Measuring the costs of compliance: the mismatch between government and business on regulation

As businesses start to get their head around new rights on flexible working and shared parental leave. One thing they can be sure of is that these changes won’t be the last…

Whitehall will already preparing further changes and regardless of the colour of the next government, a Bill in next year’s Queen’s Speech will undoubtedly include proposed changes around employment law.

Lobbying against changes to certain elements of employment law, such as parental leave, is a tricky one for small businesses. No business wants to be pitched against changes that can be seen to benefit society.

However, businesses’ main objection is to the constant changes that are seemingly introduced to this area of law. For example, parental leave has changed about every 18 months on average since 2004. Each change necessitates one of two things for a business, either making sure staff are up to speed with the new rules, or deciding to outsource HR. Both come with a cost. And that’s before the cost of replacing staff for their absence, training and so on.

The present government has made commitments to keeping regulatory costs to the minimum. From the outset they made a pledge to be the first deregulatory government in history. So how much their new regulations cost matters a great deal to them. It follows therefore that all government policy comes with an impact assessment that needs to be validated. This is done by a respectable and respected body called the Regulatory Policy Committee (RPC).

However The Forum of Private Business can tell you from first-hand experience that the RPC creates a sizeable number of large documents that weigh up the costs of regulations on business. These are then released in twice yearly Statements of New Regulation in which there is a meticulous attention to costs. This is to show that by the end of the Coalition’s term there will have reduced the overall cost of regulation.

And yet year-on-year Forum of Private Business members identify an increase in the cost of compliance, amounting on average to some £14,800 per small business. So, by the time of the general election 2015, small businesses will say the cost of compliance will have increased.

So how do these two figures co-exist? There are a number of possibilities. The government would say it’s partly down to down to perception. The annual Business Perceptions Survey carried out suggests that much of the regulatory burden is perceived and not actually experienced in practice. They also point out that the deregulatory targets do not include legislation coming in from Europe. That too is a fair argument.

The Forum of Private Business counters by pointing out some of the ‘outs’ of deregulation concern outdated pieces of legislation not used by the majority of businesses.

There is also the odd case of an impact assessment quite dramatically undervaluing the ‘in’ of a new piece of regulation. Whilst it doesn’t happen often, when it does go wrong it can be quite dramatic. For instance, it is largely accepted by industry experts that the government undervalued the ‘in’ of auto enrolling staff into pensions by a factor of 10. Prior to Real Time Information being launched in April 2013, HMRC anticipated the cost to small business at £120m, while the Forum research puts the figure at more than double that at £311m.

Taking into account all the points above there is a much simpler truth to explain the differences in viewpoint. The truth is probably down to the constant changing of regulations in the main areas of employment law and taxation.

The example above of a business spending money to be compliant with new regulations is something that happens every time those regulations are changed. Forum research showed the amount firms are paying to external contractors was the major contributory factor in the rise increasing by 6%, twice as fast as the internal costs to the business.

What small businesses require from regulation is clarity, consistency and certainty. That is the test the Forum of Private Business applies to all new regulations. Until any government commits to changing the law less frequently, the business cost will continue to rise.

Alexander Jackman is Head of Policy at the Forum of Private Business, a not for profit membership organisation which supports small, private sector employers across the UK.

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