Myths About Micros………….Why we need a Minister for Micro Businesses
There may be around 5 million SMEs in the UK, however, the idea that if each one was to provide one job by taking on an Apprentice unemployment would disappear is laughable when you dig into the figures.
FACTS relating to private sector businesses
1 Over 3.5 million of the estimated 5 million are one man bands, operating as sole traders or limited companies, plus a few 2 people partnerships that employ no one but the business owners.
For a one person business, taking on one employee, doubles the workforce.
Fewer than 7% of these 3.5 million are ever going to take anyone on part time, let alone full time.
What business, overnight, can afford to double their workforce? How are they going to double sales / profits overnight to pay for the new worker / apprentice?
2 Although around 500,000 new businesses start every year, around 470,000 fail.
Many start and fail in the same year. Over 80% fail within 3 years.
The law says an Apprenticeship must be for over 30 hours a week and last for a minimum of 12 months – this is going to exclude at least 300,000 businesses that start and fail in the same year
3 Over 1.5 million businesses are run from home, many may be breaking their lease or operating in a grey area legally.
With compulsory work place visits from training providers to see apprentices are safe on site and doing the work expected, few employers will want to fail the accompanying Health and Safety expectations and so won’t bother to start the process.
4 Only 1.5 million businesses employ 1 or more employees, fewer than 7,000 employ over 250.
Over 95% of employers have fewer than 50 employees with around 90% fewer than 10.
The idea of taking on the maximum per employer of 10 new apprentices at once is laughable. Almost no business will increase its workforce by 90 or 50 or even 30% in ONE STEP.
5 Wage rates
While the minimum apprentice wage in October 2013 will be £2.68 an hour, my experience, after over 20 years in the micro and start up business sector, is that only those who contribute next to nothing might offer themselves at this wage.
To get someone suitable for a micro business with fewer than 5 employees in London today who will add value to the business (and then only after 3 to 6 months) the necessary wage is at least £4 an hour, around £120 a week.
6 National insurance
Pay over £148 a week and you are into the onerous world of deducting / paying employee and employer national insurance – a major time stealer for micro business owners who generally loathe administration. The requirement of having to deduct tax under PAYE on incomes over £182 a week is a further nightmare.
Millions of micro businesses see having to struggle with Vat regulations even more scary than NI or PAYE and so avoid increasing sales above the Vat threshold of £79,000 a year, £1,500 a week.
The profit made from such businesses is often insufficient for the business owner with dependents to live on, let alone think of taking on an apprentice.
Even those with good margins who may be able to draw £50,000 a year for themselves from the business, would rather stay under the £79k level than face having to charge VAT and handle VAT paperwork and returns.
8 Apprentice Training Agencies (ATAs)
Many positive aspects but 2 killer implications.
First, a 20% fee, based on the apprentice wage to cover the ATA’s fees.
Second, Vat at 20% on the bill – but as stated above, many businesses are not registered for Vat and will be unable to claim it back.
The unintended consequence of the good intention of an ATA is that a wage of £120 a week (£6,000 a year) becomes a cost of £8,600 to the employer because of 20% ATA fee plus 20% vat.
9 Additional administration
Despite what they tell you, the process is not admin free.
You have to provide job descriptions, post a vacancy on the NAS website via your training provider, study applicant profiles received, short list for interview, interview (expect 50% to fail to even attend the interview), offer the position, set up payment arrangements etc.
Don’t forget to provide policies on health and safety, employment without discrimination, Equal Opportunities, a First Aid box, a Health and Safety risk assessment, an H & S poster for the wall and a copy of your Employers Liability insurance policy.
10 Other realities
In all likelihood, £300 for compulsory Employers liability insurance, (you don’t need it just for yourself) £700 for an additional computer, £300 additional cost for phone, tea and coffee and then travel expenses, possibly a new desk … and chair … and Total £3,000.
On top of which you have to train the apprentice too.
If your own fee rate might bring in £50 to £200 an hour (as a painter, electrician, accountant, business consultant, solicitor) there is a real risk you will actually lose money by taking on an apprentice.
Your minimum opportunity cost of spending 1 hour with your apprentice is around £20.
Unlike larger businesses there is no one else to do the training for the one man band.
Even with 5 employees, most will be getting around £10 an hour or more.
Larger organisations, particularly large retail chains, will have someone earning below £10 an hour that will do most of the day to day training for the new employee.
For the reasons stated above, it comes as no surprise to me that businesses with over 250 employees (and more so up to the apprentice eligible maximum of 999 employees) grasp a £3,000 take on incentive, plus no fees from external training for 16 to 18 year olds, with enthusiasm.
However, it is also no surprise to me that hardly any micros (fewer than 10 employees) take on an Apprentice.
In policy terms, the current Apprenticeship arrangements are biased in favour of larger businesses and against smaller businesses and in a period of low economic growth with larger employers shedding or not replacing staff, this may be counterproductive if the main policy objective is to increase employment and work in the private sector.
Although I have gone ahead with a 3 month intern plus a 12 month apprentice, my head tells me this will make my business “Not for Profit” but my heart tells me someone needs to do something about the 1.3 million 16 to 24 year old NEETs not in Employment, Education or Training.
Six months in, I am just about to break even going forward but looking back I never realised what the true cost would be.
Managing people, simply spending time explaining what you do as a business and what you want your apprentices to do for you, takes lots, and lots of time. Induction is a long process and often needs repeating.
My rant is that the only way you will get buy in from micro business owners is to pay them at least £6,000 a year to take on an Apprentice – after all, they have the apprentice for around 30 hours a week compared with a college at 4 hours a week – and the college gets paid around £4,500 or in school, £5,600 a year for nurturing a 16 to 24 year old and Universities get even more for educating / training 18 years and over undergraduates.
Given the millions of people running Micro businesses and their importance to the economy, the time has come to take them out of the SME category (covering all businesses from 0 to 250 employees) and appoint a Minister for Micros who understands this important group of people and what they really need from Government to get the economy moving.
If I had my way, I would exempt Micro businesses from around 90% of Health and Safety and Employment legislation; raise the Vat threshold to £100k, the NI and tax PAYE threshold to £20k a year and see a new economic boom.
What do you think?