustainable brands.

Given the chance that this policy could be undone next week, the above threats look even more risky. The Bank of England (BoE) has already had to make a dramatic intervention after the chancellor’s mini-budget sent the pound plunging to a record low, leading to a messy U-turn on income tax. Come next year’s spring statement, might this policy be similarly discarded? A sudden reversal could contribute hefty fines for late reporting and with it, more admin time, ultimately worsening the problems that Truss purports to be fixing.

Perhaps this wouldn’t seem like such an odd scheme if it wasn't for the other, more pressing issues that have been piling up on Downing Street’s door stop since 2019. Business leaders have hoarse throats from repeating the same demands for the past three years: business rates reform, greater support for re-joining the single market, and help during the recruitment crisis.

Truss’s plan might help a successful mid-sized company to scale. But it will also threaten employment law and procedure at a time of huge pressure on hiring – while providing no real transformation for genuinely small businesses. In this context, with a recession looming, withdrawing state intervention seems less like empowerment and more like abandonment.

Rather than randomly firing shots at excessive regulation, a better option would be to address the biggest problem areas directly. If productivity is the issue, why not improve apprenticeship schemes? Or provide government-funded training to help managers cope with the shortage of labour? Or support businesses adjusting to the EU’s new Entry and Exit system?

Today’s small businesses need regulation more than ever, not soundbite, rage-against-the-machine announcements. Westminster must move away from empty reform policies and design a long-term plan to help SMEs overcome specific, operational challenges – no matter the amount of paperwork it takes.

Written by:
Helena Young
Helena is Lead Writer at Startups. As resident people and premises expert, she's an authority on topics such as business energy, office and coworking spaces, and project management software. With a background in PR and marketing, Helena also manages the Startups 100 Index and is passionate about giving early-stage startups a platform to boost their brands. From interviewing Wetherspoon's boss Tim Martin to spotting data-led working from home trends, her insight has been featured by major trade publications including the ICAEW, and news outlets like the BBC, ITV News, Daily Express, and HuffPost UK.

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