UK mid-market has overtaken Germany’s Mittelstand – but we can do better

 
Simon Michaels
Manufacturing is a key mid-market sector (Source: Getty)
Angel investor and entrepreneur Sherry Coutu CBE recently said that “competitive advantage doesn’t go to the nations that focus on creating companies, it goes to nations that focus on scaling companies.”

And scaling up, growing, and exporting abroad are all challenges particularly faced by the UK’s mid-market (businesses with a typical turnover of between £10m and £300m). In Britain, we’re pretty good at helping our businesses scale up. But we could be better.

First, the good news. New data shows that the UK’s mid-sized firms weathered the global downturn better than those in the renowned German Mittelstand.

Growing by nearly 33 per cent over the last five years (compared to Germany’s 12 per cent), the UK’s mid-market now generates turnover of €1.92 trillion annually compared to the Mittelstand’s €1.78 trillion. There is good news in jobs too. The UK has overtaken Germany in terms of the number of people employed in their respective mid-markets – with the UK employing 9.3m people compared to Germany’s 9.2m.

Having taken the lead in Europe’s mid-market, you might ask what the problem is. If it’s not broken, why fix it?

The answer is that we can’t leave things to chance. The UK’s mid-market needs a supportive policy environment to keep growing. And with an election round the corner, now is the time for the business community to work together to put the needs of the mid-market on the agenda of all political parties.

The CBI has been doing great work in promoting the mid-market. Its recent mid-market summit proved to be a useful forum for discussing ideas and the needs of mid-sized businesses. The government too has made many positive steps. But there are further policy ideas that would make a marked difference to the mid-market and help keep us leaders in Europe.

First, with manufacturing a key mid-market sector, we would like to see a reduction in employers’ National Insurance contributions for manufacturing firms. We calculate that this would boost UK GDP by over £1bn, creating nearly 20,000 new jobs.

Second, the government could consider a VAT zero-rating of supplies to companies that export. The UK currently allows manufacturers to zero rate their exports. However, it is less generous with reliefs for domestic companies that supply UK exporters.

In contrast, Ireland has a more generous relief for regular exporters. A qualifying exporter is able to inform its suppliers of its export authorisation and those suppliers can then zero rate their supplies to that exporter. Such a measure provides a VAT cash flow advantage to the exporter. We recommend that the UK introduces a similar relief – except for a cash flow timing advantage given to the exporter, this measure would be Exchequer neutral.

And finally, the government can support the mid-market through its own procurement policy. Within the current open framework, the government should consider contracts on the basis of providing the best value to the UK economy, rather than looking at the cheapest price. This could boost the mid-market’s contribution to UK GDP by £285m.

As economic recovery takes hold and the election draws near, this is a rare opportunity to make the case for the UK’s forgotten middle-ground.

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