While ministers say they back small firms, one measure will hit them hard

Remember when ministers used to talk about the importance of “joined-up government”? All too often it seems that departments don’t even talk to each other, let alone act in concert.

On the one hand, you have the Department of Business’s anger at the failure of large companies to pay smaller suppliers on time – figures last week suggest the value of unpaid invoices stands at £67bn; so worried is this arm of government about the scourge of late payments that it is consulting on the launch of a taxpayer-funded arbitration service.

Meanwhile, over at the Ministry of Justice, officials have hit on a brilliant wheeze to improve the department’s creaking finances. Having introduced new fees for people taking cases to court just six months ago, it now wants to increase them dramatically. The fee for starting a case is currently 5 per cent of its value, capped at £10,000 for claims of £200,000 or above; the Ministry of Justice wants to double the maximum to £20,000, or simply to get rid of the cap altogether.

The Bar Council, which represents barristers, warns that many small businesses will be deterred from taking legal action to obtain money owed from late-paying customers. Where those customers are large companies, many will simply refuse to pay up, safe in the knowledge that their supplier doesn’t have the cash to pursue them.

Before March, no small business had to pay more than £1,350 to launch a legal claim for an unpaid invoice, or another liability. Within a few months, that cap could be almost 15 times as high; it may even have been abolished altogether.

Such increases “go against every principle of justice”, according to the Bar Council.

It isn’t only late payments where this is an issue. For many small businesses, the scandal of mis-sold interest rate swaps remains an open sore. A minority have been able to claim redress from the banks that wrongly advised them to buy these products, via a compensation scheme managed by regulators. Many more have been told that if they want to make a claim, they will need to do so through the courts. These businesses, already let down by the banking sector and the regulatory system, may now find themselves unable to afford to make a legal claim.

There’s no evidence that the ministry will make more money from higher fees: we haven’t yet seen figures for revenues raised since March’s increase. Many would-be claimants will decide they can’t afford to use the legal system. Revenues may even fall.

Meanwhile, the Department of Business will go on with its plans to set up a Small Business Commissioner, whose responsibilities will include helping smaller business to get what they are owed by large firms. The service will offer arbitration, as well as having powers to name and shame large companies that persistently pay late.

This is all sensible stuff, but will come at a price. And that price will be even higher if small businesses are no longer able to afford the cost of pursuing a claim by themselves.

The Ministry of Justice’s proposals are, in other words, both unjust and economically misguided. Large businesses will find it even easier to kick sand in the faces of their suppliers, and another taxpayer-funded service will be left to pick up the pieces.

More than 25,000 small business leaders have so far signed up to a campaign against changes to the tax charges on dividends announced in July’s Budget. The campaign, launched by Nottingham-based small business owner Serena Humphrey, is aiming for 100,000 signatories as it demands that the Chancellor rethinks his plans.

The Budget introduced a new allowance for dividend income, enabling people to receive dividends worth up to £5,000 a year with no tax to pay. Above this threshold, higher-rate and additional-rate taxpayers will now pay significantly higher rates of tax on their income. Small business directors, who often take salary from their companies in the form of dividends, are set to be hit particularly hard.

“Owner managers are a breed who work very hard and don’t make fortunes at the best of times,” said Ms Humphrey, who warns that the change may be economically counter-productive. “There are millions of them, so the impact is going to be widely felt. And this is despite the Government insisting that SMEs are part of their five-year plan.”

Britain’s late payments culture is to blame for another increase in the amount of VAT that has not been paid on time to HM Revenue & Customs, a leading finance company is warning. LDF says small and medium-sized enterprises often have little choice but to pay their VAT bills late because their cashflow is not sufficient to cope with the late payment of bills by customers.

Official figures show that VAT arrears now stand at £2.58bn, up from £2.55bn in 2014. Most companies pay VAT on the basis of the bills they have issued to customers, rather than the payments they have received, so late payments can cause serious problems.

Peter Alderson, the managing director of LDF, said these pressures were also preventing firms exploiting growth opportunities. “Even though economic growth is accelerating and order books are growing, the problem of VAT arrears does not appear to have improved,” he said. “This is a time when businesses should be able to make significant investments in staff and equipment as the economy grows, but late payments can make this difficult for a lot of SMEs.”

“In 2007 I’d been in the vehicle sales industry for 15 years, and I’d launched my own used car business a couple of years earlier, but I thought there was a gap in the market for a business that could harness the power of the internet and offer vehicle leasing to commercial clients. Using the lessons I’d learnt in previous jobs and businesses, Vanarama got off to a flying start and within a year, we had 18 members of staff.

“Then the credit crisis hit and the phones stopped ringing overnight. I was lucky because I had been working with a good non-executive director who had forced me to do some risk scenario planning; even so, we had to let 12 employees go, which was tough.

“The experience forced us to rethink our business and to try to work out how we could differentiate ourselves. It’s not the easiest of markets – we are vehicle dealers offering finance packages, both industries with difficult reputations, plus we’re doing distance selling. We decided to focus on service as well as price.

“The other thing I realised was that this was a marketplace with no established brands – and that there would be a huge opportunity if you could build a brand. So in 2013, we started doing TV and radio advertising, and we agreed to sponsor the Football Conference. At the time it felt like a real spin of the wheel, but it had a huge impact on brand recognition and sales.