I beg to move,
That this House takes note of the increasing difficulties facing small businesses; recognises their important contribution to Great Britain's economy; and calls upon Her Majesty's Government, in the national interest, to take urgent and positive steps to stimulate and encourage the prosperity and growth of this energetic and enterprising section of the community.
I hope that this Motion will be accepted by the Government. It is perhaps even more topical than I thought it would be when I was successful in the Ballot recently, in view of the speech made yesterday by a high personage in which he said that we are all "in the soup" together.
This is not a party matter. It is a matter which affects the balance, the prosperity and the happiness of the whole nation. I therefore hope that the Government will not attempt to duck the issue by trying to talk it out, but will accept what I shall say today. There may not be many of us in the House this morning, but we always understand that Friday is a difficult day for hon. Members who have to get back to their constituencies. Nevertheless, a very large number of people will be watching the debate, not only small businessmen, but employees in small businesses who will be anxious to know what we say this morning.
It is a truism that the growth of a business or of a country or of any community depends upon the vision, the enterprise and the progressiveness of its people. This is the truth upon which the greatness of Britain was built in the past and upon which our whole future depends. We are a small island. We occupy only one-five-hundredth of the world's surface. We have one-fiftieth of the world's population. We have no raw materials of consequence, except coal, ironstone and chalk, all rather valueless in the world today. We now have natural gas. That will be very important. We no longer have the captive markets of our Empire. To digress for a moment, perhaps herein may lie the seat of our present difficulties, because for over a century our businessmen had no real need to be competitive.
We have a bonus which our forefathers did not enjoy—that is, experience. These men of vision and enterprise in the past went out to trade. It is a fact that trade did not follow the flag so much as flag followed trade. If I may get in a short constituency plug, I am very proud of the fact that the old East India Company had its headquarters in my constituency of Croydon, North-East.
We are back where we started. Our whole survival and influence in the world depend upon trade and upon the energy and enterprise of our traders. Given our present circumstances, it never was more important to encourage imaginative and progressive men with new ideas, new concepts, and new enterprises to expand production in new ventures and in existing ones.
In this country successive Governments have paid lip-service to the spirit of private enterprise, but very few have done anything positively to encourage or develop it. The object of this debate is to call attention to the difficulties which have been placed in the way of this energetic and enterprising section of our community, whose contribution to Britain's prosperity in the past was both vital and massive and which, in the future, if stimulated and encouraged, rather than legislated against, have a tremendously important—I would say even a decisive—part to play.
I should like to stipulate at once in the context of the debate what I mean by "small business". Size is a comparative term. The House will remember that in the context of a recent take-over bid Courtaulds was considered to be a small business in relation to I.C.I. For the purposes of this Motion, I have in mind that a small firm is one which employs fewer than 500 people and a very small firm one which employs fewer than 25.
The hon. Member for Billericay (Mr. Moonman), in a debate in the House on 15th November, drew attention to the fact that 52,000 out of the 55,000 manufacturing establishments in this country employed less than 500 people. Whilst these figures may be somewhat dated and ignore about 100,000 very small firms, and I would support any effort aimed at achieving a reliable census of our manufacturing capacity and potential, nevertheless, they are good enough to establish that we are talking about an important section of the community.
The economic director of the Confederation of British Industry, in an article on 20th January entitled "British Industry's Image in the United States," had this to say in relation to American criticism of British management:
The American critics of British industry themselves concede that the leading British companies are by and large just as well-managed as their American counterparts. Is the difference then to be found amongst the managers of small companies which, in both countries, account for a good deal more than half of the total national output?
I must add that he went on to say:
Here again anyone who knows the two breeds must laugh to scorn the notion that the American small businessman has significantly more skill or knowledge than his British counterpart.
There are a number of special difficulties which small firms have to face in Britain as compared with their counterparts in the United States. First, public opinion has been consistently conditioned by some newspapers and television commentators, and by some Members of Parliament, to the idea that small companies are in some strange way a kind of handicap and disability to the nation and should be eliminated as quickly as possible. As well as this—I am not trying to make a party point—members of the Government have from time to time sung the praises of bigness. It is not surprising, therefore, that the man in the street should come to believe as true what is merely a fable that bigness has a special advantage in itself.
A recent example of that was in the Sunday Times of 29th January, when, in an interview, the Minister of Technology appeared to imply that the industrial efficiency of this country can be brought about only by the creation of bigger and bigger units. To be fair, the right hon. Gentleman's predecessor, Mr. Cousins, took a rather different view. In a letter to the Society of Independent
Manufacturers, with which I am connected, Mr. Cousins said:
I cannot accept the idea that Government policy has created the climate of opinion that technological break-throughs are the 'exclusive perquisite of large companies'. One needs only to think of the hovercraft and dracones to illustrate how major technical developments have grown from the ideas of individuals.
I do not think that hon. Members will disagree that in the last two years in particular there have been a number of decisions in this House which have hit the small man particularly hard. I am thinking of the close company provisions of the 1965 Finance Act, the Capital Gains Tax, the Selective Employment Tax and the decision on investment grants. Firms in the distributive trades can no longer claim for equipment. This is a crushing blow to the smaller firms. I think, too, of the Redundancy Payments Act. However necessary and good it may have been, it hits particularly at the small firms. I think even of the Land Commission Act, which will introduce a betterment levy and will mean much more complicated alterations to the Capital Gains Tax.
The situation has reached the stage where the editor of the British Tax Review, Professor Wheatcroft, has written that he has now almost given up trying to keep up with the new legislation. How can the small man hope to keep his bearings among this maze of complications? Even the Inland Revenue was forced to concede a special bonus of £50 for the extra work involved in trying to understand the Finance Act, 1965. No one has given a thought to the poor taxpayer, who has had no bonus whatever for understanding it.
I do not want to speak loo long, but at this stage I ought to declare a personal interest in that I am the managing director of a small business which is a close company. I profit-share to the extent that some of my senior staff have equity shares in my business, I should have thought that this was a good, just and honest way to run a business, yet the close company provisions for the distribution of profits are penal. Again, I cannot understand why, under the Corporation Tax, when close companies borrow from a director, from a participator or from a member of his family at a commercial rate of interest— not at any high rate of interest—this is not allowed for tax purposes but is treated as a distribution.
What is wrong with supporting one's own work with one's own money or the money of one's family? It is small wonder that when I went to my constituency last week to talk about greater efficiency among small firms, one of the audience to whom I was speaking said to me, "Come off it, Mr. Weatherill, You know as well as I do tht there is only one way to run a business these days, and that is to run it inefficiently." Under the present taxation system, that is just about right.
All these measures which I have mentioned are a tax upon the kind of initiative and enterprise which it is so essential for us to encourage. They discriminate against the average small company in comparison with the average large company. The same remark in total applies to the new Companies Bill. I must not argue now for or against that Measure, nor will I be tempted to do so, but I hope that I may be permitted to say that it will be a specific disadvantage for a small company to have to disclose publicly intimate details of salaries, export figures and turnover, since all this information can, and will, be used by home and foreign competitors.
In the case of a public company one can well understand the need to disclose fully to the shareholders and the investing public the fullest possible information. A small company, however, does not invite public investment, and to disclose these figures is simply to arm one's competitors.
In the second part of my remarks I should like to turn from the negative to the positive. I should like the Minister of State to consider a number of positive suggestions which, if he were to implement them, would go a long way towards solving the problem of productivity in Britain, which concerns us all, of whatever party. I am confident that if he were to implement them, we could lift the economy out of its present stagnation and they would help to carry us forward to a world of greater prosperity and happiness for us all.
My hon. Friend the Member for Harrow, Central (Mr. Grant) drew atten-
tion a fortnight ago to the complexity of the tax system. I am absolutely certain that this is the first thing we must put right. Income Tax at its present high level is a tax on work and a tax on effort. We shall never solve our problems if the harder a man works the more he is penalised. In a B.B.C. broadcast on 24th February the Prime Minister said:
If one-tenth of the energy and the ingenuity and expertise that goes into side stepping the tax inspector went into the export trade we should have no trade problems.
The problem is much more deep-seated than that. We know that it is by no means confined to the board rooms. It is even more apparent on the factory floor. I am convinced that a reduction in direct taxation is the first essential. The speech made yesterday, to which I drew attention, was quite right; the time has gone when we can exhort people to work harder. We must make it worth while for them to do so.
Secondly, the immense number and variety of small companies in Britain is one of the strengths of our economy. They offer an opportunity for the expression and growth of personal initiative and individual judgment. They are frequently the source of new products and new methods. When I was in America recently a book was published there called "The Sources of Invention in the 20th Century", which pointed out that over 50 per cent. of all the inventions of this century had arisen as a result of one man's efforts, or the efforts of small companies. Certain things are best done in and by small firms, because they have the adaptability, resilience and ability to respond to change, which the bigger companies lack.
The last but by no means the least important reason for small companies is that they provide an opportunity for a man who is unable to find happiness in a large firm to do so in his own company, or in a small company. The greater number of people that we train for a race the greater number of potential champions we are likely to produce. Given our circumstances, we must do all we can to encourage the enterprising and energtic section of the community—both men and women—to train for the trade race. The person—be he man or woman—who is willing to back his idea with his money, or with the money of his family, should be encouraged and not discriminated against.
I hope that the Minister will bring pressure to bear upon his right hon. Friend the Chancellor of the Exchequer to reform the close company provisions which at present are so discouraging to small business men. At present it is unhappily true that it pays to run inefficient business. That situation must be corrected, and the whole process reversed.
Although it is not the responsibility of the Minister, we must overcome the idea that, somehow or other, to be connected with trade or to be in business is to be engaged in a kind of second-class occupation. When I first came to this House and wrote out my biographical notes and put down my occupation as "master tailor", I was horrified when a very respected and distinguished Member of the House, who is no longer here, suggested that next time I should put down "company director". He added, "I think that you could go further, and put 'director of companies' ". I will not mention his name, but I said, "You must be joking." He said that he was not, and I said, "If that is true, I believe that that is just what is wrong with England."
I want to see Napoleon's sneer that England was a nation of shopkeepers turned into a term of honour and approbation, as was the late Kaiser's remark about the "contemptible little army" Napoleon was right; he saw in the English a built-in desire for individual independence, and recognised at once that that characteristic would always be incompatible with the kind of deified political leadership which France enjoyed at that time.
A large number of thrusting and thriving small businesses decreases the likelihood of concentrations of excessive power, whether economic or political. I visited the United States in the autumn and studied the Small Business Administration. For generations bigness had become a god in America. The small man had been absorbed and pushed to the wall. As a result, at the end of the war, the American economy was in trouble. They had monopolies, cartels and a general lack of choice. By the end of the war it was essential to take remedial action. Since 1953, when the Small Business Act was introduced, there have been a series of measures designed to bring back the small man into the arena of business.
In America this has become almost a welfare programme. It will be the height of folly for us to ignore the American experience. In this country the little man is being legislated out of existence. If we do not reverse the trend we may find that in 10 or 20 years' time we, too, will be called upon to use the taxpayers' money to bring competition back into our economy by a programme designed to force back the people that we are at present forcing out of business.
In the Conservative Party Manifesto at the last election we promised to set up a small business development bureau, with the object of providing information, advice and assistance to the individual with a new idea and, secondly, to act as a focus for the large number of organisations and institutions which are able to provide management assistance and finance, and market opportunities. We could and should learn valuable lessons from the United States experience and the experience of other countries with similar organisations, especially Germany and Japan.
We have the Rural Industries Bureau, which has been in existence since the early 'twenties. It has a wonderful record of success and service to rural-based industries. Its experience should be carefully analysed and studied. We have the I.C.F.C., the merchant banks, the N.R.D.C., the British Institute of Management, the British Productivity Council, with its small business clubs, the Society of Independent Manufacturturers, the Institute of Patentees and Inventors, and a whole host of other organisations. There is no lack of advice there is almost too much. What is needed is that all these organisations should be brought into focus in an organisation such as the small business development bureau.
As a positive encouragement to small business the Government—as is the case with the American Government—should set aside a proportion of its contracts specifically for tender by small companies. I am not asking for a welfare programme. In the United States, as here, the Government are the biggest customer, and the Small Business Administration has persuaded the American Government to set aside 20 per cent. of all Government contracts for tender by small companies. These companies have to hold certificates of competence. I understand that this works very well, and that the American Government, far from spending more money, save money.
The House will bear in mind the pamphlet written by my right hon. Friend the Member for Wallasey (Mr. Marples) entitled, "No Choice but Change" in which he explains how this system works. I will not go into it in detail, but the Government Department says, in effect, "Use your genius to make economies and we will share the savings fifty-fifty"—and then comes the sting—"If you do not make any savings you will never get another Government contract." I am told that it works extremely well.
Secondly, there is management training. Dunn & Bradstreet, the well-known creditworthiness organisation, has discovered that for every one business failure due to lack of finance, nine failures are due to bad management. The S.B.A., therefore, has a programme which ensures that any help, financial or otherwise, that is given is conditional upon the small firm's or individual's agreement to participate in a management training programme.
For the benefit of small companies—those employing fewer than 25 people—the American Administration has set up what is called SCORE—which represents the Service Corps of Retired Executives. As this name implies, this is a company of experienced retired business men who give their time free to act as honorary consultants to this class of company. I believe that we have in this country, too, a large number of retired executives who have several years of worthwhile effort in them and who would take it as a matter of service to help our tiny companies on to an efficient and businesslike basis.
In conclusion, I would suggest that the Government should approach this question in three stages. They should, first, ask themselves whether they wish to encourage small companies as a matter of policy. If the answer is "No", then I believe that Mr. Frank Cousins will be as disappointed as I am, and thousands of small businesses and those who work for and in small businesses will have to await the return of a Conservative Administration before their receive any stimulus or encouragement.
But if the answer is "Yes", as I hope it will be, then I believe that the Government should as a matter of urgency obtain the best possible advice about small businesses—how they can be stimulated and helped by a revision of their tax policies and by Government policies generally, and, of course, by Government purchases.
One last thing is that I am not advocating or asking for a welfare programme. While I believe that small businesses are a good thing; while I believe that it is essential to encourage all our traders, large or small, because without them we should surely starve; while, indeed, it may be morally right that we should be compassionate to the little man, it is neither moral nor right to sustain a man in business artificially. I believe that the test of a successful business is profit, and that a business which cannot earn profits should not survive.
I am, as I mentioned, a businessman as well as a Member of this House, and I say that the enterprising and energetic section of the population about whom I have been speaking today do not fear competition. On the contrary, I believe that they welcome it. But what they resent is unfair competition and difficulties, artificially created, placed in their way by legislation. The earliest nursery rhyme that any of us learn is about the folly of killing the goose that lays the golden egg, and the goose that lays the golden egg in our country is business and industry. Any Government with any sense ought to bend over backwards to ensure that we have a large flock of healthy geese. One can over-feed them, but one can also starve them. We have to get the balance right.
I believe that we cannot afford to place difficulties in the way of business men whose activities are so vital to our future. These difficulties undoubtedly exist, and I implore the Government to take note of them. This is not a political matter, and I hope that the Minister will not only accept this Motion but act upon it.
I am very glad to be able to speak for a few minutes. I wholeheartedly support everything that has been said so well by my hon. Friend the Member for Croydon, North-East (Mr. Weatherill). I do not want to repeat what he has said; I shall confine most of my remarks to the problems of the small business in the countryside and smaller towns.
However, I want to make two general remarks to begin with. First, the small businessman, whether he be an agricultural engineer, a corn merchant, a builder, or an auctioneer, as I myself am, by his very nature is local. The owners of these businesses live near them and contribute leadership to the community. When small firms are taken over by large businesses, which is happening in the towns and the countryside, particularly in the countryside, one finds that they are managed from London, Birmingham or Manchester, and those managements have no interest in the locality. They do not live there, do not pay rates there and do not enter into the community life. They cannot, of course, do so. It is a very real loss to the country districts.
Secondly, the small businesses are a very strong bulwark against monopoly, and are, therefore, a very real safeguard for the consumer. Unfortunately, it is often the case that the consumer does not appreciate their worth until they have been extinguished.
I turn now to some of the particular problems of the countryside and smaller country towns. As my hon. Friend said, there is, fortunately, a first-class organisation in existence—the Rural Industries Bureau. This organisation exists in practically every county, and there is a separate organisation doing the same sort of work in Scotland. I want to say a few words about the Bureau and how its work could be improved and aided.
The Bureau gives advice on technical services, such as choice of machinery to be used in any manufacturing process. It interprets advanced technological information and gives advice on how to apply it. One of the most difficult problems we have to face is that, while there is a mass of information, perhaps in London, perhaps in the hands of a few people, the average small businessman—and it also applies, I assume, to some of the bigger businesses—does not know how to apply it or where to seek it.
The Bureau does this job very well. It also gives advice about the design of workshops for particular purposes—a recent design that it helped with was for a very small brewery for particular types of that good liquid—and the layout of the workshops once they are built. There is a business management advisory service which gives advice on work study, accountancy—which is extremely important—marketing and exporting. It has arranged quite recently in Germany an exhibition or stand for small businesses and has gained, I believe, quite a lot of export business in that way. Finally, there are courses for builders in estimating and for agricultural engineers in maintenance and repairs.
Rural industries have, during the last few years, at any rate in my part of the country, developed very fast and in many cases I think that it is far better to expand the existing businesses and use the skills which are already there rather than to go out for a very large and expensive overspill programme. Of course, the introduction of new industries into depopulated areas in very important. But often in the rural districts many men are coming off the land who are skilled and they need these small enterprises just as the small enterprises need them.
I believe that the existing small businesses ancillary to agriculture, as well as many others, are capable of great benefit not only to the countryside but to the nation as a whole. I will give three widely differing examples in Norfolk to show how small businesses have been aided in expansion by the Rural Industries Bureau.
The first is a firm which consisted of three brothers employing themselves part-time on producing automatic feeders, agricultural machinery and bulk hoppers. Over the last few years, their business has grown until now it employs full-time over 50 people. The second is a firm building cabin cruisers and similar craft. It has grown from two men to 40 full-time employees. The third firm, which is close to where I live, produces joinery and makes garden seats and other woodworking products. It has grown from eight men to 50 during the last three years.
All these firms have been helped to start and expand, and are still being helped in some way or another with accountancy services and expert advice. Nevertheless, I believe that the Bureau could do a lot more. I want to put forward some suggestions as to how the Bureau itself could be helped in doing more. First, more money should be made available to the Central Loan Fund from which businesses gain their own loans. They do not get grants and I would not wish to advocate them except in one case. At present, the maximum figures are £5,000 for a new workshop, £8,500 for working capital and a maximum for any one firm of £12,500. Not only can these sums in present circumstances be very limiting, but I understand that the total amount available from the Central Fund is now inadequate and that applications received recently were many times the amount available.
Secondly, the yardsticks by which industries are helped are that they must be in a rural area or in a town with under 10,000 population or employing 20 or under employees. These figures could well be looked at again and I think that they should be raised. Surely the size of the town should be raised to 15,000 and possibly 20,000 population. Certainly firms employing up to 40 people should be eligible for such loans and assistance.
As I have said, I am not in favour of grants because I believe that these can keep quite inefficient firms just going. I think that the loans could be a little less than at the full market rate. Indeed, I believe that they used to be free. But they are now at something like the market rate. There is, however, one case where I think that grants could be given for a limited number of years following the precedent of grants being made available to farmers who undertake to keep farm accounts.
Grants to these small firms on the same basis could be invaluable. Many rural and small businesses turn out first-class goods and give first-class service. But often the accountancy side and costing are very weak and they are liable to be running at a loss or making too small a profit to keep their equipment and buildings modernised. So I ask the Government to look at this and see whether they could not extend to these businesses the same sort of grants that are being allowed to farmers for accountancy. It could be limited to a certain number of years until they have their accountancy on the right lines. I believe that during the initial stage of perhaps three or four years, this could be invaluable in making a firm turning out first-class goods into a viable and profitable enterprise and one which might do the country a lot of good.
There is another aspect to which I want to draw attention. I am not certain that my facts are right but I understand that the salary scales of the Bureau's staff are not keeping pace with those of the industrial training boards and that staff are being lost from the Bureau to the boards. The work is quite similar. One type of organisation works in the larger towns and the other in the countryside. This aspect should be looked at and if there is a difference it could well be put right.
My hon. Friend the Member for Croydon, North-East has already mentioned the American experience in the placing of orders with the smaller firms. I think that a lot of Government work is done by smaller firms here but nevertheless no proportion of Government work is directed to them. The Government are one of the largest organisations placing orders with industry and they should think about the American experience and try to place a certain proportion with firms employing under 500 people.
These smaller industries are vital to the life of the country districts, especially where depopulation is a threat. My hon. Friend the Member for Westmorland (Mr. Jopling) had hoped to be here but was unfortunately called to his constituency, and he wished me to stress the depopulation that is taking place. It is not particularly so in my area of Norfolk, where the population has remained static for a long time and is now slightly increasing, but in some of the more remote areas depopulation is a great problem, and there more encouragement of smaller industries is absolutely vital.
These smaller industries are able to absorb men leaving the land and to use their great skills. We have an organisation in being to help, and I ask as a matter of urgency for the financing and organisation of the Rural Industries Bureau to be strengthened.
I am very glad that we are having a debate upon such a fundamental matter. There is a feeling among many people that profits are a bad thing and are antisocial. That feeling has been propagated over a considerable period, and it is essential to realise that unless profits are made, there will be no opportunity to improve the general conditions of people. In this connection it is important to consider small companies. The idea that the small company is something out of which someone is making a good deal of money without doing any work is quite wrong. Generally speaking, the small company requires a degree of energy and knowledge of a general character that is quite exceptional.
Reference has been made to the taxes falling upon the small firm. The handling of these requires a degree of administration which is quite extraordinary. The close company is one of the problems. I saw the other day that there had been difficulty because the wrong subsection had been repealed, indicating that even the full weight of Government knowledge can sometimes fail and prove inaccurate. The Selective Employment Tax has been harmful to a great degree, particularly to the small retail company. There is a feeling that, on the one hand, there are very big companies which manage to have all the necessary administrative help, and on the other hand, there are the consumers who very rightly require efficiency from the retail trader. If there is a complaint or difficulty, it rebounds first and foremost on the retailer. We have been described as a nation of shopkeepers and we ought not to be ashamed of that. We should do all that we can to support such people as a great part of our economic life.
The hon. Member for Croydon, North-East (Mr. Weatherill) dealt with rather larger companies than I have in mind when he spoke of under 500 persons employed. Much of the important work is done by units very much smaller than that. When I was in America, not as recently as the hon. Member, I had the opportunity to speak to one of the senior executives of an organisation adminis- trating small American companies. I am confirming what has been said when I say that it was felt that this was an important organisation, because the smaller man, through large developments, was not getting a chance to show the ability and common sense which he possessed. It is necessary for our Government to consider these facts in view of the effect of legislation, particularly taxation legislation.
Death duties have not been mentioned, but they are killing to a family trying to build up a small business. In many ways they are a nonsense, yet we do not seem to be able to find the time to look at the nonsense with a view to improving it. Instead, we impose additional responsibilities on this type of person. In vestment grants have been mentioned, and here again the action taken has hit the small man. There is a case which has just come to my notice which indicates the sort of difficulty encountered by such people in connection with industrial training.
There is a small engineering firm for which arrangements had been made in connection with industrial training. The number of people employed there is 80. No particularly good facilities had previously arranged, but it had an efficient set of workpeople. What has happened is that the industrial training levy has been fixed for six months but the grant has not been fixed for the same period. The result is that the small company finds itself faced with a liability which has yet to be ascertained, of something like £3,000, but with no idea of the grant which will be paid.
This is a real problem, because the amount is large in relation to the company's ordinary business. This is a great worry and is not helping to produce anything. I always remember the businessman who put over the door of his office, "This room produces nothing". The general attitude of Government legislation today is to ensure that the office is used more than the works, though it produces nothing.
Much could be done about management training, but it is not only training which needs attention. It is necessary to provide facilities which will enable a person to strike out in a certain direction with finance which he thinks may be rewarding. I want to give a short example. A constituent of mine has been very interested in and working for some years on a hydrofoil, which is not the same as a hovercraft. The hydrofoil secures its stability by sonar rays. This matter was taken up with the Minister of Technology, who is keener perhaps on the bigger organisations than on the smaller organisations. The result of that examination was that it was found that the hovercraft was being supported to a very substantial extent. When the hydrofoil, with its different characteristics, was put before the Government, it was decided that unless, by contact with a big company, a substantial sum of money could be found by this private individual who had a small company of about 20 or 30 people mainly engaged in radar work, the Government could not support it.
That is something which should be actively considered. Not only should much more help be given in the ordinary administration of small businesses and in reducing the effects of taxation, but consideration should be given to the question of the Selective Employment Tax in certain cases. There should be some Government method by which the many people in this country with ideas could be helped by knowing where they can go to get that help, and there should be a ready acceptance that there is a big future for people with the necessary brains and ability and who lack only Government encouragement to make a success of their jobs.
In supporting the Motion so eloquently moved by my hon. Friend the Member for Croydon, North-East (Mr. Weatherill), there are two questions which I should like briefly to raise.
First, why are we concerned with small business problems and with the urgent need to encourage small businesses when in many parts of industry all the ideas are in favour of greater concentration and the need to avoid fragmentation? It is said that the problem is not so much the size of small units but the need to amalgamate units and to merge, rationalise and concentrate. At a time when there is an undoubted need, in my view, for many industries to reform in a competitive stance in relation to world markets and adjust themselves so that they can absorb the big investment demanded by advanced technology, it is incumbent on those of us who support the Motion to demonstrate why we believe that positive encouragement to smaller units is equally essential.
In my view, the two lines of activity are not exclusive. I would argue that the need to press for concentration and rationalisation in our great industries, on the one hand, and the need to foster and encourage small units and enterprises, on the other, far from being exclusive, are complementary.
On the concentration side, I have always hoped—perhaps some hon. Members would say optimistically—that the I.R.C. will use its power and influence to reinject a competitive spirit into industry. Certainly I hope that it would work in this way under a Conservative Administration and that it would use the "mini-Neddies"—the economic development committees—which are quite unsatisfactory bodies, to implement a genuine competition policy. That is on the concentration side—the side of saying that there is too much fragmentation and that we must rationalise and amalgamate.
But it is precisely this need for concentration in some areas which generates a correspondingly strong need for direct action to foster new, invading firms—small firms with new products and new ideas. I say this because perhaps the most important lesson which emerges from a study of the pattern of vast industrial development is that the whole idea of an industry as a concept is becoming increasingly blurred. The idea of a group of firms concentrating on the production of a single item or single group of items is becoming less real.
The potential rate of innovation in industry is so great that today's industry, as it is called, can be turned completely upside down by tomorrow's new idea, new product or new process. We are seeing this process already in many industries. Firms which have traditionally regarded themselves as part of an industry find their purpose and direction and pattern of production being challenged by entirely new processes and products which question the need and existence of the industry in which they believe themselves to be.
We are seeing this process particularly in the area of activity of the universities. Universities have a very important part to play in applying, through small units and new enterprises, the fruits of their technological investigation and research to innovation, new ideas and the stimulation of new enterprises. Therefore, in dealing with the question of small business, we are looking at the dynamic area of industry where the new ideas will be applied.
If I may move on to more controversial ground, this is a lesson which those who have argued most strenuously for the nationalisation of the iron and steel industry have missed. The idea that the iron and steel industry is a single industry is passing into history. What will be needed in future is many small invading firms ready to move in with entirely new products and processes to replace the basic materials on which the iron and steel industry has based its success and activity in the past. That is an opportunity which, unfortunately, has been missed in the iron and steel industry, but I hope very much that it will not be missed elsewhere.
If today's need in many industries is to concentrate and rationalise and prepare to meet the greater competition of American technology in world markets, then tomorrow's need is to encourage many new firms urgently if we are to meet the challenges which are coming.
I feel very strongly that there should not, for the reasons which I have put forward. In effect, that kind of statutory limitation is putting a stopper on what I call the invading element—the new ideas and techniques which must be injected into a great industry if it is to survive and compete. The question of my hon. Friend is central. The idea that iron and steel, or the basic product of steel, is the key commodity and central material in a modern economy is getting out of date. It will be overtaken by new processes and new materials.
That is the first of the two questions which I wanted to raise. It is incumbent on those of us who argue that urgent action should be taken for small businesses to point out that we do not rule out the need for concentration and rationalisation, but, on the contrary, believe that the two go side by side.
The second question is this. Why do I and many of my hon. Friends believe in the necessity for a small business development bureau when there are many agencies doing various things already? We have heard about them from hon. Members. I have no doubt that the point will be made from the Government Front Bench that a good deal is being done by one agency or another—private and parastatal agencies, and Government agencies. Despite this, we still need a single bureau to give the Government Departments, perhaps above all, a focus for their own policies and activities.
As my hon. Friend the Member for Croydon, North-East rightly said, looking back over the past two and a half years at the pattern of Government legislation, the plain fact is that the bias has been against small business. This may have been itentional or not. Perhaps in some cases it could be argued on partisan grounds that clearly it has been a doctrinaire move. In others I would be perfectly prepared to give the benefit of the doubt and say that it has not been intentional.
I do not think that there has been a deliberate and vicious attempt through legislation to persecute the small business. That may not have been the intention, but that has happened in practice. There has been a small-business cause within Whitehall constantly pressing the case, the needs, and the requirements of modern small businesses, but in practice the whole drift of legislation, whether by default or intent, has been against the small businessman, against the new enterprise promoter, against the man who would like to go into business, start with some new innovation, and try to build up the business on the basis of it. Whether intentional or not, the Government have become aligned, through their legislation, away from small businesses and towards the great corporations, towards the big businesses, the big corporate entities, the great companies, and their representative bodies and associations.
This trend towards what could be called eventually the pattern of the corporate State is one which worries people, not merely in small businesses, who are trying to make a living and who are finding it increasingly difficult, but ordinary people who see the pattern of Government in which only those who appear to be able to deal with the Government or gain anything or carry on discussions with the Government get through. It is this pattern of the corporate State which is one of the worrying trends in the development of government and legislation today.
We have heard instances from my hon. Friend of the way in which legislation and policy have worked against the small business in the last few years. There have been the avalanches of paper work of a kind which has virtually brought the Inland Revenue to a halt. What chance has the small business to cope with that? There has been the Corporation Tax development, which, intentionally or not, benefits the large and hurts the small, as we have heard graphically illustrated. There is the Companies Bill which, by abolishing private exempt companies, obviously must make life more difficult for the small man who wishes to get on.
These things may or may not be part of deliberate Government policy, but the fact remains that this is the drift of events. That is the way that things will go on unless all those forces and energies which are available and are working in small businesses and new enterprises are consolidated and fostered effectively and made to operate inside Whitehall. I believe that a small business development bureau could help in the whole range of manufacturing, wholesaling, retailing and service industries in a highly effective way, perhaps more on a psychological level than the level of direct assistance in the sense that its very existence would help to remind those who are going about the business of implementing policy that the small business cause exists and it is vitally essential for the health of industry and the health of the economy that those firms should be fostered and encouraged. All firms are small firms at some time at the beginning of their lives, and it has been rightly said that today's small firms may be—and we hope will be—tomorrow's giants. We must encourage them.
My hon. Friend the Mem- ber for Croydon, North-East (Mr. Weatherill), who moved the Motion, said that this was not a political occasion, but it seems to have become even less political than it might have done. I hope we shall have the opportunity of hearing, even of seeing, at least one back bencher on the Government side before we are through.
I am very glad to have caught your eye, Mr. Speaker, because although my work outside the House is now more concerned with very large businesses—indeed, in one case, with a monopoly—I have had a great deal to do with small businesses, and in particular I joined almost at its start, a small firm which became one of the largest electrical instrument manufacturers in Europe. Unfortunately, our taxation system made it impossible for us to save enough of our earnings to grow and at the same time to retain control; so, of course, in due time we were bought by an American firm. Today every warship, every defence establishment and most advanced industries in this country use and depend on the products of this firm, once British and now American.
What is a small business? The growth of a business is, or should be, a continuous evolutionary process, starting at a desk, or in a garden shed; acquiring premises; employing family money, then friends' money, then perhaps money from a merchant bank, then possibly loan capital from an insurance company; then becoming a public company; then merging with one or two other firms; then being criticised in Parliament for failing the nation, and then being nationalised. From cradle to grave there is no obvious point at which a firm ceases to be small and becomes large. But probably the best point to choose is when a firm becomes publicly owned and quoted on a Stock Exchange, and hence, with luck, free from the dreadful trammels of the close company legislation. This is unlikely to happen before a firm is earning about £75,000 a year, which is therefore a convenient upper limit for the description of a small business.
Why is it worth bothering with small businesses at all? I believe it is, first, because small businesses are, in general, more efficient users of talent than large ones. Of course, there are many qualifications to this. There are certain fields such as, for example, major computer design, where the cost of research and development and the speed of advance—of progress—the pace of obsolescence, are so great that only the very largest companies can attempt it at all, and even some countries cannot attempt it. But in an ordinary Parkinsonian sense, which anyone can understand, small businesses are more efficient than large.
Secondly, a small business can be more adventurous. It can be more of an innovator than a large one. Any professional man running a large business or a department of it, has all sorts of responsibilities. He has a responsibility to his shareholders, to his staff, to the unions, to the public, and even to Parliament. But the owner of a small business is free from most of these responsibilities. It is true that he does have one of the most dreadful responsibilities of all, which is the responsibility to his staff in the face of death duty. It may be thought that Estate Duty is a method of getting at accumulations of wealth, but it is much more often a way of destroying accumulations of talent and putting out of business and out of employment those who have put together what may one day be a large firm of great value to the country. Both these men, the man in the big business and the man in the small, are probably equally capable of taking risks, but the owner of a small business is far freer to do so.
These distinctive virtues of the small business, efficiency and innovation—in fact, the harnessing of talent—are well illustrated on an international scale by our relationship with the United States. In comparison with the United States economy, Britain itself is a small business. There are now, or soon will be, certain activities beyond us in scale altogether. Many people do not realise just how large the scale of United States enterprise is.
It is occasionally brought home to one by stray incidents, such as when some time ago Mr. Paul Getty was interviewed on television and was asked why he chose to live in this country. Instead of saying that it was cheap, or beautiful, or that we were agreeable, he simply said that it was handy for the Middle East. But because as a country we are smaller, we have certain advantages, just as small businesses have. For example, the research and development of aircraft engines can be done much better and much more cheaply here than in the United States.
If these small businesses have these virtues, what holds them back? There are many factors. It may be lack of management training, or lack of knowledge of production techniques, or problems of finance. I will not deal with the questions of management training and production techniques, because there are clouds of pamphlets on this subject and a list was put out by the Ministry of Technology in HANSARD on 27th January.
However, the problems of finance are of two sorts. There is the problem of obtaining fresh resources for expansion from outside, and obtaining it reasonably cheaply—because a small business has to pay more for its money than a large one. This is a problem which has been much discussed, but there are reasonably well-known ways of trying to tackle it and many people, such as the I.C.F.C., bank managers, merchant banks, accountants, even myself, are ready to advise on it.
The other financial problem is that of generating enough money within the business to enable it to grow. Here recent legislation has made the problem worse for all businesses, but immeasurably worse for the small. The Corporation Tax, the close company legislation and the Capital Gains Tax between them mean that taxation takes 62 per cent., 12s. 6d. in the £, of a close company's earnings, even ignoring Surtax, and the the rules about "participators", which I will not go into, make it extremely difficult to raise capital at exactly that point in its growth when it is particularly difficult for a company to raise capital from an institution.
There is a point in the life of every business when it has become too big for the owner's family and friends, but too small for a merchant bank, or an insurance company, or a pension fund, to feel that it can take a hand in it. That point is probably reached when its earnings are about £25,000 a year. Hitherto, up to that point it has usually been possible to find private outsiders who will put in a certain amount of equity capital and perhaps rather more loan capital, but now, because of this legislation, they are prevented from doing so.
In addition, the investment incentives have been reduced in value from 56 per cent. to 40 per cent. and abolished altogether for many businesses. They have been made very uncertain and they are received greatly in arrear. Even the official publication states that they are received 18 months in arrear. The Companies Bill, shortly to come before us, will put small businesses at still greater disadvantage. I will not go into that now, but these are all disadvantages from which companies in Europe do not suffer. We talk about entering Europe, but at the same time we pass legislation which makes it perfectly certain that we cannot compete with European firms. At this point I am reminded that when my electronics firm passed into the control of an American company, that company chose to manage it from Paris.
The close company legislation, which forbids small businesses to plough back any profits while large businesses are encouraged by Corporation Tax to do precisely the opposite, is guided by prejudice rather than reason. Why is there this prejudice against the businessman? My hon. Friend the Member for Croydon, North-East said that there was a feeling in some quarters that it was not respectable to he in business. There is a very much larger feeling that it is not respectable to be in politics, and it ill behoves us to adopt this attitude to business. Someone has to make the money so that we here can take it all away and squander it, and surely who makes the money is a great deal less important than that the money should actually get made. It mostly ends up here in any case, and we here in this House do not seem very good at making it, if the nationalised industries are any guide
Steel was mentioned just now and that reminded me of the curious workings of Providence in relation to the nationalised industries—that they always appear to be nationalised at the moment when there is a fundamental change in their fortunes. It is interesting that we have had this interminable debate about steel, that it was said to be too important to be left in the private sector, when a perfectly good Socialist argument, which was not advanced, might have been that this was the first moment in history when this country might not need a steel industry of its own at all.
People talk about excess profits in relation to private businesses and small businesses, but it would be interesting to know how profits should be controlled. Exactly how does one estimate and control what profit is made so that it is not excessive? Studying the results of the nationalised industries would seem to show——
I am saying that the criticisms made of small businesses do not appear to be valid criticisms when related to the actual results of those nationalised industries with which we here are more closely connected.
The further prejudice against directors' earnings, limiting them to £4,000 a year in a close company, seems particularly damaging. I know that we get only £3,250, but then there is always severe under-employment among politicians and there are seldom unfilled vacancies here. But a man running a large close company for £4,000 a year must inevitably be tempted away to a larger company, or abroad. If we do not want our industry to ossify, we must accept the businessman as human and recognise that he is trying to edge Great Britain forward just as much as we here are.
These financial deterrents to small businesses are bad enough, but I want to mention one other problem facing small businesses which has not been mentioned this morning. It is a planning problem, the planning difficulty of starting at all. In times gone by, one could just start in one's front room or in a shed, but now one has to get planning permission. In times gone by, housing and small firms existed side by side and every small collection of people had a builder, carpenter, blacksmith and, later on, light industries, in my view to their mutual social benefit. But now there is a feeling that industry has to be segregated. I have experience of this, because I run an industrial estate. There are very few industrial premises available for very small firms.
If one wants to start with one's friend in a joinery business one will need perhaps 300 sq. ft., certainly not more than 500 sq. ft., and one will want it cheaply. One does not particularly mind about the excellence of its condition. But such premises nowadays are practically unobtainable, and those which exist are rapidly being cleared away on general grounds of municipal tidiness. They are not being replaced because it is much more expensive and more tiresome for a factory owner to provide small units than it is to provide large ones. I know from my experience that much the greatest demand, and it is the demand which one would most like to meet, is that for very small, cheap units of factory accommodation to enable people to start. What would help most here is a slight relaxation of the very strict planning requirements.
There is a further deterrent to small businesses now operating. I hesitate to mention it, but must do so because it is very important. It is coming to be known as the B factor. The B factor is a coefficient of complexity. I do not think that the B in B factor stands for anything any more than the D in D-day. However, much recent legislation has a very high B factor, the Land Commission Bill possibly highest of all.
The man running a small business is now saddled with the Corporation Tax legislation, the capital gains legislation, the redundancy payments legislation, the Selective Employment Tax legislation, the new arrangements about investment allowances, the Industrial Development Act and the Land Commission legislation.
For a small business to flourish, it must have stable, intelligible conditions. Many men who run such firms have a very low threshold of tolerance of the B factor, and, unless they can have intelligible conditions in which to work, they simply drift off into larger firms, or abroad.
To sum up, I feel that small businesses are worth encouraging because of their virtues of efficiency and innovation and because they harness talent. But if they are to serve the country they must have access to advice, they must not be subject to financial discrimination—against the business, the owners or the staff—and—almost the most important of all—they must be freed from the general complexity of much recent legislation.
I think it may be for the convenience of the House if I intervene at this stage—it is only an intervention—first of all to tell the hon. Member for Croydon, North-East (Mr. Weatherill) that, of course, we accept the Motion. I should have worded it rather differently if I had been asked to put it forward, and would have given it what I should have thought would have been a more constructive content. But we will not quibble about the wording; the spirit of the Motion is something that we accept entirely.
I congratulate the hon. Member on a well-reasoned and carefully argued case. I see that he has now returned from the zone of silence in which the Whips sit, and if I say things on which he wishes to comment, perhaps he will now be in a position to intervene.
I do not quarrel with the view that the hon. Member put forward that private enterprise should be enterprising and competitive, and that its success should be measured by the profits that it earns. A lot of nonsense has been talked this morning about the attitude of the Government and my party to profits, and I shall put the record straight in a moment. The hon. Member said that no Government had given adequate aid to small firms. He should have added—I shall develop this point—"until the present Government came into office". I shall explain the help that we are giving on an extensive scale to the small firms in our economy.
The hon. Member went on to say that during the last two years there had been many fiscal decisions that had hit small firms very hard indeed. I shall not go through the list; they have been mentioned during the debate. I do not accept the views that have been expressed about the effects of these fiscal measures. There are counter-balancing things. In any case, hon. Members opposite will have the chance to impress and influence the Chancellor before very long when we come to the annual ritual of trying to get our fiscal measures straight. Perhaps I may be permitted not to deal with the fiscal arguments, which would take up a good deal of ime.
I should like, to begin with, to cover the suggestions that the hon. Gentleman threw out in order, as he said, to improve productivity and to give smaller firms a better chance to develop. I would, in passing, make one comment only—we shall be discussing the matter in greater detail on Tuesday—on the Companies Bill. Hon. Members must face up to the question: what duties should small companies accept in return for the right—it is a right—of limited liability? People are involved in that limited liability. The shareholders have been mentioned, but the creditors are also involved. I leave it at that point, because the suggestion that small companies will be handicapped if they divulge too much information about their activities can be answered only by answering the other question: what are the duties that they must accept in return for limited liability?
The hon. Member put forward a number of suggestions, and I shall try to deal with them fully as I go along. To begin with, the Government are very aware of the essential rôle played by the smaller firms in our economy, and also well aware of the need to encourage increasing efficiency—because this is where the profit comes from in a competitive community—and trade expansion among the smaller firms.
We are, therefore, agreed on the aims of the Motion, and what we are discussing today is the means of providing help to the smaller firms so that they can become more efficient and more productive and can expand and contribute more to the general economy. For a number of years—I am not, of course, going to give all the credit to the present Government—the scope of Government assistance and service to industry has been increasing. We know very well that industry generally values the services that are provided. In many cases, of course, although the Government are involved, industry itself pays the cost. It is the Government who bring the services together. In some cases industry shares the cost of these services with the Government.
Much of this assistance is available to large and small firms alike, but in many cases, for good reasons, it is the smaller companies who most welcome it and take most advantage of it. The larger firms, as has been explained by some hon. Members, in many instances have adequate resources to set up special departments in some fields, and they can become self-reliant more easily and can finance a number of activities that are beyond the scope of a small firm operating by itself.
I agree with many of the references made about the sheer volume of information that is now available, some of it almost thrown at firms. I also agree with the remarks about the complexity of modern methods of trading and the fact that these may often deter a small business from moving into new markets or renovating its production methods or managerial set-up. I appreciate, too, that when many small firms are advised to obtain specialist advice to help them overcome these complexities, they probably find that the expense of employing specialist management consultants is a stumbling block.
I assure the House, that the Government are aware of these problems. There are many Government services of particular value to small firms facing these difficulties, although I will not detail them all. Nor will I weary the House by detailing all the Government services that are available to firms generally. I will mention a few of the more important ones.
The Ministry of Technology's Industrial Liaison Service provides valuable assistance. The hon. Member for Aldershot (Sir E. Errington) mentioned the hydrofoil. The Ministry of Technology has a business bureau which runs a number of production and advisory services designed to help small as well as large firms, and many small firms are taking full advantage of the services available. There is also the Production Engineering Advisory Service, a project which should be of tremendous help to small firms which wish to develop new types of production, new ideas, new projects and so on. Whether this service is working thoroughly satisfactory is something that we can look into, but at least the basis of the kind of service which the hon. Member for Aldershot is seeking is there.
One of the difficulties in the case I raised was that while it was admitted that finance was needed, the answer given was that the project should be achieved by an approach to a large private organisation, and that nothing could be done as things were.
We also come across this problem of financing new enterprises in our development area legislation. I assure the hon. Gentleman that we are looking into the matter to see whether the present methods of giving financial help are altogether satisfactory. I accept that there are marginal cases for which the present rules do not work out satisfactorily, but we keep these matters under consideration.
In addition, there are the Board of Trade's services, particularly its export services, which are generally considered to be about the best in the world. Hon. Members will agree that these services are probably the best that any firm in the Western world can receive. The Export Intelligence Campaign is worthy of note. It has proved extremely successful and since it was started less than a year ago there have been 25,000 telephone inquiries from firms seeking advice and information about export developments. Most of these inquiries have come from small firms, a large proportion of which wished to enter the export business for the first time.
I need not go into great detail about the services provided by the Board of Trade. They are well known. We are doing all we can to advertise them and bring the benefits available to the attention of more and more firms. There are special incentives for firms setting up in the development areas and, because of this, I was surprised to hear the hon. Member for Cities of London and Westminster (Mr. John Smith) speak of the difficulty of obtaining planning permission and the other difficulties facing someone wishing to establish a small factory, even one as small as 300 or 400 sq. ft. I could give the hon. Gentleman a list of places in various parts of the country where such an enterprise could he established without the slighest difficulty—although they are all in development areas. Although I am not sure whether the hon. Gentleman had the development areas in mind, I assure him that there would be practically no difficulty facing anyone who wished to establish a factory in one of these areas.
I was also surprised to hear him express a somewhat anti-social idea which I thought we had eradicated a long time ago. He expressed the view that workers should live next door to the places in which they work. I hope that he was not suggesting that as a practical proposition.
I was not suggesting anything of the sort. One cannot consider this matter in terms of black and white. It is necessary to consider the problems facing anyone wishing to establish a small firm, and it is not necessary to divorce small businesses entirely from housing. There are certain ventures which are not certain of success. People are not sure, when starting them, whether they will become business propositions in the long run. What is wrong with two brothers who wish to start a joinery works wanting to work near their home while finding out whether or not the business will prove successful? One cannot expect them to go hundreds of miles from their home to a development area, in case the business does not succeed.
I must have misunderstood the hon. Gentleman. I imagine that he has never lived in a terraced house next door to the industrial concern in which he worked. It was that sort of anti-social prospect to which I was referring and which I thought we had got rid of in our planning developments.
I turn to some of the excellent suggestions made by the hon. Member for Norfolk, South-West (Mr. Hawkins), particularly in regard to the Rural Industries Bureau. I will not repeat the admirable description he gave of the work of the bureau. He asked a number of questions and I will endeavour to answer some of them. He mentioned the need for an improved loan service. He thought that the present arrangements were too restrictive and rigid. I understand that money for the loan fund is increasing year by year and that the figures have gone up considerably in the last two or three years. I also understand that the bureau is examining its policy regarding the size of firms which it helps and the areas in which it operates. I am sure that the hon. Gentleman's suggestion about the size of firms being assisted will be considered by the bureau and that his other suggestions will be looked into. I should point out that these are not strictly matters for the Board of Trade. Although we are extremely interested in them, they are really matters for the Development Commission and the Treasury. However, I assure the hon. Gentleman that his views will be made known to those who are responsible.
The hon. Member for Norfolk, South-West also referred to the stand which the Rural Industries Bureau had at a fair in Germany. The stand was at the Sports Goods and Open Air Epuipment Fair in Cologne. I visited the fair and spent some time on the stand speaking with the people whose products were being displayed. It was a Board of Trade enterprise jointly with the Rural Industries Bureau and everybody concerned seemed extremely happy about the outcome of it.
Some of the people displaying goods at the fair were in a very small way of business indeed, some of them making bits of equipment in small buildings. One of the most successful enterprises was a very small firm which was displaying underwater rubber swim suits. The firm was making this equipment in an old chapel somewhere in East Anglia. It began with two or three people—a man, wife and friend—producing this equipment, and later other labour was employed. Many of the old ladies in the parish were working a few hours a day—turning up at irregular intervals and doing an hour's work here and there—and all concerned were making considerable profits out of these swim suits, sharing in the profits. At the Cologne Fair this small company was taking substantial orders in competition with large firms displaying this type of equipment. There were many other things on display at that fair which I thought were a great credit to the stimulating work which the Rural Industries Bureau has done. I assure the hon. Member that the points he has raised will be drawn to the attention of the Development Commission and the Treasury.
Most of the questions put by the hon. Member for Croydon, North-East dealt with some of the more well-established services provided in this country for big and small firms alike, such as the British Institute of Management, the British Productivity Council, research associations, and so on. Of course all these varied and widespread agencies of service are used by small as well as by large firms.
The definition which the hon. Member gave was of a small firm being one employing fewer than 500 people. I do not know what proportion of all the manufacturing firms employ fewer than 500. At some point we have to make a distinction between manufacturing and distributing firms. Certainly 20 per cent. of those employed work in establishments employing fewer than 100, and 20 per cent. represents a pretty large number.
We have been considering whether the advisory services which are available to these smaller firms should be specially further developed and expanded. Much of this follows from the discussions which took place at the Productivity Conference called by the Prime Minister. In collaboration with the National Economic Development Office, the C.B.I. and the T.U.C., we are now examining a wide range of Government and other advisory services which have an impact on efficiency in industry. There are a large number of appropriate organisations which have ideas about how this sort of thing should be developed. We have consulted them and a number have come forward, as the hon. Member himself has, with many constructive ideas.
It will take a little time for the examination of these ideas to be completed in order to enable us to come forward with a report and recommendations, but this is only a matter of weeks or months. We do not intend that this examination should go on over a long period of time. We are aiming to have a report available by the time the Productivity Conference reconvenes, probably in late April or May—we are not sure when the date will be. The report which will then be made available to industry generally, to small as well as large firms, will give a more comprehensive picture of the services already available and will show where the gaps and weaknesses are.
Yes, I will do what I can in that regard. I have an idea that it will be included. I was about to say that I have an idea it has already come forward, but I should like to check on that, I know that there have been discussions about it.
In the meantime, we are not sitting still waiting for the report to come forward and for the recommendations on which we can work. As hon. Members may be aware, my right hon. Friend the First Secretary of State and the Secretary of State for Economic Affairs has recently written to several thousand smaller firms in industry drawing their attention to the services of the British Productivity Council and discussing with them the need to promote greater efficiency in industry, how to get greater productivity and so on. It is hoped that a large proportion of those firms in the 200 to 1,500 manpower range can be persuaded to ask for a visit from the British Productivity Council which will put them into touch with experts from some of the newer firms in newer industries so that, by seminars and visiting other firms and so on, they can get an idea of newer management techniques whic many of them need to reach the pitch of efficiency which they should reach.
We do not need to go over again the techniques of exporting or the problems of exporting. These are constantly under review by the Board of Trade which is in touch all the time with industrialists who bring forward their problems and suggestions. What we are more concerned with in this examination is the development of efficiency and productivity within industry to find out just where the obstacles are, the handicaps to greater efficiency—if hon. Members like, the handicaps to greater profitability—and to see to what extent the Government can help to get smaller as well as larger firms in the frame of expansion with lower costs, greater efficiency, and higher profits.
When we deal particularly with smaller firms the idea that some kind of State department should be set up on the lines of the Small Business Administration in the United States is bound to look attractive. I am not ruling this out. I think it might well be examined, but I should have thought that it would be better to deal with firms not so much according to their size, although not neglecting the special interest of the smaller firms, but according to their interests.
Businesses, I am sure, tend to be more concerned with their business than their smallness. A small clothing firm is likely to have more in common with a larger one than with, say, a machine tools firm. We have to proceed far more on an industry-industry basis when thinking in terms of Government help of one kind or another than on the basis of size. We have no evidence to suggest that a special new Government organisation concerning itself solely with small firms is required, although we are prepared to look at this.
We are well aware of the American experience in this field and of the work of the Small Business Administration. We are taking this into account in our examination of possible methods of assistance. The first reaction was that we should proceed on an industry-industry basis rather than looking at small firms, but it may be that the hon. Member's views will prevail. I am merely saying that there is a need for caution.
There is, of course, another point of view. What all small firms have in common is the invader policy. They are setting out to upset and challenge larger firms and, so far from being in line with the larger firms, they are in challenge against them.
I was coming to that point. In the discussion hon. Members have drawn attention to what from many points of view seems to be the Government's approach on the size of undertakings. We are setting up the Industrial Reorganisation Corporation. One of its tasks is to arrange for mergers of small firms and so on. Hon. Members have said that it appears that the Government wish to go for size and to get the economies of scale, and in doing so we are likely to put smaller businesses out of existence. I am paraphrasing and making it sound rather crude, but that was the approach.
We must face the fact that in some fields the small concern is at such a serious and growing disadvantage that it cannot hope to compete on equal terms with the leading firms in this country and overseas. We must pay far more attention to overseas competition than perhaps we have done in the past. As we said in the White Paper on the Industrial Reorganisation Corporation, size and efficiency certainly do not always go together, but it is sometimes only the relatively big company which can afford to make use of the opportunities for increasing efficiency which are available to modern industry.
The small or medium sized company may be unable to achieve the economies of scale which result from long production runs using expensive modern plant and machinery. The small firm may be unable to afford effective research and development work. This is a problem we are constantly meeting in regard to small firms. The fact that I represent the City of Sheffield will give hon. Members a pretty good idea of the number of small firms that I am concerned with. I would not say that all of them are efficient or that their prospects of becoming more efficient are at all bright.
It may be that some firms find it impossible to support special design and marketing staff. This is particularly a problem where the industry itself, in order to maintain its present position, let alone expand, must go into new markets and expand. It has got to reorientate its whole development from the point of view of marketing and going into new markets. This is not an easy job. I can name very many small firms that I know very well indeed which could not possibly afford the specialist designing and marketing staff which are needed if they are to do their job successfully in new markets. Many firms—here perhaps I get on to slightly more dangerous ground, having mentioned my constituency—may have difficulty in attracting well qualified management because of their smallness.
In these circumstances, the best answer may well be for smaller companies to join together, either to form a larger and stronger unit overall, or to join together to share services which are common to them all. At any rate, the Government's main purpose in setting up the I.R.C. has been to stimulate structural changes in industries which are too fragmented at present to be successful in international competition. The I.R.C. will certainly not be always on the side of the big battalions, helping giants to swallow up their smaller competitors. Wherever possible, the Corporation will try, not only to help small and medium sized companies to preserve their identities and personalities and the special contribution which their flexibility and adaptability qualify them to make in certain fields, but will also help them to achieve the higher level of efficiency which in some cases can be reached only through mergers and rationalisation.
Would the Minister of State deal with the nub of the whole matter? There are many ways of talking out a debate, if I may say that to him respectfully; I do not want to be in any way insulting. One of these ways is not to answer the main point. We all agree that the services exist. This is what the right hon. Gentleman is saying, underlining what all of us on this side know. The nub of the problem is the question of taxation and the close company provisions. It is not good enough for the right hon. Gentleman to say that he will not deal with these fiscal matters, because these are the nub of the problem. I beg him to deal with this problem, because he says that the close company provisions are an encouragement to the small business man. I say exactly the reverse.
The hon. Gentleman can go on saying so, but he knows enough about the way our affairs are conducted to realise that no Minister, a few months before the Budget, can discuss such fiscal questions. These are a matter for my right hon. Friend the Chancellor of the Exchequer and the next Budget. As I said at the beginning—I am sorry that the hon. Gentleman was not listening—these fiscal matters are questions which hon. Members will be able to deal with. They will have plenty of opportunity to put forward their views, their pressures and their persuasions on my right hon. Friend the Chancellor, if they think that, if these fiscal matters are changed, the industries and companies about which they are concerned will be much better off and will do a better job of work.
No doubt, if these fiscal measures were changed, the companies concerned would be better off. Whether they would do a better job of work remains to be seen. No Minister other than the Chancellor of the Exchequer, obviously, can come forward at this stage of the year and discuss the fiscal measures which will be dealt with in the next Budget.
I think that I have made it clear that we are certainly not against small businesses. What we want is the greatest measure of efficiency throughout British industry The contributions that small firms can make are contributions which will be measured in the wider field of overall efficiency. It may be that there are certain industries where the small sized units are a handicap to overall efficiency.
I am sure that here are other industries where the point made by the hon. Member for Guildford (Mr. David Howell) clearly applies. In order to get economies of scale, in order that some big corporation can take advantage of all the new and expensive techniques, in order to get the right kind of expensive management, and so on, it may be desirable that there should be concentration, but in that concentration it may be more than desirable to have smaller firms which are contributing new ideas and which are acting as a gadfly, as it were, on the bigger body.
These are matters which must be taken into consideration in the review of all the Government services which is now being undertaken. I would not quarrel with the view that in many industries small firms have still got a tremendously important part to play. Neither would I quarrel with the view that the Government must do what they can in those industries to ensure that the small firms make their proper contribution profitably to the expansion of the national economy.
I found the speech of the Minister of State enjoyable, as always, and well-informed, but rather unsatisfying. When he bared his soul to us, which was when he got a little nearer Sheffield, he immediately showed that he was on the side of what might be called the big battalions: that was his instinct.
Earlier we listened to a typical self-justifying Board of Trade list of the good things it does for industry. To me it sounded exactly like the recruiting sergeant outside Wellington Barracks—"Nice uniform. Nice life if you join us". However, as soon as one gets inside and really comes to grips with the environment of what the Board of Trade and the Government produce for industry, it is the pudding-basin-on-the-head haircuts, fines, confined to barracks, and goodness knows what. We are not persuaded. The Minister of State was disappointing. No doubt, he will have an opportunity to redress this a little later.
One of the most encouraging things so far about this debate—it came particularly from my hon. Friends the Members for Croydon, North-East (Mr. Weatherill), Guildford (Mr. David Howell) and Cities of London and Westminster (Mr. John Smith)—is that we have steered clear of what might be called the Oliver Twist approach to small businesses—that is, the attitude that they should have sympathy because of their poor, weak position and we should ensure that a little corner is carved out for them where they can continue their modest existence.
The whole theme of what we on this side believe is what might be called the more positive David versus Goliath philosophy of the small business. This is the philosopy that in a small business an instrument may be to hand—in the case of David and Goliath it was a sling and a stone and an agile and youthful mind—which is capable of striking down an existing monolith and replacing it with something which is immeasurably better, more enduring, more capable, and more beneficial to the community at large. This is exactly what happened with David and Goliath. With a sling and a stone, he not only destroyed the existing monolith but replaced it with something more prosperous and beneficial to the whole community.
I stress this because I believe that in the familiar and rather heart-warming theme which is true of the David and Goliath story there is something which reflects an underlying and permanent reality in the conditions and nature of life on this planet, and we ignore this at our peril. I refer to the innovator, the newcomer with a new instrument who comes in and shatters the monolith.
One of the things which continue to disturb me about the whole philosophy concerning the Industrial Reorganisation Corporation, which, we know, is a favourite of the Minister—the whole concept of conglomerating units into enormous monoliths—is that one often gets landed with something which, if it gets big enough, then ossifies and petrifies and becomes like the dinosaur, which is out of date and is by-passed very often by events occurring in the smaller bodies around it.
I want to illustrate the whole of this danger of the monolith, of this concentration into something which will allow, perhaps, the sting of a gadfly, as the Minister described it—something which merely stimulates it superficially and locally—but which is too big to countenance more fundamental change. This sometimes happens when there are units of colossal scale.
I want to be a little more specific by drawing the attention of the House to what might be called a David company among the Goliaths of the industrial giants. My example is a particular one in iron and steel. I make no apology for mentioning—I hope that the Minister will have heard of it—the name of the Millom Hematite Ore and Iron Company. I notice that the Minister nods his head. He will now be regaled with a little of the prospects and difficulties of this David company amongst the Goliaths. I have no interest to declare in the Millom Hematite Ore and Iron Company other than my stake in the national interest. That is the stake which we all have.
Now let me particularise. Millom is a small town on the coast of Cumberland. Hematite is a special kind of ironstone ore which can be dug up locally in that part of Cumberland. The Millom Hematite Ore and Iron Company, as its name implies, through its blast furnaces, turns this ore into pig iron, which is then used in the great steel-making plants all over the country.
It is, however, a very small company, because—this is where one has immediately to register where it fits into the context of this debate—in the White Paper on Steel Nationalisation, which gave the scale beneath which the State was not interested in taking over private companies, namely, 475,000 tons of crude steel production per annum, Millom would not so much as be noticed. It hardly produces any steel. It produces only a certain amount of iron ore, the basic ingredient of steel, to the scale of about 500,000 tons a year. It is way beyond the scope of even the threshold of discrimination set out in the Bill to nationalise iron and steel.
Millom, however, has two particular features, which, I believe, are peculiar to small companies, which have brought it out into a significant and striking position vis-a-vis the steel industry, one particular sector of this big-versus-small dialogue with which we are concerned.
Millom's two features are, first, that it has a small, vigorous and efficient management, which, as we have heard today, is very often a feature of a small company. Management is more effective because there is more sense of involvement between managers and workers in the enterprise, communications from top to bottom are easier and it is easier to move the manpower in a more flexible way among a whole variety of jobs. Above all, when a company is small its survival is not underwritten by anybody and it has to struggle on its own.
In any event, Millom undoubtedly has an efficient management. This is one of the features and advantages of being small. It has, however, another interesting and perhaps indispensable feature to recognise, and it at least is capable of recognising this feature: that is, it is constrained in something of a straitjacket by its peculiar external circumstances. It is small and it is very much subject to the pressures and constraints of market conditions outside it. This is one of the dangers which are often overlooked in a big unit, which does not realise the extent to which it may be by-passed by changes and currents in the world outside and which simply drifts sublimely on its own way.
Millom is a company small enough to be extremely susceptible to commercial and environmental factors in its own field. To that extent it has continually had to consider how it could adapt and change to fit in to the changing structure of the world of iron ore in which it worked.
In the case of this ore company, the main difficulty was the discovery of rich ores in other parts of the world and the ease with which nowadays those ores can be reduced to pellets and transported and imported into this country very cheaply. Therefore, the Millom Hematite Ore and Iron Company found that the cheapening ore market was making its competitive position very difficult and prices were squeezing it. Because of changes which deeply affected it round about, it had to change and innovate in order to survive. It could not control its own environment. It had, therefore, to react to it and change accordingly. It therefore decided that it must make better use of its ore.
It hit upon the revolutionary—I use the word advisedly—idea of seeking to try to make steel directly from iron ore. We ought to pause to reflect on the sheer audacity, the wild-eyed optimism of this idea of a small iron company of almost minimal size, seeking to jump the gap between iron ore and the semi-finished steel product. It is almost inconceivable that anybody should even think of it.
For the last 150 years, almost since the birth of a modern steel industry in this country, there have been three distinct phases of steelmaking, of which the reducing of the ore in a blast furnace to pig iron is only the first. The two subsequent stages are in many ways the most difficult and expensive: namely, the transporting of the molten iron ore to the next stage, which is the purifying process in the steelmaking furnaces; and the third stage, the rolling and shaping of the hot finished steel into the primary shapes. There have always been these three stages.
The enormous expense—this is perhaps significant—latterly in steelmaking has been in the last two stages, because the modern steel converter, the L.D. converter to use the technical term, must be on an enormous scale, often in excess of 300 tons capacity, let alone its outside weight, to be an economic unit. Correspondingly, because of the large size of these big steel converters, it has been necessary to have a big plant in modern rolling mills which will handle the growing volume of red-hot ingots which come out of the steelmaking process.
These L.D. converters and the primary rolling mills have in recent years been the two growing sides of steelmaking and easily the most expensive. I am certain that the Minister of State, who represents a Sheffield constituency, is well aware of this. Indeed, the whole of the Benson Report on the future state of the steel industry is conditioned and governed precisely by these economic realities, including the enormous expense of steel-making through the oxygen process and L.D. converters and the huge cost of the primary rolling mills. The Benson Committee produced a plan for the British steel industry which is geared entirely to these economic realities.
It is, nevertheless, possible to report to the House today that there is now in operation a small company which has succeeded in jumping the gap, in eliminating two of these most expensive stages by what has come to be described as the new revolutionary spray steel process. I have no hesitation in saying that this process is as revolutionary in its field as the jump in electronics and miniaturisation through the development of transistors to take the place of the former old mechanical processes in radio.
It is now possible by the Millom spray process to produce steel from the iron ore stage right through to the steelmaking and shaping process, by the continuous casting method, at one-quarter of the cost of the traditional steel-producing method. It is an almost inconceivable change in one of the most capital-consuming sectors of industry. This process is capable of cutting plant and production costs by as much as three-quarters. This is the scale of possible change that we are now faced with by the new Millom spray steel process.
The traditional method of making steel from iron ore was to put it in the bath and blow bubbles into the bath. Huge injectors push oxygen into the molten bath of steel and bubble it up so as to bring the molten iron into contact with the oxygen. The spray steel method is immeasurably more simple than traditional methods—like all great break-throughs. The molten steel drops through a spray, and is atomised by a jet of oxygen, water and lime in a powdered form. Because it is atomised a far greater surface of the molten metal comes into contact with the oxygen, and it therefore drops as steel, direct from the iron ore, into a bath or container underneath. The molten steel is so hot that it is capable when received in the receptacle, of melting 35 per cent. scrap steel along with it. From there it can flow, through the continuous casting method, into final primary shapes—by-passing the traditional steel furnace and the rolling mills. This revolutionary method of production was developed through the British Iron and Steel Research Association, and Millom has had the sense to initiate because it was constrained by circumstances to strike out and develop.
But there is a fly in the ointment. I have no doubt that the Minister is aware of it. It is probably a fly of which the Minister of Technology and the Minister of Power are even more keenly aware. Having developed the new technique which B.I.S.R.A. invented, and having successfully produced a spray steel plant which can produce 35 or 40 tons per hour of finished steel direct from the blast furnaces, Millom found itself with the technical and theoretical possibility of raising this production to 500 tons per hour direct from the blast furnaces. So it set about trying to raise £1 million—which it will have no difficulty in doing—to go over from the prototype to the processing plant, or to scale up; it cost about £100,000 to produce this successful pilot plant.
But the Iron and Steel Board has jumped in, typical of the big battalions. I am not trying to impute any unworthy motives to the Board, but it is absolutely typical of the situation in which a small innovating firm, having developed a revolutionary process, comes up against bureaucracy, vested interests and traditional methods. The application to raise £1 million in order to scale up has been "deferred", to use a polite description.
The hon. Member may remember that when the Iron and Steel Board was being set up we warned the then Government that this was precisely what would happen. They did not take our advice.
The reason I am concerned about this deferment is that the Chairman of the Iron and Steel Board, Sir Cyril Musgrave, is a member of Lord Melchett's Organising Committee, and I fear that Lord Melchett, no doubt under the influence of the Minister of Power, has let the Board know that it would be entirely wrong, in advance of steel nationalisation and the emergence of the National Steel Corporation, to allow this project to go ahead, because the organisation of the steel industry is in a state of flux. The tie-up between the Chairman of the Iron and Steel Board and Lord Melchett's Organising Committee, and the link between that committee and the Government—who, as we all know, set up the Organising Committee—must be suggestive when one considers the un- justified deferment ladled out to this small progressive firm.
I hope that the Minister can reassure us that there is nothing conservative, in the wrong sense of the word—nothing stick-in-the-mud on the part of vested interests and the big battalions—holding up the Millom advance. This is far too important a matter for the nation, quite apart from the sound growth principle of David slaying Goliath. I would remind the Minister of State that this is not just the gadfly principle—the small irritant which may make a marginal change in the processes of the Goliath. This is a case of a newcomer which could force a whole industry to change over to a new technique and a new process.
Such forced changes have occurred in the past. An obvious example of this situation was Wilkinson Sword Company's forcing the great Gillette to change over to stainless steel razor blades, or the little invention of Moulton, which produced a bicycle with small wheels and rubber suspension, thereby forcing B.S.A. and other large manufacturers of bicycles to change and adapt to the small wheel. David does not merely irritate Goliath; David slays Goliath.
This is what could happen if Britain made a corner for herself in spray steel. The present fashionable way of producing steel is by the L.D. converter process. The Minister of State's own party was constantly criticising the Iron and Steel Board, before it came under the purview of nationalisation, for not paying enough attention to L.D. and the oxygen processes. But do not forget that L.D. originated in Austria—one of the least of the tribes of Israel, one of the least important of the producers of steel in the world. Why did it originate in Austria? It was because there was severe competition from France, Germany, the United States and Britain, and because it had peculiar qualities of ore to hand. It had to adapt, adopt and innovate in order to survive. Survive it did, and it has forced the whole world of steel production to change, in exactly the same way as Gillette's were forced to change to stainless steel blades and B.S.A. to small-wheeled bicycles.
Here we have a chance of getting in on the ground floor through sprayed steel. Only about 25 per cent. of our steel production is tied to L.D.—the expensive oxygen converter process. The Japanese, whom we are always having thrown in our faces as bigger and better competitors, have 50 per cent. of their plant in L.D. If we produced a successful spray steel plant we should be able to turn the flank of Japanese steel production. Yet the Government are deliberately deferring this development and holding up this process.
If we cannot go ahead, somebody else will take it up. That has happened before. It will go overseas, although Britain has developed the process. It reminds me of the alleged fact that the Rootes Company was once offered the Volkswagen design and engine, just after the war. It was told that it could take it up; but it said, "No, we are not interested, because it is not modern or good enough". The production went to Germany, and it is now leading the whole world. This will happen to spray steel if the Government do not wake up and intervene to tell the Iron and Steel Board to give the green light to spray steel before some other country takes it up and it is lost overseas.
It is no good the Minister's talking about a gadfly. He must make allowances for small Davids who can slay Goliaths. British industry must be flexible if it is to take advantage of modern techniques, and nationalisation is the one guarantee that this cannot happen. It is essential that Millom Hematite should be allowed to get under way before the National Steel Corporation is set down on the country like a monolith which will in due course be all too likely to turn into a dinosaur.
My hon. Friend the Member for Barkston Ash (Mr. Alison) has told the House of his suspicions about the activities of the Organising Committee of the steel industry. I think that he has made his case and that there is a point to answer.
I warmly congratulate my hon. Friend the Member for Croydon, North-East (Mr. Weatherill) on introducing his Motion, which well repays close examination. The House is indebted to him for his studies of the Small Business Bureau in the United States, which have added greatly to the value of our discussions.
I was very disappointed by the Minister of State's reply. He entirely avoided reference to the taxation matters which are among the most important factors. It is not good enough to say that no Treasury Minister can intervene in the debate because of the nearness of the Budget. I do not accept that the type of taxation reviews that we are calling for comes into that general category. That attitude is to be deeply regretted.
I want to deal with two main subjects—the effects of the close company taxation provisions and the effects of the Capital Gains Tax on the small company.
What should be the Tory attitude to small businesses? Undoubtedly there are good and bad small businesses. It is entirely wrong for us to adopt a Poujadist attitude in protecting and preserving the inefficient elements. The forces of competition deal with the inefficient elements, rather than the forces of the taxation system, which artificially hinder the development of good small businesses. This is wrong in principle and it hinders the development of the national wealth. It is wrong also because the small business is vital to a thrusting and pulsating competitive economy.
I deplore the Socialist attitude to small businesses. The empty green benches on the Government side of the House make this point more clear than 10 speeches from this side of the House. I deplore it particularly because on the benches opposite there is tremendous superficiality combined with lack of knowledge about the problems of small businesses.
Historically the Labour Party started off with a general hostility to all businesses, big or small. We have seen a change in this pattern. There has been a rather reluctant acceptance of the mixed economy by the Labour Party but they have favoured big and medium-sized companies in preference to smaller units. I believe that the basic reason is that the Government feel they have much greater power and influence over large and medium-sized businesses than over the more numerous and diverse smaller ones. They feel that if they want to speak to I.C.I. they can get Sir Paul Chambers along and he will listen attentively. Whether he will accept what they say is another matter, but he will listen attentively. But if they want the small businessman, the employer of 20 people, to come along to see the Chancellor, that is beyond their grasp. This frustration has coloured the Labour Government's attitude.
I want particularly to talk about the problems of close companies. Many of these problems arise because of the type of Corporation Tax that was introduced by the Government in the 1965 Finance Act, and because of the way that the taxation was forced through the House by the Labour Government, with very little constructive criticism and examination from the Government benches. We shall have for many years the problem of correcting the structure of Corporation Tax, about which the Government made such a mistake in 1965.
The first problem in regard to close companies with which I want to deal is that of the level of directors' remuneration. This is fixed at £4,000 for one full-time director, £7,000 for two full-time directors, and £10,000 for three full-time directors. If the profits are sufficiently large, there is the alternative of 15 per cent. of the company's profits, but that comes into operation only in the case of extremely large companies. This is an unreasonably low level of remuneration.
For example, one can have the situation of a company with two full-time working directors which makes £50,000 profit and has a turnover of, say, £5 million, and those directors have to divide between them £7,000 as directors' remuneration. This is unreasonably low having regard to the heavy responsibility involved and the risk to their own capital in the enterprise.
Yesterday I was looking at figures in the Financial Times of comparable salaries paid to directors and executives in other businesses. For example, the salary range of the deputy chief executive officer (administration) of the co-operative Wholesale Society is £8,000–£10,000. The salary of the chief executive officer of a large engineering group is £7,500. The salary of a group sales and marketing executive in the automotive components replacement trade is £7,000. I could go on ad infinitum giving examples to reinforce my point that the arbitrary figures for directors' remuneration in close companies are unreasonable low.
Another problem arises when a director wishes his son to come into the business. His son may have gone to university or technical college and become a skilled engineer, scientist or accountant, but, no matter what qualities he has, he is limited to the same salary scale as I have outlined—about £3,000–£4,000. But if the son goes to I.C.I., it can pay him what he is worth. So there is an artificial limitation in the case of the close companies.
Another point arises when a firm wishes to bring in an outside director with special technical skills. The Minister of State spoke of bringing in design and marketing staff, or perhaps a skilled engineer. Provided that the man is not given more than 5 per cent. of the company's shares, the company can pay him what he is worth, but if he is given more than 5 per cent. of the shares, his salary is limited to the £3,000–£4,000 scale. This is particularly stupid because it means that the small business is placed at a disadvantage compared with larger firms in attracting skilled staff and is also discouraged from giving a share of the business to skilled personnel. This is one way in which the Government are further assisting the brain drain.
My second point about close companies concerns the statutory provision that the company must pay out 60 per cent. of its profits after Corporation Tax. That figure has been written into the Act.
When the Finance Act, 1965, was going through the House my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) argued that it was wrong to put in a specific percentage because the Inland Revenue would take it as an automatic requirement that 60 per cent. was to be enforced. That is what has happened in many cases. I do not want to reveal what happens at private meetings between companies and the Inland Revenue, but I assure the Government that this is the attitude being adopted by the Inland Revenue, and it is in direct contradiction with the soothing words of the Chief Secretary to the Treasury, who said that the figure was merely a guide, that it could be very flexible and that all kinds of other things were to be taken into account.
We argued then also that in any case 60 per cent. was too high. This point must also be reinforced once again in this debate. Of course we now have the anomalous situation whereby the Corporation Tax system encourages companies generally to retain profits while the Inland Revenue is forcing close companies to pay out profits, which is the opposite of the general intention. We thus have the comic result of some quoted companies being forced to increase their dividends to meet the 60 per cent. payout requirement, which is directly contrary to the Government's prices and incomes policy.
The Treasury is unable to give any figures of the number of companies involved and has also specifically refused to limit them in dividend increases in the same way as they are limiting other companies. This situation bears out again the anomalous position that the Government have put themselves into on this arbitrary statutory requirement as to payment of dividends by close companies in the misguided legislation of 1965.
Interest on a loan or debenture stock is not allowed as an expense before Corporation Tax if the capital is provided by a director or a director's family or other participators. For example, if a man is starting a business and wishes his father or brother to put money into it by way of loan capital, he is unable to pay him a normal rate of interest as an expense before Corporation Tax. This is madness. It is unfair because it is the small businesses which find the greatest difficulty of all industrial concerns in raising capital and they are being doubly penalised because there is also the Chancellor of the Exchequer's advice to the banks not to lend money except in very special priority cases. So, all in all, this is an absurd provision and I repeat our request that a reasonable rate of interest should be allowed for such loan capital or a formula decided as a rate of interest of perhaps 1 of 2 per cent. above the current Bank Rate.
There is a reasonable and simple way round the Chancellor's intention. I am always glad to take an opportunity to give publicity to any method within the law of getting round tax legislation which I consider to be unfair and unreasonable. The method concerns the example I gave. The father could deposit his capital with a bank or merchant batik at an agreed special rate of interest. The bank or merchant bank would thin lend that money to the close company and then, of course, the bank would be paid its interest in the normal way and this would be allowed as an expenses before Corporation Tax. This method would get round the anomaly introduced by the Chancellor of the Exchequer, so I hope that we will see it being done rather more in the years ahead.
Of course there are many other detailed unfairnesses which have been shown up in the close company legislation, such as the definition of a participator and other matters that I shall not go into now. The operation of this legislation has been highly undesirable. Where the company profits are under £10,000 a year with two full-time directors, I do not think that it matters greatly. But when one gets over that stage, it becomes more and more penal in its operation. The central theme of the debate is really the harm that this legislation is doing.
In the recent debate on tax reform, I said that I had been told that the Inland Revenue had prepared a report on the working of the close company legislation. I said that I had heard this only at second or third hand and was not sure whether the information was correct. I asked the Financial Secretary to deal with it in his reply but he did not do so, so I repeat my question today. I am told that the Inland Revenue report says that the legislation is too tightly drawn and is harmful to the development of small businesses.
I want to say something on the question of the Capital Gains Tax as it affects small businesses. This is immensely complicated. The tax can arise on the sale of a business and that creates its own problems. It can also arise on death or transfer of business or a share in the business to a son. This raises the problem of finding hard cash to meet the Capital Gains Tax.
While the Government made a small concession when the Act was going through the 'House, this still has not met the essential problem. The Capital Gains Tax on small businesses will be seen over the years ahead, particularly with inflation, to be more and more savagely harmful in its effect and I hope that the Chancellor will look at this again in framing his budget.
I occasionally have the responsibility of advising people who are looking at the problems of whether or not to commence small businesses. I try to advise them on their taxation position under a Socialist Government. I do not really feel that people have yet fully realised the grave seriousness of the taxation problems which have been created for small business by the 1965 Act. I am afraid that my advice is that, unless they are going to run their business in such a way as to keep their profits under £10,000 a year for ever, or unless they have strong personal motives in wanting to set up in business for the hell of it, or unless they can get their profits up to about £100,000 within 10 or 15 years and get a Stock Exchange quotation, my view is that, under present legislation, it is just not worth it.
I am obliged to my hon. and learned Friend. I suspect that there is a degree of Machiavellianism in this because I will never forget the remark made by the hon. Member for Edmonton (Mr. Albu), then Minister of State, Department of Economic Affairs, when the Act was going through the House on Second Reading. My right hon. Friend the Leader of the Opposition had said that this legislation would
… be damaging and lead to the break-up of family companies on death.
The hon. Member for Edmonton replied:
And about time."—[OFFICIAL REPORT, 10th May, 1965; Vol. 712, c. 72.]
I am obliged to my hon. and learned Friend the Member for Antrim, South (Sir Knox Cunningham). This makes the point very well about the Government's basic attitude of hostility to these small businesses. I am extremely pessimistic about the future. Like my hon. Friend the Member for Barkston Ash, I recall that 50 years ago today's industrial giants, such as I.C.I., G.E.C., Marks & Spencer were very small businesses indeed and grew within the last half-century.
This present legislation will have the effect of severely harming the growth of the small company and bringing a new Ice Age to Britain's industrial structure, allowing the big to stay big while the small are artificially prevented from grow- ing by the party opposite. This is disastrous for Britain and we on this side of the House must reiterate our aim to use the individual efforts of tens of thousands of men to contribute to a growing and competitive economy.
No words of mine will be half so eloquent about the indifference of the Labour Party to the fortunes of the small businessman as the empty benches opposite. It is extraordinary that not a single speech in this debate has come from the other side of the Chamber, with the exception of that from the Minister of State. His speech was extraordinarily disappointing in that he did not address himself to the central argument of my hon. Friend the Member for Croydon, North-East (Mr. Weatherill), namely, that it was the level of taxation and the framework of taxation which was leading to so many of the difficulties of small businesses.
Naturally one does not expect the Minister of State to anticipate the Chancellor's statement. No one is so naive as to expect that, but at least we might have expected some glimmer from the Minister of State that he recognised that there was validity in the proposition that the Finance Act, 1965, and some of the consequential legislation and created special problems for small businesses. It was the absence of even a token recognition which has given us such acute disappointment in the Minister's speech, delivered as it was with his customary urbanity and charm.
I should like to congratulate my hon. Friend the Member for Croydon, North-East on his good fortune in the Ballot, and for having chosen this subject. It is one of immense general interest, certainly outside this House, and it has enabled the House to concentrate upon an important aspect of our industrial structure, all the more significant in that the debate takes place a few weeks before the presentation of the Budget. My hon. Friend was absolutely right to say that he was not presenting the arguments about the small business as a plea for generous indiscriminate Government help, rattling the begging bowl for further subsidies.
This is very alien to the thinking on these benches, and the argument was very well sustained by my hon. Friend the Member for Barkston Ash (Mr. Alison). It is true that in a discussion of the rôole of the small business we do not want to be obsessed with some kind of nostalgia about the god-given rôle of the little man, any more than we should be obsessed with some belief that scales of size produce more economic production and marketing. These assertions are often made and argued in this House but it ill becomes politicians, or civil servants, to be too confident in asserting that there is a given pattern of size which is desirable and which, more to the point, is inevitable.
The market, if it is left to operate, will do much more than we are likely to be able to see with the crystal ball provided by the particular school of economics to which we lend our ear. That is why I confess to a little hesitation in endorsing any arguments that the Government's procurement policy should be biased in a certain way to produce the continued existence of a certain number of small businesses. This is something that I would not be prepared to endorse any more than I am prepared to endorse the use of public purchasing power to alter the structure of many of the supply industries, unless it appears to the Government in their procurement capacity to be a sensible, economic use of their purchasing resources.
The idea that there is a Marks & Spencer rôle for Government Departments has some validity, but one must remember that these Departments are not normally operating by sheer commercial criteria. They are politically motivated and they are required, for example, to pay special attention to the provision of employment for the disabled; they are often required to pay special attention to the provision of employment for those in development districts. There are a host of other distorting factors which, wisely or otherwise, we often place upon political purchases. That is why I should like to enter a quite severe reservation about adding too much to the distortions applying to politically motivated purchases.
There are two aspects of the problem to which I should like to refer. They relate to the responsibilities that we alone discharge in this House. The first is the legal and tax framework under which we expect small businesses to operate in future and the second, what rôle we see for the small business in an increasingly centrally-planned economy, as is quite clearly the intention of the party opposite. Undoubtedly the legal framework is very much conditioned by the 1965 Budget. My hon. Friend the Member for Belfast, North (Mr. Stratton Mills) has dealt with this in some detail and I do not want to elaborate on the argument which he put with such clarity.
When one recalls that particular Finance Bill, and I do this with some trepidation in the presence of my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin), who played such a major part in those debates, it is to remember that it was a triumph of this House over the intentions of the Government which made the distribution requirements discretionary on the Inspector of Taxes rather than mandatory by the Government. I want to be as bipartison as I can—it was also due to the good work put in by the hon. Gentleman the Member for Manchester, Cheetham (Mr. Harold Lever) who now sits on the Treasury Bench.
His promotion into the rôle of an ensnared gamekeeper augurs ill for this House, in a bipartisan capacity, being able to exert the same solid common sense on any Budget, this year or subsequently. I have a feeling that the hon. Gentleman will be much less effective now that he sits tamely on the Front Bench, than he was as that splendidly free-lancing character from below the Gangway. The legal consequences of the 1965 Budget, the question of the restriction of directors' fees allowed for Corporation Tax, the whole question of the close company status, taken in consonance with Capital Gains Tax, all of these have created among many small businessmen the feeling that the Budget was deliberately construed to harass them, because they were thought to be the rather anarchistic unorganised part of the economy which would be regarded with hostility by a Government dedicated to centralised planning.
The point made by my hon. Friend the Member for Belfast, North about the significance of the restrictions on directors' fees is especially important, because when we talk about business operations we all too readily assume that one of the major factors—perhaps the major factor—is physical assets, and one of the great limiting and inhibiting factors on the expansion of small businesses to play a more profitable rôle in the economy is that there comes a time when they are unable to obtain the capital needed to take further steps forward.
This is a view which should be challenged because at least of equal importance are human assets—the qualities of certain entrepreneurs, rogue businessmen, if one likes. It is the human skills in this country and the reward of the profitable application of those human skills which is every bit as important as our current concern about the level of physical assets.
Another point which must cause the House considerable concern is that there is every indication that the abolition of the exempt private company status will harass the small businessman. The Minister of State took the view that this would be better discussed on the Second Reading of the Companies Bill. I fully accept that. None the less, the Minister might at least have attempted to answer the point made by my hon. Friend the Member for the Cities of London and Westrninister (Mr. John Smith) that we look like having a form of company legislation which is inconsistent with Continental practice and which, incidentally, would be detrimental to the fortunes of the small businessman. I am sorry that apparently we shall have to wait until next week, but I hope that the way in which the House was treated today does not give any indication of the way in which we shall be treated on this important point later.
Under the French system, there are the Société de Responsibilité Limité for the family business and the Société Anonyme, which is more akin to our public corporation. I should like to see that system contained in the companies legislation which may eventually become law, because I think that it would be consistent with being good Europeans and with giving small businessmen the kind of framework in which it is desirable they should operate.
We have to decide whether we want small businesses to operate within the framework of limited liability or force them into a framework or partnership. There are plenty of indications that, whereas limited liability is becoming a difficult proposition, partnership is becoming easier. There happen to be certain disadvantages about the partnership framework for industrial and commercial businesses, but I do not wish to argue that now. What the House is entitled to know is whether the concept of limited liability for small businesses is being attacked by the Government because it is thought to be unsuitable or whether the attack is on small businesses themselves.
So much for the first point which I wished to make concerning the legal framework in which Parliament expects small businesses to operate. My second point turns on what future we might expect for small businesses in the centrally planned economy. One of the characteristics of small businesses is that they tend to be found in much greater profusion in the service industries and agriculture, and particularly in those areas because possibly there is greater ease of entry and where the initial capital requirements tend to be lower. That being so, the whole of the Government's policy, which has been avowedly against the service industries, is bound to have had the consequence of being particularly hurtful to many small businesses.
However, the Government's search for new planning machinery to supplement their existing Whitehall framework, which was elaborated with such solemnity by the Minister of State when he told us about all the advisory services which had been spawned by the Government, turns on some kind of compact which the Government are trying to conclude with the C.B.I. The C.B.I. is singularly ill-equipped to represent small businesses and not least by virtue of its Charter.
I took the precaution of obtaining a copy of the Charter from the Library. It is entitled "Supplemental Charter and Byelaws". On page 12, under "Qualification of Members", it is stated:
The following shall be eligible to be Full Members …:—
(a) any company or firm which is wholly or mainly engaged in productive or manufacturing industry in Great Britain"—
and then comes the important phrase—
(as opposed to trade of any type or services ancillary thereto)".
At one sweep the C.B.I. Charter excludes many of the people about whom we are talking.
All the evidence shows that the Government's present consultation with those whom they seek to affect by their economic policies is directed either through the C.B.I. or the N.E.D.C. and its proliferating offshoots. These are no more able to represent the small businessman than the C.B.I. But if we need any indication of where the Government's loyalty, interests and affections lie, I need only to turn to yesterday's Written Answers. In answer to a Question by my hon. Friend the Member for Guildford, (Mr. David Howell) about having another National Plan, the First Secretary of State said:
I had a useful discussion with the National Economic Development Council on 1st February about future planning work. Preliminary studies of likely trends in the economy are in hand and will, I hope, establish a basis for consultation with N.E.D.C. and industry about detailed revision of the Plan."—[OFFICIAL REPORT, 9th February, 1967; Vol. 740, c. 341–2.]
It might be ungenerous and out of order to pursue that line too far. But, for the last couple of years, the C.B.I. has been riding in the Government's hip pocket with precious little result. Though there may be some sign that at last it is clambering out, throughout that time small businesses had not had their case represented to the Government with any degree of fluency. Certainly there had been no success. It has been left to hon. Members, particularly to those who argued during the Finance Bill, 1965, and who have argued against the Government's measures against the service industries, to put the case for the small businessman, just as my hon. Friend the Member for Croydon, North-East has put it today.
This was why the Society of Independent Manufacturers was set up. I have a suspicion that the C.B.I. is not very much in favour of its activities, but it was set up simply because there was no voice for small industry and it needed one.
I could not agree with my hon. Friend more. I am delighted that the move which he has described was made, and we are all grateful that, inspite of his many business commitments, he has found time to facilitate the evolution of an alternative forum for small business, and I wish him every success with it.
We live in the era of the antiseptic organisation man, a person who belongs to a self-styled managerial élite, who is contemptuous of shareholders and of consumers. He is the man with whom the Government seek to make a compact in the belief that they are talking to industry. I have no wish to make any offensive personal references, but the whole philosophy which I find so distasteful is contained and elaborated in Mr. Catherwood's book, "Britain with the brakes Off".
What is it about the small business which so distinguishes it from its big brethren? It is this: that the proprietor and the manager have a common interest, whereas with large-scale industry today the managerial function very often has little interest with that of the shareholders, and very often it is directly hostile to the interests of the shareholders, a situation which I hope might be remedied by constructive and radical reform of company legislation. It is because the small business brings this healthy and anarchistic element to our economy that it is so distrusted by hon. Members opposite. My fear is that the tax harassment contained in the 1965 Budget is intimately linked with the whole philosophy of centralised planning for big business which has now become the central feature of this Government's economic policy. This could never have been more evident than it is today in the way that this debate has been conducted almost entirely by hon. Members on this side of the Chamber.
Today the attention of the House is called to the problems and increasing difficulties facing small businesses, and we are urging the Government to encourage the prosperity and growth of this enterprising and I believe, essential part of the community.
I am speaking today as a small businessman, and, therefore, if I have an interest to declare, then I declare it. But it also means that I have some knowledge of the subject on which I am speaking. I am bound to say also that having sat through most of the debate, I am absolutely horrified at the total lack of any interest whatsoever by Labour Members in the subject we are discussing.
I am grateful to my hon. Friend for that intervention. It is perfectly true that there are no Liberal Members in the House. I have not seen any present during the whole of our discussion. If they were genuine in their belief, one would have expected at least one of them to be here. I was pointing out the total absence of Labour Members. I have never seen the House looking like this. There is not a soul on the back benches. There are only two Members of the Labour Party present, one a Minister and the other a Government Whip. I am delighted that another Member of the Labour Party—the hon. Member for Wandsworth, Central (Dr. David Kerr)—has been spurred by my remarks into taking his seat. The lack of Labour Members is a clear indication of the interest which the other side of the House has in this particular topic.
Small businesses are essential to our country. I say this for four important reasons. I am glad that the Financial Secretary to the Treasury is present to hear the debate. I hope that he will agree that this is something in the longterm interests of the country. Almost every one of the large businesses which dominate British industry today started as a small business. I do not need to remind the House of the start of Lord Nuffield. I do not need to remind the House of the start of Lord Thomson and of the start of so many of our major industrial concerns. They started from the energy, the enterprise and the initiative of one individual who had something to give that the community wanted—one individual, whose driving force created what has now become a major industry. I could look at my own constituency at Andover and Basingstoke, where there are a certain number of industrial firms and substantially more coming in because of town expansion. Those firms started from small beginnings, and have grown up over the years. They started as family businesses and have grown into the major exporting and industrial firms that they are today.
First, if we do not encourage small businesses, where will the large busi- nesses of the future come from? All the great businesses of today started in a small way. Second, we have to consider the essential part that is played by what I call the feeder industries to the large industries—people who make the parts and the accessories. This is especially important for the assembly industry, such as the motor car trade, where parts have to be efficiently brought forward at the time they are wanted in the assembly line. Small firms have a major part to play in this.
Third, I should mention agriculture, a major industry of this nation which is dominated by small businesses. Agriculture plays an essential part in Britain's economy. As a nation—and this is true of Whitehall regardless of party—we tend to underrate the value and the importance to the nation of British farmers and British agriculture. British farmers are overwhelmingly small businessmen, and all of their production is a reduction in the amount of imports which this country has to bring in. They have a vital part to play in our balance of payments. It is small businessmen who overwhelmingly dominate this part of our economy.
My fourth point concerns a matter of principle, on which I do not expect the Government to be with me. We have to consider the sort of society that one is trying to create. I was particularly impressed when the hon. Member for Croydon, North-East (Mr. Bernard Weatherill), in opening the debate, drew attention to the opportunities for the individual which are given by the small businessmen. In the whole of our economy and political life we see a division between those who believe that we should concentrate into the hands of the Government wealth, power, control and ownership. We have just had a Bill to nationalise the iron and steel industry. The Steel Corporation has been given powers to extend and to divisify into a major number of other activities, of which it has to give practically no account to Parliament. Here we have the whole concept of concentrating power and wealth in the hands of the Government, or, by contrast, spreading it among small businesses, with wealth, power, position and participation increasingly in the hands of the individual.
My hon. Friend has said that nationalisation of steel would concentrate power and wealth in the hands of the Government, but would he not agree that the Steel Corporation will be an enormous unit of economic power totally out of the control of the Government, or the House, or the market, and that therefore the effect of nationalisation is to provide these great blocks of economic power which are not responsible to anyone or anything?
There is a great deal of truth in that comment. I remember that shortly after the nationalisation of the railways someone said, "Is it not nice? They are our railways". That theme and thought soon disappeared and today very few people feel any sort of sense of participation in British Railways or their activities.
The Minister was very helpful. Broadly he gave a general welcome to the Motion and promised that the Government had an interest in small businessmen. But, regretfully, the House has had to record on more than one occasion that the promise of an interest is likely, like other promises, to show little fruit in practice.
I entirely concur with my hon. Friend. I was about to make that point. In his very first words, the Minister said that he could not deal with any fiscal matters, and yet the whole essence of small businesses and of the problems around them is fiscal—the financial problem of how to manage one's overdraft when it is costing the present rate of interest, how to make a profit at the end of the year with the decline in the level of economic activity which the stop-go policies of the Government have brought about. These are the essential problems—and they are financial problems—which face small businesses, which are less able to cope with them than are large businesses, and yet the Minister's first words on the subject were to say that the Government washed their hands of this aspect.
I am delighted that the Financial Secretary to the Treasury is now here. I recognise that he cannot, and that it would be unreasonable to expect him to, give us any indication of what he and the Chancellor of the Exchequer may have in mind for the Budget, but I am glad that he is here to listen to the debate and I hope that he will read the speeches which were made before he entered the Chamber and which clearly showed the damage being done to small businesses and the business community in general by the Government's financial policies and particularly by the excessive level of taxation.
I welcome what the Minister said about the assistance and advice which the Government give to small firms, especially those seeking to export, through the Board of Trade. Having had some recent experience of dealing with that Department, I am very ready to say how efficient and helpful it was when I contacted it in connection with some items for export. However, the Minister went on to refer to consultation with industry. I got the very clear impression that the consultation with industry was with the C.B.I., which is in touch with the major firms of British industry, such as I.C.I., but very little with the small firms. I have never been asked in my business to give my view of any aspect of Government policy to the C.B.I., and there are countless business firms which are not members of the C.B.I. and which have no connection with it. These small firms are never consulted by the Government and their case largely goes by default.
I will give one small example of the way in which the Government can do a lot of damage to industry because of insufficient consultation. This may sound silly, but I assure the Minister that it is not. The Government have introduced a safety regulation for carrycot stands—Regulation No. 1610 of 1966. This is an item of consumer protection. It is highly desirable and it provides that carrycot stands should not be dangerous. The manufacturers of these stands were circulated with a draft of the regulations which it was proposed to introduce and were asked to comment. At least one, from whom I have had some complaint, did not receive any acknowledgement of his letter making comments.
The very next thing to happen was that on 1st February the Government called a Press conference at the Home Office announcing that the regulations were to come into operation the following day. A manufacturer with 5,000 carrycot stands three-quarters of the way through production would have to change his specifications in the middle of production, and yet the Government expect industry to be cost-conscious and efficient. That is a very small example, but it can be repeated many times over and demonstrates the lack of consultation between Government and industry. What is worse, it also indicates a lack of notice of the Government's intentions.
A whole range of problems is associated with this subject. Small businesses and large are both at risk of damage by the actions of the Government. The essential home market, which is the very basis on which an export trade can be built, in many cases has been substantially reduced by the Government's stop-go policies and their failure to take adequate action early enough. Small businesses are particularly affected, because they do not have the financial resources to ride out such a situation. Damage to the export trade arises because costs of production per unit rise enormously when there is a cut-back in demand and a cut-back in the number of articles produced, so that overheads have to be carried on a much smaller number of items. There have been all sorts of other increases in costs—petrol tax, National Insurance stamps, Selective Employment Tax on the service industries which supply manufacturers, and so on. A whole complex of problems has been worsened for industry when costs have been increased by Government action, and small industries have been affected most of all.
I am delighted to see that the Minister of State has now returned, because I want again to refer to what he said. He said that he was not concerned with the fiscal aspect of this subject. But that is the essential part of the debate. There is nothing more important than that aspect. This is what makes business tick. Why do people start businesses? Why do they carry them on? Does the Minister think that they do it for love of the Chancellor of the Exchequer, or love of the Board of Trade? There is more affection for the Board of Trade, but I can assure him that it is not affection for the Board of Trade or the Chancellor of the Exchequer which makes a businessman start and carry on a business.
It is true that there is the challenge, the fun of the skill and the craft and a desire for success and a sense of accomplishment, but far more important as a driving force over the major part of industry is the profit motive, the desire to enjoy the fruits of success at the end. What is it that drives people forward if it is not the hope of enjoying a better standard of living, providing for their old age, ensuring security for their widows and giving their children a better start in life than they themselves had? But now we find that taxation is killing incentive, initiative and enterprise, and it is on those three that the future prosperity of the nation is built.
More than anything else, enterprise, initiative and incentive have been killed by the penal levels of taxation which the country is suffering and which affect the small businessmen worst of all when the driving force comes from the individual, the businessman proprietor, the working proprietor in his own business. When a company makes a profit, it has to pay 40 per cent. of that profit in Corporation Tax. As a result of the 1965 Budget, the businessman in a close company then has to distribute 60 per cent. of his profits. On that 60 per cent. he has to pay Income Tax and, if he runs a largish business, making an important contribution to the country's economy, he has to pay Surtax too. The total rate of tax on his profits is 66⅔ per cent. if he is not paying Surtax, and if he pays Surtax then he pays 2s. or 4s. in the £ on top of that, so that 75 per cent. of his profits are taken in taxation before he goes any further.
The Government thus reduce the incentive for him to go out and to get business and to build up his business. They also reduce the incentive to economise within the business through eliminating restrictive practices and becoming more efficient; that incentive to economise is reduced by 75 per cent., because only 25 per cent. of the profits are left in the hands of the business man.
Let us suppose that the man works his life in the business. The meter is ticking away. One day his estate will have to pay death duties. He may take steps to eliminate or reduce them, but he cannot take steps to eliminate Capital Gains Tax. The taxi meter in that respect is ticking away from April, 1965. If inflation continues at 5 per cent. a year, over 20 years that business doubles in value—on paper; it doubles not in real value but in inflationary terms, and purely as a paper item. If he sells the business and retires, or even if he gives it to his son, he has to pay in tax 30 per cent. of that increase in paper value.
The essential problem is that he has to pay that out of his savings from his taxed income. I have made it clear that with the present level of company taxation and personal taxation, we have reached a situation in which it is not possible for a businessman to make those savings. In particular, farmers, whose returns are much smaller, are unable to accumulate enough cash to pay these taxes. Farms have been inherited from generation to generation, as have small businesses such as the grocery store in the high street. One day the farmer or the shopkeeper may want to give the farm or the business to his son. He has to find 30 per cent. of the paper increase in value in cash to pay the taxes, and it is totally beyond his financial ability to do so. Hardly a farmer in the country can do it. This will lead to the fragmentation of farms and businesses and to the break-up of the firms which should provide the great industries of the future.
It is because of this severe damage to British industry in the long term—not in the next few months or weeks—that I plead with the Government to listen to the case which has been made by my hon. Friend, and in the Budget to take steps to restore incentive for initiative and enterprise which are so vital to our future.
Taunted by the gibes of the hon. Member for Oswestry (Mr. Biffen), I felt it incumbent upon me, in my humble way, to remind the House that this side of the House includes a number of small businessmen, among them myself. It is often overlooked that there are no worse examples of small businessmen in the community than the general practitioners. We suffer from precisely the same disad- vantages as have been outlined with such predictable ennui by hon. Members opposite and unfolded with such pious drivel as has kept so many hon. Members away from the debate today.
We all know that, for hon. Members opposite, the small businessman today occupied the rôle of the small landlord of perhaps 10 or 15 years ago, when they so often said that we must protect the small landlord because invariably he was a widow.
I recall a colleague of mine, then chairman of a finance committee of a local authority, once scratching his head with bewilderment, because, he said, it seemed that all the small landlords were penniless widows. Today we are being instructed in the invidious position of the small businessman—small farmers, small doctors and small shopkeepers on the small corner of the small road. Our hearts bleed with pity for these people. They are in great difficulty.
What I find insufferable is the suggestion by hon. Members opposite that this is all the fault of the Government's taxation system. I recall so well going around my constituency in the 1964 election. It contains many small shopkeepers. Indeed, I once said that one of the few big businesses was Wandsworth Gaol, and that is not doing too well at the moment. The small shopkeepers in my constituency were riven with terror, not at the thought of a Labour Government but because of the action of the preceding Conservative Government over resale price maintenance. Today hon. Members opposite come here with their political knives, cut their political onions and shed their political tears over small businessmen.
Yes—wholeheartedly. But when hon. Members attempt to defend the small shopkeeper, it is right to remind them that their defence of the small shopkeeper, when they had the responsibility of Government, was extremely badly handled.
But resale price maintenance is scarcely the most important consideration which affects the small business man today. His grave problems are not resale price maintenance or taxation; they are the problems which arise from land costs and employment policies. Land costs have steadily driven the very valuable social amenity of the small shopkeeper from his place in the high street, and we have seen him replaced by the larger supermarket, the betting shop and other questionable social amenities. That is not the result of the present Government's policies. That has been determined for some years by the quite deliberate policies of Conservativism and capitalism.
Hon. Members opposite shed their tears over a system which they are devoted to support, when that system can thrive only on the destruction of the incompetent, the inefficient and the disadvantaged. The very essence of competition is the preservation of the strong and the destruction of the weak. When we are talking about small businesses, it is no wonder that hon. Members opposite pay no heed to the number of bankruptcies. The hon. Member for Basingstoke (Mr. David Mitchell) spoke as though every tiny little engineering firm, every tiny little builders' yard in the suburbs of London, was a potential Trollope and Coils or a potential Nuffield Motors. I can assure him that mathematically they are potential candidates for the bankruptcy court as a much better bet than they are every likely to become another I.C.I. or Acrow or any of the other big firms to which the hon. Member referred.
I do not accept that. The hon. Gentleman overlooks the essence of establishing businesses. The problem facing all hopeful developers of new industries, whether in this country or in any of the developing countries, is the search for capital. [Interruption.] I insist on my belief that the severest brake on the development of any new industry, no matter where it is to be established, is the difficulty of discovering new capital at a reasonable rate of interest.
The hon. Gentleman has caught me with my legs crossed, for I do not know precisely what the plough-back provisions of that Measure are and it would, therefore, be rash of me to support them. The essence of this problem is not the creation of new capital once a business is established but the discovery of launching capital.
The 1965 Annual Report of Bankruptcies shows that small builders were subject to no less than 392 bankruptcy receiving orders. The liabilities of small builders at that time amounted to just over £1 million and their assets totalled about £349,000. The number of these small businessmen—which the Opposition is so busy promoting—is obviously too large for anybody's mental comfort. Their contribution to the building industry is little short of a disgrace. Their activities are absolutely inefficient and the twoman builder who sets up with a stepladder and a wheelbarrow is not assisting in the development of the kind of building industry which we want. In fact, that sort of organisation is carrying us away from the highly efficient, automated and mechanised building industry without which we cannot progress to the kind of programme we want. Yet this is the sort of small business which is suffering not primarily from the existing taxation system, which is only the development of previous taxation systems, but from its own in-built incompetences.
I referred to the question of land values. It is not only in the high streets that the small shopkeeper is being driven out. The small business professional men—doctors, solicitors and so on—are finding it increasingly difficult to acquire office and other business accommodation in areas where they are not only most likely to prosper but where they are most needed.
It is all very well for hon. Gentlemen opposite to shed tears over the plight of small businesses and attempt to use this as a stick with which to belabour the Government. But the damage which Conservative policy did to small businessmen over so many years cannot be allowed to be forgotten and the case being adduced by hon. Gentlemen opposite today cannot be allowed to go unchallenged.
There is still a great deal to be done for small businesses. I hope that when the time is right—and I hope that that time is not too far ahead—we will look sympathetically at creating some sort of advice centre for the many people who think that they should spend their hard-won savings on establishing, say, a small tobacconist's in a side-street but who later find that they have gone in for a disastrous and laborious undertaking. We need a bureau to which these people can go for objective advice and assessment of the opportunities which face them. We also need to make capital available for potention growth industry. We need to devise new means of obtaining new capital at competitive rates of interest and not allow developing industries to fail because they are placed in the hands of financial interests which, I say bluntly, find their representatives on the benches opposite, no less than other industries do.
The charge is a substantial one and I would deplore it if it was thought that the absence of hon. Members from this side of the House in any way indicates that we are on the defensive. We are not. We are only on the defensive against the unutterable boredom of hearing the re-statement of this case from hon. Gentlemen opposite.
The hon. Member for Wandsworth, Central (Dr. David Kerr) is quickly bored. He did not arrive in the Chamber until the debate had been running for over three hours and he was called to speak within half an hour of having arrived here.
In view of his profession outside the House, he might, perhaps, care to look at an excellent address which Lord Bowden gave in Norwich on 4th September, 1961, to the British Association for the Advancement of Science. He was speaking particularly about the impact of automation and, during his remarks, he told his audience about a splendid ship's doctor who, during the Seven Years' War, used to tie a rope around the middle of his ailing sailors. If they had a pain above the rope he gave them an emetic and if the pain was below it he gave them a purge. All his patients died, but nobody thought his behaviour odd. The speech of the hon. Member for Wandsworth, Central followed that noble tradition.
It appears that unless one has some involvment in the State—unless one is, certainly to some extent, under the benevolence of a Government Department—one has no right to state one's case. This is indeed Socialism writ large. The hon. Gentleman's speech was an outrage, if only for the fact that he admitted, after being questioned by my hon. Friend the Member for Oswestry (Mr. Biffen) that he had been caught with his legs crossed and was unaware of the state of the present legislation regarding close companies. For any hon. Member to have the presumption to take part in a debate such as this without realising the position resulting from that legislation is nothing but an impertinence.
I do not accept that a lack of technical knowledge about close companies is of the utmost importance when talking about small businesses, the great majority of which are not companies of that type but are one-man or privately-owned concerns, about which I am in a very good position to talk.
That merely demonstrates the hon. Gentleman's unwisdom in not having made certain of the law applying to close companies. Had he taken that trouble he would have realised how grossly unfair present legislation is in two directions; first, in the complete escape it gives to partnerships and, secondly, the escape it gives in many respects to the very big public companies compared with private close companies. The demand, visualised in forthcoming legislation, for details to be given by close companies—although that demand is, apparently, not to be made of partnerships and those in business on their own—is a grave unfairness and will be highly damaging from the competition point of view.
I will not give way again. Many of my hon. Friends wish to contribute to the debate and the hon. Gentleman has not been in the Chamber for most of this discussion.
Before proceeding I should, perhaps, declare my interest in that I am a director of two private companies and that I
have known the experience of triumph and disaster, although I have tried
… to treat those two impostors just the same
however difficult that may have been. Nothing said in this debate has been more important than the pleas made by my hon. Friends for a revision of the fiscal use of Government powers. Governments have many powers at their disposal and there is no more important a weapon—whether it is used in a punitive sense or from the point of view of giving encouragement—than the fiscal weapon. If it is used in the wrong way, the Government can do far greater damage than they can do by omissions in other respects.
It is true that the Government have set up a number of bodies and organisations. We are well aware of them and I will not list them. It is also true that the Government have a great deal of machinery through which they can give advice to industry. However, nothing is less impressive than when Government Departments, which are notorious for the monstrously incompetent way in which so many of them are organised, start laying down the law about how businesses should be run.
Running a Government Department is not a commercial exercise. Government Departments always know that, if they overspend, the unfortunate taxpayer can be fleeced to foot the bill. That is not the case in commerce; nor is it the case in industry. Unless the Government are a little more humble in their approach to these problems and become a little less arrogant, they will go on making the sort of mistakes which led to the iniquitous 1965 Finance Act.
I say to the Minister of State that it simply is not good enough to say that he is not proposing to deal with fiscal matters today because the next Budget is looming up. The least he ought in courtesy to say is that he will give an undertaking to convey to the Chancellor of the Exchequer the points which have been put to him. I hope that he will now rise and say that.
I hope that the hon. Member will remember what I said at the beginning of my speech when I was replying to the point made about fiscal taxation. I said that hon. Members will have their opportunity to present their views to the Chancellor. It was implicit in all I said that I would convey the views expressed in this debate to the appropriate Ministers. It is very unfair of the hon. Member to make that kind of suggestion to me.
I heard the whole of the right hon. Gentleman's speech. If I have done him an injustice, I gladly withdraw it. May I say how delighted I am he has said what he said just now. I hope that he will convey the points put to him about fiscal policy to the Chancellor well in advance of the next Budget, so that the Chancellor may take notice of them before he introduces his Budget.
I wish to make one or two additional observations. I do not want to repeat much of what has been said already in the debate and with which I agree. There is one thing which might help to encourage small businesses. When there are big flatted factories in cities such as Birmingham, the rental for them is often a great deal less than for premises on the fringes of a fairly substantial town which is not yet a fully industrialised city where one has to occupy a single-storey building which probably has been built by private speculation. When those big flatted factories are built they tend to be hogged by one of the bigger public companies. This forces the small man outside the city where it may be more expensive for him. I can well understand that it is very much simpler for those administering such new buildings to let them to one tenant, or at the most to two, but this means that a small man has hardly a look in.
It is very important that we should not be carried away with passionate emotion about the virtues of smallness for smallness' sake. As my hon. Friend the Member for Basingstoke (Mr. David Mitchell) said, in agriculture the vast majority of undertakings are small. By no means all of them are companies. I should say that companies in agriculture are still a tiny proportion of the total agricultural exercise, but there is one virtue in smallness which should not be overlooked. In a period of agricultural depression often the smallest farmer survives while the middle-sized farmer goes out of business. When he is relying on employed labour and the market suddenly dries up, he is hit far more quickly than the small man with a family helping him to farm. By taking up another couple of holes in his belt, the small farmer is able to carry on. This happened in the period between the two world wars.
Another virtue, which was completely overlooked by the hon. Member for Wandsworth, Central, is that if something involves taking a calculated risk and it is proved to be unwise, if the undertaking has started in a small way this cuts down to the minimum those who are punished, whereas if we allow new enterprises to be started only by the great giants of industry, or under Government auspices, then if something goes wrong the whole organisation behind it suffers. When it is a Government undertaking, the taxpayers suffer. There is a virtue in smallness in that context.
The hon. Member trotted out figures about bankruptcies, but it is interesting to read what has been happening in America. I commend to the Minister of State, if he has not seen it, a report presented by Mr. Roberts and Mr. Wainer to the Twentieth National Conference on Administration of Research at Palm Beach, Florida, on 27th October, 1966. I hope that that report is already in the Department. It is fascinating to note that 80 per cent. of new companies formed in the United States fail within their first year of operation. In contrast with that 80 per cent. first-year failures those companies which start within the reach of most modern technological resources such as the Massachusetts Institute of Technology survive in four cases out of five. This is of very great significance.
We are living in an entirely different age from that in which Ely Cathedral was built. It was a magnificent achievement to bring timbers from Yorkshire to be erected in the Lantern Tower of that great Cathedral of the Fens, but we are living in an age when technology is on the march and we have some wonderful technical resources in our own country. By studying what has been done in the United States I think the Minister of State will find that where we can associate the development of an area on the fringe of a city within ready reach of technological resources those who start companies and enterprises tend to survive better than those who are without those facilities on their doorsteps. I should like to see colleges of advanced technology which are now being given university status linked with these enterprises. This could help to make small businesses as well as large ones innovation-minded. We are, perhaps, open to the criticism that our readiness to innovate is not what it should be. We could improve matters greatly by linking the academic technologist and research worker to the day-to-day problems of industry.
I hope that we shall always recognise that this country's geographical position gives us one unique advantage. Not only is no factory in the nation further than 100 miles from the sea, but our centrality on the face of the globe is such that we are closer to a greater proportion of the rets of the world than any other country on earth. This is what has given us our standard of living in the past. It is still cheaper to export—and to import, alas—across the Atlantic than it is to move goods across the American continent.
All these factors make it absolutely imperative that we have outward-looking management at all levels of industry. Unless new blood is coming in the whole time, we shall fail, and others will take our place. We have an advantage which we should be mad to throw away. The one thing which this Government's policy is tending to do is to make it more difficult for anybody who takes calculated risks to reap a fair reward. I emphasise the adjective "fair". It is all too often the case that legislation treats those who have done this sort of exercise as though they were all potential minor criminals who were trying to fiddle something the whole time. This is a gross insult to those whose initiative has given us our standard of living in the past. I hope that the Government will take note of this and do something in their forthcoming financial legislation to put right the appalling inadequacies of today.
I want to make only a short intervention, because I know that some of my hon. Friends want to speak before my hon. Friend the Member for Worthing (Mr. Higgins) winds up. I congratulate my hon. Friend the Member for Croydon, North-East (Mr. Weatherill) on the excellent way in which he initiated the debate.
On a point of order. As the Government have agreed to accept the Motion, and as a very important Motion on London housing follows, I wonder if we could bring this debate to a close so that we could discuss the vital issue of London's housing?
Anyone who has a number of small businesses in his constituency is bound to know the value of initiative and independence which the small businessman is able to bring to the community and to business as a whole. My hon. Friend the Member for Basingstoke (Mr. David Mitchell) underlined this point effectively.
As the Member for Harwich, I am concerned with the Continent. The Minister of State knows the arguments I have had with him about granting industrial development certificates to persuade ventures to come into the area of the Port of Harwich, which I have the honour to represent. This is a factor which will come about, anyhow, but it is important that the Minister of State should realise that it would be far more economically advantageous, rather than giving industrial development certificates for the north of Scotland and some of the development areas in the north of England, to give industrial development certificates to enable small firms to come into the heart of the industrial complex which divides North-East Europe and the Midlands.
My next point also concerns the Continent and the small businessman. I refer to the Government's failure to show more enterprise in encouraging the European Institute of Business Administration. This is a school, established at Fontainebleau in France, which trains business men in business methods on the Continent and also enables them to mix with their colleagues. This would be very valuable to us in the future contacts we hope to have when we enter the European Economic Community.
Other Continental countries—France, Germany and others—provide considerable facilities in the way of scholarships for their members to go to the European Institute of Business Administration. Alas, we are taking up only a very small percentage of scholarships. INSEAD, as it is called, is recognised by the Ministry of Education. I am glad that the Marketing Council is holding its summer seminar at INSEAD this year, but if we are to give proper encouragement to business men in the coming years, we must give more help to this Institute, if we are to make progress with our exports and ensure that our small businesses survive in the European Economic Community.
There has been no mention of the effect that the Selective Employment Tax is having on the hotel industry, not on the large hotels, but on the smaller hotels, many of which are dependent on retired folk helping them with much of their work. This additional tax has been imposed upon them at a very difficult time. Many of these smaller hotels cater for industrial workers from the Midlands and elsewhere, thus saving foreign exchange. It is vital that the Government should give more help to the smaller hotels and try to do something to relieve them of the iniquities of the Selective Employment Tax.
In speaking in this debate, I am concerned not so much about policy as with the way of life. In the way of life which we on this side believe in and support, we are not so concerned about the paternalistic, monopolistic or socialistic society which the Socialist Government are trying to create. We are concerned with welfare and with seeing that help goes to those who need it.
We want a free society in which the small businessman can develop his initiative. We want a society in which there are independent people to prevent the individual becoming a cog in a vast Government machine. The small businessman should be helped to make a start. Where did the man in Marks and Spencer, for example, make a start?
I might add that I started off my political career in the Fulham Road.
We want to help people to have this start in life. Under the Conservatives' 13 years of prosperous, excellent rule, we were able to give great encouragement to the small businessmen so that they had a chance to develop their business. One of the things which has prevented the small businessman from developing nowadays is the inability to get investment capital. The availability of risk capital in the kind of free society in which we on this side believe is the important factor and the growth point in any economy.
Those of us who, like myself, have been out to Japan and seen the enormous growth rate in the Japanese economy know that it is due not only to technical training, but to the fact that risk capital has been made available. There is an enormous sector of small industry in the back streets of Tokyo and Osaka to which help has been given.
Above all, progress is dependent on encouragement of the individual to go ahead and play his part in the economy. Instead of envying the individual who wants to work or trying to hold him back, we should give reward and incentive, because the way to help the weak is to reward the strong. [HON. MEMBERS: "Oh."] I know that this is against the philosophy of hon. Members opposite. I am not afraid to say it because I am convinced that unless we are able to create more wealth, we will not be able to have more wealth to share for the many people who need it.
It is taxation and the kind of measures which the Government have introduced which are pulling the country down and which more than anything else are killing initiative, damping down the willingness of people to work hard and sending many of our best brains abroad to other parts of the world. I am therefore glad to have participated in this debate, to support the initiative of my hon. Friend the Member for Croydon, North-East and, above all, to underline that the small business man stands not only for enterprise and initiative, but also for independence.
My hon. Friend the Member for Croydon, North-East (Mr. Weatherill) deserves to be congratulated for taking the opportunity to raise a subject of wide scope, in which I have a personal interest. The definition "small business", as applied by the Government in their close company legislation, covers a wide range of businesses. It was terrifying to hear the hon. Member for Wandsworth, Central (Dr. David Kerr) suggest that small businesses started as tobacconists' shops and ended as two-man bricklaying companies. For generations my family has run a small, traditional, go-ahead textile firm. I see it today as a close company, with more of the directors' time being taken up with tax problems than with technical developments and export drives.
At the other end of the scale, and more personally, I have a direct interest in that about four years ago I put a modest investment into a new invention which, without investment by myself and one or two friends, would probably have passed into obscurity until it was overtaken by other developments in that industry. I have not yet realised a penny for my investment, but I still hope that I shall make a fair profit, and that considerable export sales will result from my investment.
But had I known that the Labour Government were coming in, and that Capital Gains Tax would be applied to the money that I hoped to make, that Corporation Tax would cripple a company of the size of my company, and that the limitation on small companies would prevent the earning of directors' fees, I honestly doubt whether I would have risked my money. There have been risks throughout the period of my investment, and at times I have not expected to see any of my money back. Even today, after having put in a great deal of unpaid work, I cannot be certain that I will get my money back.
Without modest people like myself putting in small amounts of money, a good deal of sweat and a certain amount of "know-how", thousands of new inventions and new ideas would be left unexploited. Anyone who has considered the question knows that literally thousands of ideas are put forward every month. Perhaps one in 20 is a viable commercial idea; perhaps only one in a thousand or even one in 5,000 is a revolutionary one. I sincerely believe that today, because of the structure of our industry and the way in which we have tied oursleves up, many revolutionary inventions and new ideas are being left forgotten in the files of the Patent Office purely because no commercial set-up exists for their exploitation.
We want a commercial set-up, a tax law, and a company or partnership structure which allow a man who invests money at risk—and risk capital means that the money can be more easily lost than increased—to get a decent return. If there are good returns, some of the revolutionary ideas which are now being overlooked will be backed up and will proceed, via small businesses, to big business, thus adding to the strength of British industry.
The bleeding heart attitude of mind of the hon. Member for Wandsworth, Central is terrifying. The former Member for Ebbw Vale, Mr. Aneurin Bevan, might have reminded the hon. Member that what we want is not bleeding hearts but bloody brains. There are very few, or no, restrictive practices in small companies. One gets none of the nine-to-five mentality of so many of the bigger businesses. One gets more initiative, more teamwork, more dedication and more plain, simple but unrecorded productivity. I do not think that anyone would doubt that the small company is one of the happiest forms of industrial organisation. These companies serve the nation, and those which fail suffer heavy penalties. Figures have been quoted of the number of small builders who have gone out of business and faced bankruptcy.
There are other aspects, and my hon. Friend the Member for Harwich (Mr. Ridsdale) has outlined them. There are the social aspects of small businesses. I represent a country constituency dotted with small manufacturing and marketing towns. It is ironic today that that area of great initiative received its first adequate transport service from the father of Mr. Catherwood, who seems today to be so anxious to kill enterprise on a small scale.
In those small towns we see the real possibility of a break-up of the social pattern that we know, and like very much indeed, in Northern Ireland of a fair mixture of industry and agriculture, so that people in the country understand what industry is about and none of the people in industry in North Antrim considers that the farmers are featherbedded. But men are going off the land. There is not the employment per acre that there was five, ten or twenty years ago.
I regularly motor from my home through my constituency to get an early morning aircraft, and I see hundreds of people standing with their lunch in their bag at six and seven in the morning waiting for a bus or a lift in order to go to work 40 or 50 miles away. I see them making their return journey after 7 p.m., in the pitch dark of a winter evening. if there is one thing that I want to stop in my constituency, it is the soul-destroying type of work whereby a man has to travel 40 or 50 miles in order to earn a living and then back again.
The answer to this problem is to develop small businesses in the smaller towns in the country areas. However, frankly, if we allow the Government's present policy of taxation of small companies and penalisation of capital gains when they are made—capital gains in small businesses are more the exception than the rule—we shall not have people taking initiative to set up the small factories that we need in the smaller towns. A small town with only one factory has all its eggs in one basket. We want the small market town to have five or six growth industries so that if one sector of business suffers regression the town is not thrown into complete unemployment.
We are beginning to achieve this, but there is undoubtedly a falling off in local initiative because the rewards seem far too few, and the safe, unenterprising job with a pension attached to it is attracting far too many whose fathers were men of real initiative.
From the industrial point of view, small firms are vitally important. Time and again I visit larger firms which are opening up in my constituency, and am told, "We love to come here, but the real trouble is that we have not got the small businesses around to serve us." Every large factory, whatever its size, depends on a ring of satellite service industries. Each of these takes initiative to start, and that initiative needs to be rewarded, but the Government are taking the reward away.
I do not think anyone in the House does not realise that it is a natural part of industrial evolution for big businesses to take over smaller ones, particularly smaller ones which have lost their initiative, drive and momentum. It is a naturally sound means of industrial growth.
If we are to have a continuous process of takeover of small by big, we must also have a continuous process of creation of small companies. It is tragic that the Government, perhaps largely by accident, perhaps by design, perhaps just on grounds of prejudice, seem to be stopping that process of continuous development of small enterprises on which British industry has largely been founded.
I was hoping that my hon. Friend the Member for Antrim, North (Mr. Henry Clark) would develop his closing theme because it is of immense importance. The development of small business is of the utmost importance to the country and I make no excuse for intervening in the debate. I was sorry that the hon. Member for Bilston (Mr. Robert Edwards) sought to move the Closure and was delighted when Mr. Speaker refused to accept it.
The interests, the problems, the difficulties that face small businesses and, indeed, not so small businesses, do not often get an airing in this House and I add my congratulations to my hon. Friend the Member for Croydon, North-East (Mr. Weatherill) on using his good fortune in the Ballot to give the House an opportunity to discuss these problems today.
The Minister of State will know that when I have spoken on industrial matters, I have perhaps tended to concentrate my thoughts on the problems of the country's major businesses, and obviously they are important. I make no excuse, therefore, for talking about smaller businesses because I count among my constituents a great many men who are first or second generation businessmen, who started business in a very small way in the East End—in Stratford, Bethnal Green, Tottenham, Walthamstow, Leyton and elsewhere—and who, because they made a success, achieved their life's ambition of buying a house in Woodford, Woodford Wells, Monkhams Valley or in Wanstead in my constituency and have made for themselves and their children a better life than that with which they started out.
They have done this because they have been successful small businessmen in a wide variety of trades and activities and I count many of these people among the salt of the earth. They are splendid people upon whom the nation bestows not enough credit or value for the benefits they have conferred upon the country as a whole. Many of them have made it abundantly clear to me in recent months that they feel that the climate in which they are operating, particularly the legislative climate, is creating difficulties which they feel they should not have to face.
I am not seeking necessarily here to make any exclusively party point. One of the Measures of which they complain the loudest is one that I support and which was passed by the last Government—the Industrial Training Act. Not only the problems of administering the Act but the levies which the Act calls for seem to be pressing very hard on a number of small businesses whose owners feel that it is unlikely that they will derive benefits from the Act commensurate to what they are being asked to put in. I believe that the Act was right because there was the justifiable criticism that, on the whole, the larger firms tended to do all the training while the smaller and medium-sized firms tended to employ the trained men without having contributed to their training.
It should be noted that this is a source of complaint and grievance. Something should be done about it. The weight, complexity and sheer volume of legislation has increased enormously in the last two years. The Redundancy Payments Act, Corporation Tax, Capital Gains Tax and Selective Employment Tax—those four measures have imposed administrative burdens as well as financial burdens upon small firms which moved the Chartered Institute of Accountants, in a recent report, to complain about what it called:
… the unprecedented increase in administrative complexity consequent on recent enacted or proposed fiscal legislation".
A complaint of that order, coming from a body of that type, is something of which the Government ought to take note. When there are added to that the changes in the investment incentive system, the Industrial Development Act and now the Land Commission Act, one begins to realise that the complaints of
these businessmen that the legal framework within which they are having to operate makes the running of their businesses almost impossible, may be well-founded.
There is a tendency in Government circles to look at these individual subjects in isolation. Each measure might be justifiable on its own but there is no single Government Department or Minister whose job it is to look at these things in the round and to listen to and deal with complaints from people who may say, "Look here. Each of these may be all right but, taken as a whole, they are becoming quite an impossible burden."
The big company can afford to employ specialised staff and to go in for the mechanisation of records and all the other necessary information. The small company finds itself unable to do this, and increasingly the time, effort and enterprise of top management in those small companies—people such as the proprietor-director—is being devoted to administration matters rather than to the betterment and increased efficiency of their business, which is in the last resort what they and the whole country depend upon.
I beg the Government not to underrate the seriousness of this problem. It is one affecting a very large number of businesses, and I am satisfied, as a result of complaints made to me by my constituents, that it is one to which the Government must pay some attention. Had there been more time, I would have liked to deal with the close company position because it is one to which I have, as my hon. Friends will recognise, devoted a good deal of time and effort in an attempt to put it right, with very little success. The close company legislation in the Finance Act, 1965, imposes savage penalties on smaller companies and is making life extremely difficult for them, not only in the raising of new money to plough back and invest, but also simply to carry on business.
I found an echo of this in the now famous speech by Mr. Nial Macdiarmid to the annual meeting of Stewarts and Lloyds in Glasgow, the day before yesterday, when he said that bad laws were the worst kind of tyranny. In legislation there is no worse law than the cruelly penalis- ing provisions of the close company legislation.
I would like to refer to two points of detail which will particularly affect the smaller company. The Selective Employment Tax was one of the features which we criticised fiercely when the Finance Bill went through the House last year. It leaves to Government Departments and the Minister of Labour in particular the unjustifiable discretions as to how companies should be administered and as to how the incidence of the tax should fall. We had an example of this the other day in relation to distribution depôts discriminating most unfairly against the smaller firm which operates only in the distribution field, which is the wholesaler, and in favour of the larger firm, the manufacturer, which runs its own wholesaling and distribution business. I hope that the Minister of State is listening to this and that he will feel it right to convey it to the Minister of Labour.
By a simple diktat from the Minister of Labour, distribution depôts operated by manufacturers and which might be miles from the factory are to be treated as part of the manufacturing enterprise and, therefore, for Selective Employment Tax purposes, to be entitled to the refund of tax with the premium, provided that the overall numbers still fit in, whereas exactly the same depôt fulfilling exactly the same function with men engaged on exactly the same work which has to be operated by a wholesaler carrying out distribution for different industries—the wholesaler is almost inevitably much smaller than the manufacturer—has to pay the Selective Employment Tax and gets no refund or premium. This has been done entirely at the instance of the Minister of Labour who does not even have to present an Order or Regulation to the House in order to make that change. The Act was perfectly clear and the Minister, by a simple letter, has altered it.
I refer to a matter which falls squarely within the purview of the Minister of State which is again bound to affect the smaller industry and penalise the smaller firm which may be in competition with a large firm. The right hon. Gentleman will recognise that one of the important provisions in the Industrial Development Act related to the giving of grants for computers. He will remember the lengthy debates which we had in Committee on the incidence and availability of those grants for computers in different circumstances. The basis of the scheme is that any firm which installs a computer is entitled to a grant, although it will be only at the lower rate even if the computer is installed in a development area. We had some arguments about that.
I do not like quoting my own speeches, but a speech which I made in Committee seems to me to put the matter so shortly that I may be allowed to do so. I said:
… the pattern is growing up in the United States, and I have no doubt that it will develop here, of the service computor company operating centrally from input devices located in the premises of a large number of customers, who feed their own programmes into the computer entirely independently and get their own results out."—[OFFICIAL REPORT, Standing Committee D, 21st June, 1966; c. 258.]
I pointed out that this would qualify only for the lower grant. What I failed to realise, and what has now been brought to my attention, is that the situation is much worse. Whereas the large firm can afford to put in its own computer and get a grant for all the equipment associated with it, the small firm which wants to make use of a computer bureau such as I described in Committee and needs only to install what I might call the peripheral equipment—the input and output equipment—gets no grant for that equipment.
This point has been raised by a small firm of wholesalers wishing to mechanise its operations and which, as the managing director put it, has been looking at the question of putting
their statistics and accounting on to a computer basis in the very near future".
It believes that on its level of turnover it could not possibly justify the purchase of a computer. Therefore it approached one of the growing number of computer bureaux in this country and asked about the possibility of its subscribing to the service which that bureau was providing. It discovered that, whereas, if it wanted the computer it would be entitled to a 25 per cent. grant, merely because it wished to buy peripheral equipment it would get no grant, notwithstanding the fact that the equipment would have qualified for grant if it put in a computer.
This is the sort of nonsensical discrimination which we criticised when the Bill was going through the House and which is becoming apparent in more than one respect as the Measure is administered by the Board of Trade. No one can seriously seek to defend that sort of nonsensical and ludicrous discrimination. It is relevant in this debate because it is the sort of discrimination which discriminates against the smaller business which cannot afford the full equipment but wishes to install part of it and make use of these valuable services.
These are but two examples of the way in which the interventionist legislation, which is so beloved of Socialists and Socialist Governments, is operating—not just can operate or might operate, but which is directly operating against the interests of the small business and the small businessman, and making his life so much more difficult than it might otherwise be.
I am sorry that I was not here earlier to hear the words of the Minister of State. I was engaged in trying to advise somebody about the prices and incomes policy which, in itself, is not much joy. But the anodyne phrases which have been reported to me as having been said by the right hon. Gentleman gave no indication that he appreciated the problems which these industries are facing in these circumstances. Although he accepts the Motion, for which we must give some small thanks, the fact of the matter is that the Government have to show by their actions and not by words that they place great value on the activities of small businesses.
The House has welcomed the Motion which we have been debating today, and which was so admirably proposed by my hon. Friend the Member for Croydon, North-East (Mr. Weatherill). I am sure that we have been right to do so. Perhaps I may take this opportunity to congratulate my hon. Friend on the moderate way in which he proposed his Motion, but to point out that none the less it contains a grave warning to those who fail to recognise the vital rôle played in the economy by small businesses, and their contribution to our past prosperity and to future progress which, I am sure, they will encourage.
It has not yet been pointed out how important these firms are, but firms with less than 500 people employ about 50 per cent. of those in the manufacturing industry, and contribute about 45 per cent., by value, of the actual amount of industrial sales.
In addition, there are the important contributions made by small businesses in agriculture and in the service industries. Therefore, this matter is really one of very great importance for the future of the country.
We on this side of the House are glad that the hon. Gentleman the Minister of State, Board of Trade, is prepared to accept my hon. Friend's Motion. But I must admit that I received his acceptance with some doubt, because he accepts the Motion, which points out the increasing problems facing small businesses, but he made no attempt to point out why these problems should have been increasing, and what justification there is for the Government's policy which my hon. Friends have been criticising during the debate.
Still less did he make any attempt to say what urgent and positive steps the Government were prepared to take to stimulate and encourage the prosperity and growth of this energetic and enterprising section of the community. We on this side of the House cannot accept his view that he can make no statement about the fiscal side of things because the Budget is impending. Budgets are always impending, but this does not preclude a general statement on fiscal policy. We are sorry that he did not feel able to go into great detail on this subject.
One of the most significant aspects of this debate has been the way in which we on this side of the House have made a number of speeches which reflect the great experience of hon. Members in small businesses. Many hon. Members have spoken with great authority. I have listened to every speaker, though not literally to every word that has been said. The debate has brought out a number of interesting and very important points. It is sad that the only contribution from the back benches on the other side of the House was made by some one who arrived a few minutes before he made his speech. He made a speech which clearly he would not have made had he been listening to the debate, and he attacked small businesses rather than supported them.
There was one misapprehension in what he said, which should be pointed out. We on this side of the House are not in favour of inefficient small businesses. We are in favour of small businesses which are the right size for the job they are doing, and which create increased competition and efficiency within the country. That is the stand which we have taken and it is not at all the position which it was suggested we were adopting.
Would not the hon. Gentleman agree that the debate has been filibustered in order to prevent a debate on London housing and that hon. Members were conscripted after the lunch hour so as to prevent the debate on London housing from taking place?
I would not accept that for a moment. Three or four of my hon. Friends, for example, my hon. and learned Friend the Member for Buckinghamshire, South (Mr. Ronald Bell) and my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley), are still hoping to catch your eye, Mr. Deputy Speaker. The debate has been by no means repetitious. Indeed, a remarkable feature of it has been the lack of repetition. It is true that certain broad subjects, such as Corporation Tax, have come up several times, but each of my hon. Friends has concentrated on a particular aspect. The hon. Gentleman would not suggest any element of filibustering if he looked at the record.
So that the somewhat juvenile intervention of the hon. Member for Croydon, South (Mr. Winnick) may be put in its true perspective, would it not be worth putting it on the record that both my hon. Friend the Member for the Isle of Ely (Sir H. Legge-Bourke) and myself can be remembered among hon. Members who attended the debate from the outset almost non-stop until we were called?
That is certainly so and I am grateful for that intervention.
The remarks of the Minister of State were moderate and reasonable and although the constructive suggestions which he made were extremely limited, we are glad to learn that the position of small businesses is being considered in the Productivity Conference Study which is now being carried out. However, as my hon. Friend the Member for Oswestry (Mr. Biffen) pointed out, in studies of this kind there is a tendency for small businesses not to be represented and for the larger organisations and the confederations to be represented, and I hope that the Minister will bear that in mind when he establishes and concludes these studies.
The basic theme throughout the debate has been the growing pressure being put upon small businessmen. My hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) was right to stress that it is the accumulation of these things falling constantly on the small businessman and in particular the depressed state of the economy which is likely to have a bad effect upon him. While it is true that in the post-war period there were periods of stop-go, on the whole the periods of stop were short, whereas it is now becoming increasingly clear that the present period of depressed economic activity is likely to continue for longer than previously, which means that the reserves of the small man will probably be less than adequate to meet the situation, and the strain put upon him in the present credit squeeze will be considerably increased.
Apart from the general economic situation, there has been considerable pressure because of the Corporation Tax. One point which has not been mentioned is the way in which the imposition of the Corporation Tax encourages plough-back by large firms and thus reduces the amount of capital going into the market itself. As a result, the capital available to the small rather than the large man is reduced. As my hon. Friend the Member for Harwich (Mr. Ridsdale) pointed out, this is likely to inhibit the growth of the small company. We have also had references to the close company provisions, but I would not presume for a moment to repeat the cogent arguments which have been adduced in that connection. My hon. Friend the Member for Croydon, North-East, in proposing the Motion, quoted from his considerable personal experience in the matter and pointed out the way in which the amount of finance which he can find from his own pocket is being limited by the provisions of the close company legislation. He is therefore having to go for capital elsewhere when he would prefer to provide it himself. It was also pointed out that the Government's provisions tend to encourage firms to adopt a partnership form rather than a limited liability company form, and the effect is to make the organisation of the small firm less efficient and less suitable than otherwise it would be.
An important point about the Selective Employment Tax is the fact that on the whole the service industries, against which the tax discriminates, are normally smaller industries and firms which do not employ economies of scale. Service in-duties tend to operate on a relatively small basis. As my hon. Friend the Member for Oswestry pointed out, this means that the Selective Employment Tax is not merely a tax against service industries; because of the relationship between service industries and size, it also discriminates against the small man.
There are also anomalies in the Selective Employment Tax. My hon. Friend the Member for Wanstead and Woodford made a point which I should like to elaborate. He pointed out that the small independent depôt or warehouse, purely because of a dictum of the Ministry of Labour which has not yet been debated in the House at all, will have to pay Selective Employment Tax whereas an integrated concern, under the ruling which the Ministry of Labour has made, will receive a premium. The effect is clearly to discriminate against the small man. This is unfortunate. It may be that the optimum size would be better achieved by the small man concentrating on distribution than by a number of firms, vertically integrated, which have a distribution system of their own which is below the optimum size.
If the hon. Member reads the speech made by the proposer of the Motion he will find that this was done at the beginning of the debate. I do not find it necessary to repeat it.
I come, next, to the question of investment allowances. Here again, these tend to discriminate against service industries and therefore against smaller companies.
Other points made concerned the effect of death duties, the Redundancy Payments Act, the Companies Bill—and all these accumulate into what my hon. Friend the Member for the Cities of London and Westminster (Mr. John Smith) called the B factor, a coefficient of complexity which is making it more and more difficult for the small businessman to operate without spending much of his time in coping with the increasing burdens which are imposed on him by the Government.
My hon. Friend the Member for Croydon, North-East suggested that positive action should be taken by the Government to simplify the tax system and, in particular, to reduce the level of direct taxation in order to give more incentive to the small man. He also suggested other reforms. I was surprised that the Minister of State did not give any detailed consideration to the proposals which my hon. Friend made, based on American experience—first, the question of procurement programmes under the Government's present policy and also the proposals for the SCORE arrangement in America whereby a retired executive who wishes to go back into businesss can assist the small firm to be operated more efficiently. The Minister of State said that while he accepted the Motion he was sorry that it was not more constructive. It seems to us that my hon. Friend's proposals were very contructive, and certainly if the Government implemented them in nullifying the effects of their own measures on the small man, together with the positive proposals which my hon. Friend made, we should have a constructive policy.
I agree that during the debate a number of quite constructive suggestions have been thrown out, as it were, but none of these are mentioned in the Motiton, which merely
… calls upon Her Majesty's Government … to take urgent and positive steps …
The Motion does not say what those steps should be, and that was the point I was making.
At any rate, those he did make were largely inadequate.
I turn to some of the positive proposals which have been made by my hon. Friends. The House will recall that in our last manifesto we made the definite proposal that there should be set up a small business development bureau to help small businessmen to start and grow. That proposal has received widespread support from the public and I have received a considerable number of letters supporting the idea.
My hon. Friend the Member for Croydon, North-East pointed out that the establishment of such a bureau could act as a focus for existing institutions. This is important because while there are a number of existing institutions which seek to help small businessmen, many small businessmen do not know to whom they should go for advice about the help available to them. In addition, there are gaps in the provision which is made for helping the small, growing company. I stress that in making this proposal we do not believe that it is in any way incompatible with a belief in private enterprise. It is necessary to do something to offset the fact that the amount of information in the market place for the small businessman is not being as adequately provided as it might be, remembering that it is a classic tenet of economic theory that one can have perfect competition only if the information is also perfect.
Reference has been made to Small Business Administration. I have had the pleasure of visiting that organisation on two occasions when I have been in America and I assure the House that it is doing important work. The proposals which the White House Committee has put forward in support of Small Business Administration are somewhat similar to those for the small business development bureau which we are suggesting in that, first, the existence of a large number of small independent businesses helps to preserve competition, which ensures efficiency, high quality and reasonable prices for the consumer; secondly, because a large number of small independent businesses decreases the likelihood of excessive political power; thirdly, because they offer an opportunity for the expression and growth of personal initiative and individual competition; and, fourthly, because small businesses are frequently the source of new products and methods.
For all these reasons, the sort of bureau which we suggest should be established is compatible both with the ideas of the United States Government on private enterprise and efficiency and with ideas which my hon. Friends believe should be implemented in this country.
It is all a question of bringing into focus the various institutions which already exist. Some of these, like the I.C.F.C., help to provide capital. Others, like N.U.M.A.S.S. and National Management Consultants, help on the consultancy side. But it is important that there should be a focus for them so that the individual businessman knows what is available for him.
I interpose a personal view by saying that there is also a gap from the point of view of the new firm which is starting up. Reference has been made to a book on the sources of invention. It stresses the need to give facilities to small inventors because about 50 per cent. of inventions of importance in recent years have come from that source, while the rest have come from large corporations. We believe that, if this is to be fostered and if companies are to grow and competition is to increase, there must be a body which is able to provide the risk-taking finance. A significant change in the approach of Small Business Administration shows the way in which, instead of taking a narrow range of risk—for which one can be reasonably certain of a moderate rate of return—one should take a number of projects which could possibly give a very high rate of return but which entail a very high risk. They hope that by taking on a number of those it will be possible for the ones with a very high return to pay off. That is where a gap exists, because the normal financial institutions such as the, I.C.F.C. do not provide the kind of risk capital which the S.B.A. in a number of cases is bringing in.
My hon. Friend the Member for Barkston Ash (Mr. Alison) spoke about the idea of a small individual firm breaking into a new market. This is something to which the Minister of State gave scant recognition. He did not appreciate that what we want is the opportunity for a small firm with a new idea to break in and to compete with the larger firms. This is a basic necessity if the standard of competition is to be increased and the large firm is to be subject to greater and greater competition from new ideas, innovations and better technology.
Finally I come to——
I am right at the end of my speech and I have only a couple of minutes to make an important point. There is a big difference in the attitude of the two sides to business. We are not necessarily in favour of big firms, nor are we necessarily in favour of small firms. We are in favour of firms having an opportunity to grow to the optimum size. They should have an oppor-to grow to that size where costs per unit of output are reduced to the lowest level, where they can compete efficiently in world markets, and have an opportunity of doing so in the Common Market. Therefore, in supporting this Motion, which I am glad that the House accepts, I suggest that there is a desperate need for the Government to ascertain what the economy of scale in production and marketing is in different industries.
There have been studies recently, one by the Insitute of International Affairs and another by the N.I.S.R.D., to find the economies of scale in different industries. While some firms require to be very large and some to be medium-sized, there should be a definite place for small firms today in a particular job such as shopkeeping or warehousing. Only when there is a constant flow of new initiative coming from small firms can we hope to have a constant flow of new economy, which is what my hon. Friend the Member for Croydon, North-East and my other hon. Friends are desperately anxious to see achieved. We are glad to have had this debate which has covered one of the most important subjects in the economy today.
That this House takes note of the increasing difficulties facing small businesses; recognises their important contribution to Great Britain's economy; and calls upon Her Majesty's Government, in the national interest, to take urgent and positive steps to stimulate and encourage the prosperity and growth of this energetic and enterprising section of the community.