Why government must stop treating medium-sized firms like corporates

Jonathan Riley
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Politicians don't “get” medium-sized businesses - any firm bigger than an SME is defined as “large” (Source: Getty)

Speaking to business leaders earlier this week, David Cameron unveiled a British version of Germany’s Mittelstand scheme. Help to Grow will see £1bn of funding ploughed into medium-sized businesses across the country, bridging the “valley of death” funding gap that hampers our most promising scale-ups. But while there have been several high-profile and encouraging moves from government to support small and medium-sized businesses, not everything can be quite so eagerly applauded.

The Small Business Bill is a case in point. Currently making its way through Parliament, it provides, regretfully, a textbook example of policymakers patching a large wound with plaster, when really, major surgery was required.
The problem is this: while progress has been made, politicians still do not wholly “get” medium-sized businesses (MSB). As currently drafted, there is distinct confusion in the Bill over what large or small actually mean. And MSBs are not even mentioned. The result is that any firm larger than the Companies Act definition of an SME is defined as “large” – even after the government’s Growth Review acknowledged that this is not the case.
It is both unfair and simplistic to believe that all firms with more than £25.9m turnover and 250 employees are “large corporates”. Does it feel right that Tunnock’s Tea Cakes face the same regulatory hurdles as BP? Not only this – it also reinforces the current inconsistencies within government definitions of different segment sizes.
This is a great shame. After all, the UK mid-market (around 34,000 firms of 50 to 499 employees) is a vibrant and dynamic business segment – the unsung powerhouse of the economy. But despite supporting over 4m jobs, it is continually overlooked by policymakers, whose initiatives are geared either towards large corporates or small enterprises.
The current black and white, binary view of the business community means that MSBs don’t benefit from any of the positive measures to help business growth and, at the same time, face the additional regulatory requirements of large firms. Our analysis has highlighted the lack of clarity. It’s shown that over 2,800 companies that the government defines as SMEs for the purposes of the R&D tax relief would be defined as “large” firms under the Bill. Many of these are MSBs, which face being excluded from many of its designed benefits – a point which has been noted by various Lords during the Bill’s passage.
That said, there is a lot in the Bill that is good; looking to tackle the issue of late payment, for example. But even this is a prime example of how a piece of legislation can fail to mitigate against its impact on MSBs. For while it is highly likely that, from next year, small business will be exempt from reporting on their payment practices, MSBs will again need to jump the same hurdles as large corporates, despite not having anywhere near the same level of resources or in-house expertise.
Legislators must address the varying capabilities of each company’s size, so that the approach can be tailored, and that those with the broadest shoulders carry the heavier compliance burden.
The Bill provides the opportunity to clarify and define the UK’s fruitful and growing mid-sized business community. But that community is now having to prepare for the Bill’s uncertain impact. General principles and new powers appear to have been finalised, yet how these changes will manifest themselves through secondary legislation is less assured.
It is now vital that the government seeks to understand the impact of legislation on the mid-market, with firms becoming increasingly concerned about the effect of regulation. Latest figures from the ICAEW/Grant Thornton Business Confidence Monitor show that 44.7 per cent of MSBs surveyed anticipate that meeting regulatory requirements will be more of a challenge this year than last – a rise of over 5 per cent. Through our ongoing engagement with the government on the MSB agenda, we know that progress has been made, but more can and should be done.
Government has a real opportunity to signal its continued support for MSBs. Policymakers should need no further inducement than the findings of our most recent research, which suggests that, in freeing up mid-sized businesses so that they can focus on areas such as boosting skills and exports, £50bn could be added to the UK economy by 2020. This is precisely the sort of medicine our recovering economy needs.

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